Roundtable Report: Opening New Doors

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It’s said old habits die hard, but that’s often with good reason. In the cold vault, convenience retailers have slowly whittled down the space they allow for carbonated soft drinks (CSDs) from three and four doors to what’s becoming an industry standard of two doors.

“I’ll never go below two doors of CSDs,” said Bill Tencza, senior category manager for QuickChek Corp., Whitehouse Station, N.J. “The volume is too large.”

That doesn’t mean retailers aren’t keenly aware of the challenges the beverage category of CSDs faces after nearly a decade of sales declines and a now-challenged diet portfolio.

“I’ve got three doors of CSDs, but I’d like to cut that down,” said Bill Ripley, director of marketing for Stop-N-Go Stores of Madison, Wis. “I have three kids under the age of 16, and they don’t drink soda. [They drink] milk and water.”

Still, Ripley finds the sheer volume of CSD sales, which contributed more than one-third of c-store packaged-beverage sales in 2013, too significant to cut back further.

It was this issue—the largest subcategory in decline—that kept the focus of CSP’s Cold Vault Summit squarely on to whom else c-stores could sell beverages. The short answers:

▶ Millennials

▶ Consumers trying to eat healthier

▶ Women

Beyond the opportunity to draw additional sales, the added benefit in each case for retailers is the opportunity to improve market-basket totals and margins by reaching out to these demographics.

Trading Up

“Most of the recovery [from the recession] is coming from high-end consumers,” said Judy Hong, a beverage analyst with the global investment research team at Goldman Sachs, New York. “People are willing to trade up. People are willing to pay for authenticity.”

It’s on that point that retailers find it hard to complain about the decline in CSD sales—down 1% in units in the first half of 2014, largely on the unexpected drop in diet-soda sales, which most believe is the result of aspartame backlash.

“Our customers have moved on to more profitable beverages,” said Ashraf Abu-Aita, marketing category manager for Family Express Corp., a chain of 60 c-stores based in Valparaiso, Ind.

The moves by consumers from CSDs to energy drinks, protein shakes and sparkling waters are welcome, because these now-preferred drinks often bring more margin. As a result, CSD sales in Family Express stores have been down 3% per year. However, “CSD is the most profitable part of the cold vault,” said Bill Nolan, the chain’s vice president of marketing. “We’ve got to maximize whatever we can. That’s why we’re looking for alternative brands to be in.”

So are the major beverage makers, Hong said. “The beverage companies are looking for a solution [to the decline in CSDs],” she said. “So you’ll see a lot of innovation in this area in the next year or so.”

One of the areas of innovation will certainly be in lower-calorie line extensions. It’s already well underway with Dr Pepper Snapple Group’s TEN line and more recently PepsiCo’s Pepsi True and Coca-Cola Co.’s Coke Life.

But industry watcher Hong does not see a lot of promise there: “Based on the track record of the midcalorie beverages that we’ve seen thus far, I’m skeptical that we’re going to find some Holy Grail.”

CONTINUED: Driving a Trend

Driving a Trend

Citing several healthy U.S. economic indicators, Hong underscored a 2.5% increase in consumer spending, with “most of the recovery coming from high-end consumers.” This offers a retail opportunity to spotlight higher-end products and price points.

Wawa recently reached the same conclusion.

“We’re very concerned about [the state of] diet sodas,” said Kevin Quigley, assortment manager of packaged beverages for the 660-store Pennsylvania-based chain. “But we think premium sodas are a real opportunity.”

Hong cited forces driving this trend:

• Millennials coming of age: “This generation will go from the smallest spending demographic to the largest in the next five years,” she said. Understanding their preferences and patterns will be important in accessing that revenue.
• Health and wellness, or “climbing up the freshness ladder”: One key attribute of millennials is that they are more focused on working out and eating right. “Staying healthy is a ritual activity,” Hong said. This bodes well for bottled water and functional beverages.
• Premium-ization: “People are willing to trade up,” Hong said. “People are willing to pay for authenticity.” Take beer, for example: “Beer has been underdeveloped on the high end compared to wine and spirits. It’s only about 30% of the market, but it’s growing.”
• Digital marketing/e-commerce: Here, Hong points to recent product releases from Coca-Cola and Pepsi exclusively on Amazon.com. And with Keurig’s anticipated Cold Brewer promising Coca-Cola flavor from pods sold online, she says, “That’s just more CSD pain for retailers.”

When all these forces are factored in, “premium, alternative beverages should continue to gain market share,” Hong said, citing energy drinks, iced teas and enhanced beverages among them. “High end will maintain  growth.”

Leverage Beverage

With beverages already a traffic magnet in c-stores, summit attendees turned their attention to a major portion of the population—women—who will not or do not consider c-stores a primary option when making a beverage purchase.

When it comes to packaged beverages, c-stores rank third among women as a place to purchase, according to Technomic. And women are likely to buy an alcohol beverage from a liquor store, warehouse store, specialty food store, traditional supermarket or mass merchandiser before considering a c-store.

“Part of that is because women are often in those stores already to do their grocery shopping,” said Donna Hood Crecca, senior director of the adult beverage resource group at Chicago-based Technomic. “But women also have a lot of concerns about shopping in convenience stores. They’re concerned about safety, cleanliness [and] the health attributes of some of the products we sell.”

The issues are similar to those retailers face when selling foodservice. But the beverage category has one major advantage, according to Crecca: “The c-store industry has the expertise to sell packaged beverages. It has permission to present these items to the consumer.” In other words, beverages—unlike foodservice, in many cases—are an accepted part of the c-store offer. “[Retailers] need to leverage that to bring more women into their convenience stores,” she said.

CONTINUED: Improving Sales to Women

Crecca and Adrienne Nadeau, Technomic’s senior research analyst, outlined areas of beverage sales that retailers could focus on to improve sales with women:

▶ Millennial women—ages 18 to 34—are willing to spend more for a beverage if it meets their preference for healthy and functional ingredients.

▶ Baby-boomer women are more likely to buy on impulse, but they are more price-conscious.

▶ Yes, women overindex for buying white wine, but they also drink beer. They prefer domestic light and regular beers but show a growing interest in imports and craft beers.

▶ Only one in 10 women purchases wine or spirits in c-stores. One way to improve that is to provide a wide selection, which tells the shopper that the retailer takes the category seriously.

▶ A variety of alcohol beverages is particularly appealing to millennial women because this generation has cultivated an interest in wine and spirits at a much younger age than previous generations.

▶ As an added bonus—and back to that struggle with foodservice—a wide variety of adult beverages will improve foodservice sales among female customers, according to Technomic’s data.

As retailers headed out of CSP’s Cold Vault Summit, they were armed with knowledge of where consumers are headed with their beverage preferences and whom else they might tap to sell more of the growing selection of premium drinks.

Attendees of CSP's Cold Vault Summit, held Oct. 28-30 in Chicago:

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