Alternatives on the Rise

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Alternatives on the Rise

By W.B. King

If nothing else, a twisting, turning economy is good for one thing: identifying the wants and needs of a respective consumer demographic. In short, when there is limited money to spend, choice products rise to the top, and that is the case with alternative beverages.

"The packaged beverages department has changed over the last few years by consumers wanting more healthy drinks and perceived enhancement in drinks causing a shift from traditional carbonated soft drinks (CSDs) toward other segments, such as enhanced waters and low-calorie sport drinks," said Tom Cook, district manager at Cody's Convenience Stores, a 25-unit chain based in Missouri.

Last year, the packaged beverage category as a whole posted an 8.2 percent sales per store increase, which followed a 9.9 percent increase from the year before, according to the Convenience Store News 2008 Industry Report. And c-stores' share of packaged beverage sales also increased last year, as the convenience channel gained more than 1.5 points compared to supermarkets and drug store chains.

This increase may be due to c-stores offering more choices than other channels, according to Gary Hemphill, senior vice president in charge of Beverage Marketing Corp.'s Information Services Division. "Consumers want variety, and often their beverage choices vary by usage occasion," he said. "The same consumer is not necessarily going to drink the same product in the morning that they consume at other day parts, and the product offerings of convenience stores have to reflect this change in the marketplace."

Last year, the Beverage Marketing Corp. released a report that found energy drinks, bottled water, ready-to-drink teas and enhanced or functional beverages experienced significant, and in some cases off the chart, growth rates, while more established products lost momentum. However, with approximately 50 percent of the total market share, conventional CSDs remain the most popular category on a volume basis, explained Hemphill.

Coke and Pepsi products remain top sellers at Cody's, according to Cook, with traditional CSDs occupying 44 percent of the cooler. But enhanced waters and ready-to-drink (RTD) teas and enhanced sports drinks comprise approximately 35 percent of the cooler, which is an increase over past years.

Cooler Predications
Cook explained when determining what customers want, each store's demographics are studied. "We set out cooler space accordingly," Cook said. "We then monitor sales by item movements on a per store basis and determine what segments we need to expand or decrease."

Taking calculated chances is often the only means to determining what products will sell on a large volume basis. In today's market, alternative beverages are the metric to follow.

"Alternative segments are driving sales into stores by bringing the more health-conscious consumer into our stores, which is a new consumer and usually allows us to charge a premium retail for these products where the perceived value is higher than with traditional CSD sales," Cook said. "These consumers are not near as price sensitive as our traditional consumers."

It stands to reason that if traditional c-stores are experiencing an influx of consumers willing to spend extra on alternative beverages, specialty c-stores, such as the Torrance, Calif.-based Famima Corp., which operates 13 Famima!! stores in Southern California, has an edge.

"By looking at the growth, or decreased growth, and the consumer tendency,it is most likely the carbonated drinks, [such as] Pepsi and Coke will decrease," said Sato Hidenari, vice president of operations for Famima!! "On the other hand, due to the healthy, non-carbonated trend, it is very easy to say that enhanced water, tea and specialty water will continue to grow."

Hidenari explained Famima!!, the American brand name for one of Asia's leading convenience store chains FamilyMart Co. Ltd., operating 12,914 stores in Japan, Taiwan, Korea, Thailand and China, initially wanted to focus on specialty teas and waters.

"We originally limited Coke and Pepsi products, but have actually expanded their SKUs," said Hidenari, adding the first Famima!! location opened in 2004. "Customers need to see the typical drinks to be comfortable, but at the same time need to see something that is new to them."

As the market continues to grow, and "splinter" as Hemphill noted, opportunities will emerge for progressive retailers. "We will see the continued development of finely targeted categories and products," he explained. "This poses a challenge as well as an opportunity for all retailers, but especially convenience store operators because of the shelf limitations they face."

A Healthy Pulse
Across the nation, retailers recognize that changing the approach to traditional cooler offerings is essential to capitalizing on consumer trends. The CSNews 2008 Industry Report found energy drinks are slowly gaining more ground in the cooler, which is at the expense of the CSD category. Last year, energy drinks increased to an average of 10 percent of cooler doors, which is up from 8.7 percent the previous year. CSDs dropped from 29.7 percent of cooler doors down to 29.0 percent in the past year.

"Energy drinks continue to grow for our markets as well, Cook said. "To grow this segment, we are looking at targeting the consumer who wants bigger sizes and using the energy drink to last all day, such as the 32-ounce size. We are also increasing our multi-pack options to help grow the category to switch the consumer from the traditional CSD drinker to the energy department. This approach will grow both our sales and profits."

Hindenari explained Famima's approach to new product offerings is fluid. "We are still a small company and are flexible to try out newly introduced products," he said. "This means we will have those products on the shelf as soon as possible and look at the data daily to see sales figures and make evaluations for the next step."

Among leading brands are Smartwater, O-i Ocha, Naked Juice, Aquafina and Arrowhead. And while Famima!! carries AriZona and Nestle teas, Hindenari said customers are getting sour on sugar drinks. "Teas without sugar are doing very well," he said.

Looking forward, Cook said: "I think we will continue to see additional segments and hybrid drinks come around as the traditional CSDs need to compete with enhanced waters' and teas' growth."

And while it remains clear the alternative beverage category will grow, product offerings may be hit or miss. According to Hindenari, however, one thing is for certain: "We can say the traditional carbonated category will not expand."