Bursting the Bubble

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Bursting the Bubble

By Mitch Morrison - 05/05/2003
Once the entertainment center of a convenience store's back-end, the carbonated soft drink section now resembles a bookcase or reclining chair — a nice piece of furniture but no longer the heart of activity.

While teas, bottled water and energy drinks justify their greater cooler space through quenching sales' growth, the carbonated soft drink (CSD) category is leaving retailers rather thirsty.

"They're flat to down," said Jon Fleck, director of purchasing and marketing at 31-unit Zip Trip Stores of Spokane, Wash. "All our growth is in water. We've gone to where we have a full water door. Pop has at least two cooler doors and most have three doors. It still sells, but the excitement isn't there."

Fleck's comments apply nationwide, not only in c-stores but in the retail world at large. According to ACNielsen, in a 52-week period ending in mid-February, CSDs garnered more than $18.8 billion in volume, representing less than 2-percent growth in the food, mass, drug and c-store channels, with non-diet climbing only nine-tenths of 1 percent.

Still, as a nod to the convenience channel, c-stores' yield was almost 4.5 percent, pushing up the transaction ticker from $4.9 billion to nearly $5.1 billion in sales in same 52-week comparisons.

It would be unfair, if not downright impudent, to place the blame squarely on carbonated heavyweights Coca-Cola, Pepsi and Dr Pepper/7 Up or to dismiss the carbs as a fizzled category. New products, including Pepsi Blue, Vanilla Coke and Red Fusion, have shown legs and could be long-term complements to the core cola and lemon/lime drinks.

Further, despite impressive leaps by other cooler categories, soft drinks remain top stock across all retail channels. According to New York-based research firm Beverage Marketing Group, the average person consumes 54 gallons of soda annually. Number two in the cooler is water, with 21 gallons per person.

"The growth has obviously slowed," said Gary Hemphill, Beverage Marketing's senior vice president. "In each of the past four years, sales growth has been less than 1 percent. Even with all the innovation, we saw only incremental growth." In contrast, water has enjoyed sale surges in excess of 25 percent annually in recent years.

Changing Relations

It wasn't long ago when a Coke or Pepsi representative would show up at a local c-store chain and, with a wad of financial promises, put together a cold vault planogram.

With soft drink sales sagging, retailers, once beholden to the demanding multibillion-dollar beverage behemoths, are pounding their chests in defiance, pressing suppliers for enhanced marketing allowances while bluntly turning aside cooler demands.

"Waters and teas are catching up and, to be honest, companies like Poland Spring and Gatorade are paying good money to have prime cooler space — and I mean thousands of dollars, not chicken feed," said Kevin Noon, president of K&K Food Mart, a 10-store chain in Brockport, N.Y. "Meanwhile, your traditional pop is dying. It's like groceries — you'll have your mainstays, but that's about it."

K&K favors a 16-door set with four doors for carbonated, another four to five doors for beer, two for dairy and the rest for water, teas and sports drinks.

A couple of years ago Noon slotted three cooler doors apiece for Coke and Pepsi and one door each to the non-carbonated family. Now, K&K is entering into an exclusive agreement with Pepsi, meaning that Coke is relegated to a single door, while Pepsi seizes 75 percent of carbonated space.

"The slotting fees are much more aggressive," Noon said. "That's squeezing smaller guys out. What I expect is that five years from now these big companies are going to go back to basics. That means everyone will have fewer selections and pay more attention to the beverages that got them to where they are."

Brad Lemoine, marketing director at U-Pak-It, a 37-unit chain headquartered in Monroe, La., is less cynical than Noon. He sees soft drinks as a critical mainstay, a destination. But like Noon, he acknowledges that the shifting landscape toward non-carbonated is intensifying space allotment and which players get forced out.

"We still see carbonated beverages on the upswing," Lemoine said. "But, of course, there is more competition with water, New Age and the juices. Unfortunately for a lot of smaller players, there is more opportunity to lose because they can't make the cut."

In a 13-door cooler set that includes beer, CSDs occupy three doors, while isotonics, dairy and New Age receive one apiece. Beer and wine fill the rest. "Something interesting I've discovered is Coke is advocating BevMax, where the carbs are all together and they pulled the Minute Maid flavors from the carbonated to the non-carb with Fruitopia."

Coca-Cola, which could not be reached for comment for this story, rolled out Beverage Max last year with the purpose of catapulting cold-vault sales by organizing space based on consumer needs. The program endorses a handful of distinct categories: carbonated, juices/juice drinks, ready-to-drink teas, sports drinks, water, energy and New Age beverages, and dairy.

"Right now," said Lemoine, "we're hesitating whether to continue using the BevMax philosophy. The problem we've noticed is customers are expecting the beverage to be where they've been. They don't want to go around looking for them."

With Coke sales strong, but stagnant — CSD sales grew 1.2 percent last year as opposed to the 3-percent goal — Lemoine is moving forward with a daring plan. He is revamping his merchandising and marketing program, slicing year-round Coke promotions to nine months, while inserting a Pepsi promotion for one month in the spring, summer and fall.

"It's a dangerous precedent and a Catch-22 for Coke," he acknowledged. "But if we do well with a nine-to-three, Coke-to-Pepsi [promotional] schedule, we think the whole category can benefit and Coke will do better."

Growth Hope

With popular brands like SoBe, Fruitopia, Aquafina, Tropicana, Minute Maid, Gatorade and others under the Coke or Pepsi umbrella, the fact that carbonated has lost its edge is not altogether demoralizing for the two beverage giants.

"Each of the three companies have basically made a commitment to being a total beverage company," said Hemphill of Beverage Marketing. "They want to respond to whatever may be the consumer need."

"People are still paying $2.99 for the 12-pack, the same price they paid 20 years ago," said Fleck of Zip Trip. And the buy-two-get-one-free on 20-ounce SKUs remains popular with retailers interviewed.

Yet, despite heightened promotions and retail discounts, a growing segment of customers no longer view carbonated drinks as a staple, but as a treat. Zip Trip's Fleck cited himself as a primary example of today's beverage consumer.

"A year ago, my doctor said my blood pressure and cholesterol were too high. So I started running, lost a lot of weight and I don't drink pop anymore. In pop, you've got the sugars and caffeine. I try to stay away from that."