The Business of Beverages

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The Business of Beverages

By Mehgan Belnager, Linda Lisanti & Tammy Mastroberte

No matter their store count, or the area of the country they operate, one thing was unanimous among the retailers at Convenience Store News' recent Packaged Beverages Roundtable -- it's good to be in the beverage business these days.

"The category is a profit generator," said Matt Paduano, vice president of information for Nice N Easy Grocery Shoppes in Canastota, NY. "A lot of the competition is making it a loss leader, but it is the most profitable category in the store next to foodservice."

Much of the category's success can be credited to noncarbonated beverages. Health and wellness trends have launched this segment to a lofty place for consumers and retailers alike. Expanding bottled water segments -- including ultra-premium, functional and flavored -- along with a plethora of energy drinks, functional beverages and premium teas are keeping consumers interested, while high retails are keeping c-store retailers happy.

Functional waters, such as Glaceau's Vitaminwater (at presstime, Coca-Cola announced it reached an agreement to purchase the Whitestone, N.Y., beverage company for $4.1 billion), are moving at a quick pace for Nice N Easy, according to Paduano. In fact, he expects the brand to be in the Top 5 of all the beverage brands the chain carries within the next 12 months.

Retailers agreed that while ultra-premium waters -- Fiji, Smartwater, etc. -- feature a high price point and are doing well, their taste might not be that different from regular bottled water. One retailer cited an exotic ultra-premium bottled water made from glaciers.

"I think we've done almost all we can do with water," said Dan Harvey, category manager of beverages for Irving Oil Ltd., operator of more than 500 convenience stores throughout eastern Canada and New England.

Energy beverages are another segment within the category showing explosive growth.

Retailers, like Harvey, noted that the multitude of product introductions in the past few years have made it difficult to stay on top of the category. "I struggle ... there is so much to list to avoid duplication," said Harvey, who predicts that there will be a rationalization in the energy segment eventually, and "time will tell" which brands survive.

"I've said it for five years -- there will be a shakeout," echoed Butch Fulton, merchandising manager for Plaid Pantries Inc., a 100-store chain based in Beaverton, Ore.

It's a matter of when, not if, in retailers' minds. The consensus was that after consolidation, six to eight brands will stay in the cooler. Fulton said he currently has 30 energy drink brands in stores, but he expects five to 10 to remain long term.

The category has not reached that point yet, however.

"We're seeing line extensions upon line extensions in energy drinks and 24-ounce upsizing," Nice N Easy's Paduano said. "Some of the big players try and muscle their way in with their 'me too' brands that add no value to our coolers. The first brand to create an innovation -- we stick with them."

In Li'L Cricket Food Stores' Southeastern market, the Monster energy drink brand is growing rapidly. "With its new distribution agreement through Anheuser-Busch, I think Monster is going to give Red Bull a run for its money," according to John Zuber, vice president of marketing for the Spartanburg, S.C.-based chain.

Fulton noted that the prolific success of energy drinks is not only stunting other packaged beverage segments, but also other categories outside the cold vault. Since consumers are now turning to energy drinks for an afternoon pick-me-up, candy bar sales have suffered.

In the ready-to-drink tea category, colors are all the rage. Green, white and red varieties are catching customers' eyes, while boasting antioxidant and EGCG health claims. Brands doing well for the retailers include Snapple, Lipton and Arizona.

"We're expanding teas -- the whole category is picking up because of the health factors," said Rick Rykal, retail specialist for CHS/Cenex, St. Paul, Minn. "It's got a bright future."

However, there was some debate over Arizona's pre-priced cans. Harvey of Irving Oil said he stays away from them, while another retailer believes they can be used for traffic generation and said "looking at it now, we could build volume to get them in the store."

Retail prices on the drinks will climb, Paduano forecasted. "I don't think going lower [in price] will work. I think it's the other way. That's where the future is."

Marty Eskenazi, Cadbury Schweppes Americas Beverages' VP for the convenience channel, shared that in select markets, the company has introduced a new three-tiered strategy for its Snapple brand -- super-premium, premium and value.

CSDs Not Giving In
With all the fierce competition from alternative beverages, carbonated soft drinks (CSDs) continue to fight for space in the cooler. The latest trends in the segment are diet options and new flavors, which are helpful in terms of boosting sales, but challenging when it comes to finding adequate space for all the new products.

"[Manufacturers] keep coming out with new brands, and how can we give them a fair test?" questioned Rykal. "We want to be the first with new products, but it is in the thousands for the number of new products in the whole beverage category, and this trend will not only pick up, but will continue to get worse."

So then, how much time is enough before a convenience store should either incorporate a new beverage into the permanent planogram or remove it forever?

Several roundtable attendees said they subscribe to a three-to-six-month rule, while others feel it doesn't even take that long to know if a product isn't working. And all believe the vendor community should step up and take more responsibility in the process.

"It benefits the supplier if they make the decision to pull the product because then chances are, they will keep the space," said Mark Wilcox, category manager for Jacksons Food Stores. "If we make the decision, chances are they are going to lose the space."

Nice N Easy usually follows the three-to-six-month rule, but Paduano says it depends on the season the product is introduced. "If you put a new product in during April and by July, it is not cutting it, we are usually ready to get rid of it before the vendor," he noted. "They won't lose the space that way, and we are helping them by eliminating a dog and putting in something of theirs in that is actually selling."

For Rykal, it may not even take that long. "If we promote something heavily and it doesn't do anything in 30 days, then we may not keep it," he explained.

At Plaid Pantries, the company is "more selective" on what new products it tests, according to Fulton. "Getting the products first is not an issue; it's finding room for them. We are constantly attempting to get new items into the vault."

Some of the new items this year, he said, are Xenergy and 12-ounce Red Bull, both of which have proven that consumers will pay higher prices for the items and brands they like. "I was very concerned about the retails on the 12-ounce Red Bull, but it took right off and is growing every month," Fulton said. "Xenergy is priced 40 cents higher than our other 16-ounce drinks, but has created a strong following [that is] willing to pay the extra."

This year, Fulton also started stocking Stewart's and Jones Soda in premium beverage glass bottles in an attempt to drive some life into the CSD category. "While it's still early, it looks like it is a good way to go for us," he said. "The products are doing really well and are showing an early return."

Cadbury's Eskenazi urged retailers to take advantage of supplier resources when deciding how to stock their coolers, and in the end, "If the shoe doesn't fit, don't wear it."

Another strategy that many retailers are applying to counteract slowing sales in the CSD segment is promotions. "We are seeing sales drops and consumption is down, so we are conditioning people to buy promotionally," Harvey said. "We leverage the seasonality for a promotional theme, and right now, we are doing hockey."

At Li'L Cricket stores, take-home packs are used as promotions to get people into the store to buy other items as well, according to Zuber. The chain doesn't use single-serve items in promotions, because it "only cuts into margins," he said.

Two-fers are the most popular promotional strategy in the packaged beverages category. Since they can draw consumer interest and in some cases, boost sales, "we do a lot of two for $2.50, and then put a higher price on 1-liters, which are growing tremendously in my market," Fulton said.

He also cross-merchandises the category with candy. "We do cooler clings with coupon pads and usually tie it in with a candy bar -- buy a bottle, get a free candy bar or 50 cents off a candy bar," he explained.

On the other hand, while two-fer promotions may bring attention to the category, many retailers still find their single-bottle sales get the most rings -- which isn't a bad thing, considering singles provide a better margin. "We do Dr Pepper promos at two for $2, but 80 percent of my sales are still singles at $1.49 each," Nice N Easy's Paduano said.

Confronting the Challenges
Out-of-stocks are still an issue, although retailers say it seems the tables have turned when it comes to stocking the category and maintaining the in-stock position. Whereas warehouse suppliers were often the culprit, today it seems more of a DSD issue.

Many of the wholesale vendors are utilizing technology with retailers for computer-assisted ordering, automatic replenishment and more, while the DSD vendors "are not equipped to do it," Paduano pointed out. As retailers become more sophisticated in terms of technology, they are demanding more, and many are in talks with their DSD vendors to begin utilizing this technology to reduce both overstocks and out-of-stocks.

"There is a huge opportunity for forecasting at the vendor level," Harvey said. "Our wholesaler always sends us reports, and we started asking our DSD suppliers to do the same. Since I started asking them for reports, the out-of-stocks have improved."

Others are taking a more hands-on approach. Last summer, Jacksons implemented a program where it had staff go out to the stores and check for out-of-stocks. "We thought the staff members would be out at stores until noon, but they were actually out until 8 p.m.," Wilcox explained. "We did this from Memorial Day to Labor Day, and we had the best summer ever in terms of beverage sales because we had vendors delivering on Fridays and we were in-stock for the weekend."

Plaid Pantries took a similar approach, sending staff out on Fridays and Mondays to check the stores and the in-stock positions. "We have made plenty of phone calls on Friday or Saturday to get product. I've been known to make calls on Christmas Day," Fulton said.

The flip side exists as well, and that is overstocks. "We have more of a problem with overstocks," Zuber noted. "Either unsuccessful items not moving out in time or vendors bringing too much inventory."

Yet another issue is the move by wholesalers to apply activity-based costing to the packaged beverages category.

All the retailers in attendance felt that the wholesale price increases will result in higher prices for the consumer. However, many said they will not see those increases because they use smaller, regional distributors who are not following the path of larger wholesalers that increased prices to distribute packaged beverages -- at least, not yet.

"We're with a small, regional distributor," Paduano said. "Unless he gets a cost increase from a vendor, he doesn't add on costs. I see it as a competitive advantage -- the competition will raise prices and I can match their retails and generate more profit out of the category."