The Business of Beverages, Part 1

SCHAUMBURG, Ill. - Beverages -- whether packaged, alcoholic or fountain -- continue to be key drivers for the convenience store industry, although shifting consumer preferences and outside forces such as the weather are not making it easy.

The Convenience Store News 2014 Beverage & Beer Retailing Summit took a closer look at the overall beverage marketplace, bringing retailers and suppliers together June 5-6 at the Renaissance Schaumburg Hotel and Convention Center.

In broad terms, the convenience channel is benefiting from consolidation, demographics, time-sensitive consumers and a shift to higher-margin foodservice. At the same time, the channel is facing several challenges, including the ongoing swipe fee battle, health care reform, higher minimum wages and channel blurring, said Bonnie Herzog, managing director of beverage, tobacco and consumer research at Wells Fargo Securities LLC.

Still, beverages remain a bright spot -- even if the category is undergoing a metamorphosis of sorts.

In packaged beverages, consumer preferences are shifting away from carbonated soft drinks (CSDs) and toward healthier products such as water and functional beverages, including energy drinks and teas. Non-carbonated beverages are taking share away from CSDs and driving growth in the category.

"Bottled water has driven incremental growth in beverage volume, but the category has the lowest average price per case with low margins," Herzog explained, adding that she expects to see innovation across the various subcategories of water because of the low margins in "plain" water.

CSDs, on the other hand, have lost 12.5 percent of total packaged beverage volume since 2003, and Herzog expects the segment to continue to shrink over the next five years. Diet CSDs are under significant pressure and saw total declines in 2013 of approximately 7 percent -- what she termed the "diet downturn."

"Consumers are leaving the [diet segment] for alternative options: health and wellness products, the energy category and regular CSDs -- just less," she said.

That doesn't mean the convenience channel should count out CSDs, however. They are losing share, but are still the largest segment, she pointed out.

In the good news department, Wells Fargo Securities' latest Beverage Buzz survey for the 2014 Memorial Day weekend found that beverage sales were up 4 percent during this year's holiday weekend compared to the 2-percent increase seen over the 2013 Memorial Day weekend. Greater beverage promotions and favorable weather drove most of this year's upturn, according to Herzog.

ENERGY BOOST

The continued growth of energy drinks, which are forecasted to outpace overall beverage growth, is another positive for c-store operators, but the target market for them isn't what many people expect, said Jim Sleightholm, director of category management for Red Bull North America.

The common perception is that consumers who buy energy drinks are all young men into extreme sports and loud music. The reality is that while energy drink consumers are generally young, more than half are over the age of 34 and 36 percent are women.

Several major factors will fuel further growth of energy drinks, according to Sleightholm. Improved consumer penetration is expanding the customer base and on a generational level, Gen Y is highly engaged with the segment. Yet, spending on energy drinks is up the most among non-Millennials since 2009.

Usage occasions are also expanding as energy drinks become an enabler instead of a crutch and offer consumers an easy pick-me-up. "The need for energy is universal," Sleightholm said.

Energy drink innovation has also removed standard barriers to entry by improving taste and offering low-calorie and low-sugar varieties.

Sleightholm also noted that while energy drinks do need to be promoted by retailers, they don't compete heavily on price. Consumers don't tend to wait for them to go on sale before making a purchase.

For more insights from the Convenience Store News 2014 Beverage & Beer Retailing Summit, log onto www.csnews.com on Tuesday for Part 2 of our event coverage.

The Beverage & Beer Retailing Summit was sponsored by Anheuser-Busch, Red Bull North America, WhiteWave Foods, Grindmaster-Cecilware, Nestle Waters North America and Sparkling ICE.