Glass Half Empty or Half Full?

Beverages ? whether packaged, alcoholic or fountain ? continue to be a key driver 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 Illinois. The Summit was sponsored by Anheuser-Busch, Red Bull North America, WhiteWave Foods, Grindmaster-Cecilware, Nestlé Waters North America and Sparkling ICE.

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 convenience store 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 water subcategories 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? 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 during 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 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.

BALANCING BEER

When it comes to winning in the beer category, convenience store retailers often take one of two approaches: focus on craft or focus on the core. And neither one is the right approach.

A balanced strategy is the most successful, Dean Zurliene, senior director of category management for small format at Anheuser-Busch, told attendees of the Summit.

?A good beer store is typically a good beer store across all segments: craft, import, premium, value and [flavored malt beverages],? he explained. ?If you don?t have the right assortment in one segment, you can affect another.?

To drive this point home, Zurliene noted that a customer who buys a six-pack of craft beer also buys a 30-pack of value beer.

?Assortment is key because people like variety,? he said. ?But there is a tipping point and the key is finding that tipping point.?

The premium segment still holds reign over the beer category and more often than not, if a store does well in premium, it probably does well with craft beer and imports.

While beer delivers lower margins than other products ? only cigarettes have a lower margin inside the store ? the category is up almost 5 percent in the convenience channel nationally, Zurliene stated. Beer, on average, typically represents 10 percent of inside space and 14 percent of in-store revenue.

In addition to assortment, cold beer is the rule of thumb for c-stores. Ninety-two percent of all beer in a convenience store is sold cold, according to the Anheuser-Busch executive.

?Convenience and cold are two of the things you have to do right,? he stressed.

COMPETITION HEATS UP

With other retail channels moving into the ?convenience? territory, c-store retailers have to up their game to stay a step ahead.

According to The NPD Group?s Warren Solochek, vice president of business development, foodservice, approximately 50 percent of the population hasn?t visited a c-store in the last year. On the upside, this leaves retailers with a lot of potential to get new people into their stores.

?You as operators have to tap into new sources of growth,? he said.

There are currently two types of c-stores: the ?haves,? which offer a diverse, sophisticated merchandise mix and engage in multiple foodservice occasions; and the ?have nots,? which are gasoline dependent and have minimal foodservice capability and willingness. The ?haves? are going to survive, Solochek cautioned.

Beverages make up the most important part of the foodservice menu mix, with NPD data showing they are included in approximately three-quarters of all quick-service restaurant (QSR) meal/snack occasions.

Notably, c-stores have increased beverage servings over the long term, while beverage incidence and servings have declined at traditional QSRs. Beverage variety is also generally better developed at c-stores.

C-stores can effectively compete with QSRs by capitalizing on the convenience they offer and focusing on the top-growing foods in the c-store market, which are different from the top-growing foods for QSRs. They include salty snacks, breakfast sandwiches and pizza. Combos or bundled offers are other key c-store tools for boosting order size and the average check.

THE WEATHER FACTOR

Weather conditions are a primary driver of consumer needs and buying decisions, but they also create risks, opportunities and disruptions, said Eric Symon, senior vice president of Planalytics Inc.

It?s important for c-store operators to ?weatherize? themselves and understand the impact weather can have on a store?s performance, while leveraging weather opportunities to increase sales and customer engagement, he noted.

Because favorable weather in some markets can balance unfavorable weather in others, its impact can go unnoticed at the headquarters level, according to Symon. On a store level, operators should be aware that individual serving sizes are more sensitive to weather changes than bulk sizes. Water, soft drinks and sports drinks are the most sensitive segments; juices and energy drinks are least sensitive.

Although temperature does make a difference in beverage sales, very high or very low temperatures don?t necessarily mean a sharp change in sales will result. ?Extreme? temperatures are based on what a region is accustomed to.

Still, at a market/week level, demand swings due to weather can range from plus or minus 40 percent to 60 percent or more, and swings in demand pre-, during and post-major weather events can reach into the positive or negative triple digits.