Thirst for Knowledge

Retailers, industry experts trade information at the 2013 Beverage & Beer Retailing Summit

There are almost as many potential strategies for the beverage categories as there are individual products to stock in the cold vault, at the fountain machine and on the coffee island. So, how are ambitious convenience store retailers supposed to know which will lead them to success?

For a number of c-store and grocery channel retailers, the answer was to attend the 2013 Convenience Store News and Progressive Grocer Beverage & Beer Retailing Summit, which took place June 6–7 at the Westin Chicago North Shore. Coffee, energy drinks, carbonated soft drinks (CSDs), alcoholic beverages and more were on the agenda at the second annual event.

A variety of industry experts provided a comprehensive look at the current state of the beverage market — and more importantly, how it is changing — in an effort to provide the best answers to the question of how retailers can improve their beverage business. Retailers in attendance included representatives from BP Americas, The Pantry Inc., Sunoco Inc., Mid-Atlantic Convenience Stores, The Kroger Co., Walgreen Co., Maverik Inc., Brookshire Brothers, Hess Corp., Bobby & Steve’s Auto World, Bradley Petroleum and Casey’s General Stores Inc.

CHALLENGES & OPPORTUNITIES IN AN EVOLVING MARKETPLACE

Bonnie Herzog, senior analyst of beverage, tobacco and consumer research for Wells Fargo Securities LLC, kicked off the event with a keynote speech entitled, “Evolution of the Beverage Shopper.” According to Herzog, large-format retail remains the dominant liquid refreshment beverage (LRB) distribution channel, yet supermarkets and vending have lost share of CSD volume as mass merchandise, convenience and gas have gained share.

Among the factors that negatively impact sales of non-alcoholic, ready-to-drink (NARTD) beverages, weather remains a significant one. Precipitation and lower temperatures discourage activities associated with high-volume beverage purchases, such as barbeques, family get-togethers, etc. Based on a survey of 10,000-plus beverage retailers, sales were up only 2 percent for Memorial Day 2013 vs. 6 percent for Memorial Day 2012, as this year’s holiday weekend was decidedly wetter and colder in the top 15 cities. Furthermore, 60 percent of respondents indicated that weather had a “much worse” impact on second-quarter beverage sales.

Additionally, Herzog noted that the beverage promotional environment remains high, particularly true during the Memorial Day holiday. Survey respondents indicated that promotions were up 4.6 percent this year vs. 3.1 percent during the same time last year. Respondents ranked energy as the most promoted segment, followed by colas and enhanced waters/sports drinks.

Seventy-three percent of respondents indicated that multi-purchase promos are up this year and having a positive impact on volume, but take-rates are declining. Consumers are becoming fatigued by this method, as they want value and not necessarily volume. Herzog said pricing and displays have the greatest impact on sales, as most consumers make their purchase decisions in-store.

Health and wellness trends remain a key factor in the beverage market. As consumers continue to seek lower calorie and more natural beverage products, manufacturers are responding by aligning their messages with balance and healthy, active lifestyles, as well as developing innovative sweeteners and brand and product extensions that provide more low- and no-calorie offerings.

Examples of this include Dr Pepper Snapple Group’s TEN platform, The Coca-Cola Co.’s global commitment to fight obesity, and PepsiCo Inc.’s partnership with Senomyx to develop sweetener technology that could potentially lower the sugar, high fructose corn syrup and calories in beverages.

In terms of the competitive environment, Herzog concluded that Coca-Cola is the best-positioned beverage company overall by virtue of its leading global market share and distribution system, dominant trademark brand, comprehensive LRB portfolio and occasion-based strategy.

Dr Pepper Snapple holds its ground in the United States with strong flavored CSDs and improving teas, as well as the potential of its TEN platform to drive volume growth over time. PepsiCo, however, needs to improve in the beverage market to accelerate its shares, Herzog stated, noting the company relies heavily on snacks to drive growth and profitability.

ALTERNATIVE BEVERAGES HAVE THE ENERGY TO GROW

Long a subcategory favored by teenagers and young adults, energy drinks have matured but still have plenty of room to grow, Red Bull North America’s Guy Wootton, director of category insights, said in his presentation on alternative beverages.

While the penetration level of energy drinks is low compared to CSDs, that translates into room to grow and the segment is doing just that. Based on market data, Mintel recently revised its five-year forecast for energy drinks from 64-percent growth to 86-percent growth, with a projected $11.9 billion in sales in 2016. Additionally, within the overall beverage category, energy drinks are already the second-largest subcategory.

So, who is buying these alternative beverages and who should c-store retailers focus on? It remains a highly youth-dominated product — “really staggering how much it is,” said Wootton — with higher levels of penetration among younger generations. More than half of energy drink consumers (54 percent) are under the age of 34. While the majority are white, energy drink consumers have a more diverse racial mix than the general population. Hispanics are particularly strong consumers, accounting for 21 percent of energy drinks’ customer base.

Although most energy drink consumers are currently male, Wootton cautioned retailers not to ignore the 38 percent of energy drink purchasers who are female — a figure that’s growing over time as new flavors and more diet varieties become available.

Over the next five years, Red Bull expects energy drink growth to be driven primarily by five factors: baseline growth from core brands; consumers’ insatiable need for an energy boost and expansion of usage occasions; focus on category management; growth of the core demographic target, especially Hispanic shoppers; and category innovation.

Along with positive projected growth rates, energy drinks provide a number of advantages for retailers, some specifically for c-stores, according to Wootton:

• High gross margins, at 27 percent for grocery and 44 percent for convenience stores.
• A wide variety of usage occasions and time-of-day consumption.
• High dollar volume, with energy drinks making up the top two single-serve beverages in both grocery and c-stores.
• Impulsive shoppers, with energy drink consumers being 31 percent more likely to buy on impulse.

When it comes to innovation, the subcategory has seen less lately, but recent innovation has had more impact, Wootton added. The industry is seeing a strong trend of cross-category innovation from energy drink brands within the category (such as Red Bull’s flavor additions), as well as from brands with other category claims (such as energy water drinks) and from other category brands with energy claims (such as Mountain Dew Kickstart).

One of energy drinks’ major challenges moving forward will be to bring its store footprint up to match its category share, as well as to optimize its existing space, he said.

ALCOHOLIC BEVERAGES REMAIN STRONG FOR RETAILERS

Despite the many challenges faced by c-store and grocery retailers — described by Nielsen Client Director Danelle Kosmal as “death by a thousand cuts” due to poor weather, high taxes and the still-weak economy — alcoholic beverages are selling very well and remain one of the top five departments in stores.

Kosmal noted that all three segments — beer, wine and spirits — experienced growth last year across all off-premise retail channels. So far this year, wine and spirits are performing well, but beer sales have been soft, according to Nielsen research.

“‘New’ is a fundamental part of the beverage alcohol landscape,” said Kosmal, pointing out that 77 percent of the beverage alcohol growth in c-stores was due to new category items. Craft beers, flavored malt beverages and cider account for a disproportionately higher share of sales, she noted, but nine out of the top 10 beers are still mainstream or below premium brands. In fact, the top 10 beer brands account for 70.3 percent of beer unit volume in c-stores and 67.1 percent of dollar volume.

Retailers during the roundtable discussion acknowledged the increasing number of new items being introduced by suppliers. However, they expressed concern that “new items are taking up space without growing the category.” As one retailer commented, “New items are not generating incremental customers, nor incremental volume.”

The retailers in attendance also noted that in beer, the pricing differential between premium and sub-premium beers has narrowed considerably.

Kosmal wrapped up by summarizing three major trends in the beverage alcohol category:

• High-end premiumization: The high end leads growth in all alcoholic beverage segments. The grocery and convenience channels are leading growth for high-end beer, wine and spirits, and the high end is particularly growing among Millennials.
• Blurring lines: Consumers are blurring the lines between beer, wine and spirits. Craft beers are taking on popular wine and malt beverage flavors, such as vodka chardonnay. Pouches are a cross between wine and spirits. “Most major players have entered the pouch space in the past year,” said Kosmal. Plus, sweet tastes are driving sales. For example, moscato wine is favored by the growing Hispanic demographic.
• Variety: Variety is a constant in motivating additional purchases. “Millennials, in particular, like to experiment and they drive sales,” the Nielsen executive added.

Some additional insights into driving beer sales, in particular, were provided in a presentation by Dean Zurliene, senior director of category management at Anheuser-Busch. For c-stores, beer is both a destination and highly-planned purchase at high weekly frequency. How shoppers think about purchase occasions determines both where and what they purchase, based on what’s offered.

To help retailers get into the consumer mindset, Zurliene highlighted several “choice driver” shopping missions: the planned event, the routine refill, the social beer run, the savvy stock-up, the “for me”/“for now,” and the unplanned fill-in.

To optimize beer sales, c-store operators should emphasize certain key initiatives, he said, including attracting and converting shoppers, focusing on core shopper retention, winning immediate occasions while planting the seed for future purchases, and driving total store performance.