Consumers have signaled their desire for more variety in their beverage choices and the leading beverage manufacturers are striving to meet demand. The results have led to a spate of innovation within the carbonated beverage sector as well as acquisitions by the industry’s leading companies in non-carbonated beverage brands.
Carbonated beverages form the foundation of PepsiCo, Inc.’s beverage business, which include, among others, the Pepsi, Mountain Dew and Sierra Mist brands, and The Coca-Cola Co., the two largest carbonated beverage manufacturers in the world that control 50% of the carbonated beverage market. Cadbury Schweppes P.L.C., the maker of 7UP and Dr Pepper, ranks behind the two, a distant third.
While both Pepsi and Coca-Cola have extended their reach into the non-carbonated category, with The Coca-Cola Co. most recently announcing it will acquire Glaceau, carbonated beverages account for approximately 60% of the beverage market.
In the U.S., however, carbonated beverages are not a driving force in the market, according to "The United States of America Soft Drinks Quarterly Beverage Review," a report from Canadean Ltd., a beverage industry research firm based in Basingstoke, England. Instead, the demand for bottled water has grown with sales of multi-packs leading the way. Volumes for carbonated soft drinks were down more than 1% compared to 2005 with colas.
Negative publicity has plagued the carbonated beverage industry, according to Mintel International, Chicago. Concern for effective weight management has led consumers to discriminate against sugary beverages, and regular soda is practically the embodiment of "empty calories." According to the research group’s survey, 52% of respondents who reported they were drinking less soda than a year ago said they drank less regular soda than a year ago, and cited concern for their health as the reason; 45% cited concern for their weight.
Canadean, however, noted even diet carbonated beverages are of concern as sales during the last three months of 2006 were down by more than 3% compared with the same quarter in 2005. Regular carbonated beverages also suffered a negative performance.
"Clear attempts by carbonated beverage suppliers to maintain consumer appeal by investing heavily in new packaging, flavors and brand launches were negated by cost-driven price increases introduced in Q4," Canadean said. "All the major players suffered."
Low-calorie drinks currently have a third of the carbonated beverage market, but 2007 projections were not optimistic, according to Canadean. The decline in carbonated beverage consumption last year is expected to increase slightly in 2007, and a volume gain of less than 1% is predicted for the segment.
"I think we continue to see the consumers shift from carbonated soft drinks to non-carbonated," said Dawn Hudson, chief executive officer of Pepsi-Cola North America, during a conference call April 25 to discuss PepsiCo’s fiscal 2007 first-quarter earnings. "This is how people have been drinking for a long time in their homes and when they go out and live life on the go and want a ready-to-drink beverage. They are continuing to take more of the non-carbonated beverage area so we don’t see fundamental change to that.
"But I think it would be a mistake to say the category is tanking. Consumers still continue to really like carbonated soft drinks and there are some real opportunities to position new brands against new, unmet needs and to continue to ride brands like Mountain Dew or Sierra Mist that are still in the areas of the market that are growing."
Looking at the sales of carbonated beverages from a historical perspective, growth has been sluggish, according to ACNielsen’s Strategic Planner, which includes total U.S. food, drug and mass merchandiser data, excluding Wal-Mart Stores, Inc. For the 52-week period ended April 21, sales of total carbonated beverages were $14,147,605,598, a slight increase compared to the same 52-week period ended April 21, 2003, when sales were $13,817,463,413.
Where the red flag comes out is looking at unit volume sales. For the same period, unit volume sales of carbonated beverages in the U.S. declined to 8,239,069,078 in 2007 from 10,093,917,279 in 2003, according to ACNielsen’s Strategic Planner.
Looking ahead, Mintel’s report "Carbonated Drinks 2007," released in April, offers a pessimistic view of potential category growth.
"The future growth of carbonated drinks looks less-than-promising as the U.S. consumer combats obesity and moves toward ready-to-drink non-carbonated beverages, such as bottled water, hybrid juices, sports drinks, and also energy drinks," said the Chicago-based research firm. "Mintel’s forecast for these markets is more than robust as, for example, bottled water is projected to generate 36% inflation-adjusted sales growth during 2005-20; and energy drinks sales are expected to grow inflation adjusted 97% during 2006-11. In comparison, carbonated drinks sales are expected to decline 1% during 2006-11."
In 2006, performance across a variety of categories ranged from the significant growth of energy drinks to the flat performance of fruit beverages and carbonated soft drinks, according to the Beverage Marketing Corp., New York. Bottled water growth continued, but was outshined by the small energy drink market.
Blurring the lines
The B.M.C. noted the boundaries between beverage categories have blurred. The distinction between carbonated and non-carbonated beverages appears to be losing relevance for consumers who now choose from a range of beverages to meet a variety of needs.
"The liquid refreshment beverage market is being driven by the health and wellness trend," said Michael C. Bellas, chairman and chief executive officer of the B.M.C. "Beverages offering functional benefits are growing two or three times faster than conventional refreshment beverages. As consumers increase their per capita consumption of beverages in these newer segments, they are putting pressure on carbonated soft drinks and juice as well as tap water."
Companies seeking to regain momentum in the carbonated beverage category have turned to newer flavors, energy concepts as well as vitamin and mineral fortification.
In April, Coca-Cola North America introduced Diet Coke Plus, a fortified carbonated beverage. The soft drink has no calories and is a good source of vitamins B3, B6 and B12, as well as zinc and magnesium.
"Consumers, including Diet Coke drinkers, are increasingly looking for more beverage options, and we wanted to offer them the convenience of a calorie-free beverage that is a good source of several essential vitamins and minerals, and one that delivers on the great taste that they have come to expect from us," said Katie Bayne, senior vice-president, Coca-Cola Brands, Coca-Cola North America.
According to Mintel International, teenagers and young adults (ages 18 to 24) considered to be key carbonated soft drink consumers, are migrating from carbonated beverages to energy drinks, because they consider them to be more attuned to their fast-paced lifestyles.
In an effort to recapture those consumers, both Pepsi and Coke have introduced products that provide an energy boost. Through its Mountain Dew brand, Pepsi has introduced both MDX and AMP. The company also has added Diet Pepsi Max to its line, but the product, which contains extra caffeine, is targeted to adults ages 25 to 34 who are looking for an extra "boost" during the day.
The Coca-Cola Co. has introduced Vault to counter the migration to other energy brands. Marketed as a "hybrid-energy" drink, Vault features less carbonation than other energy drinks.
Less carbonation in Vault, fortification, lower calorie and new flavors are all examples of the different ways carbonated beverage manufacturers are trying to be innovative. However, Mintel’s forecast for the carbonated beverage market points to the perception of soft drinks being a cause for obesity as a hurdle the industry must get over.
"Health and weight concerns will continue to plague the carbonated soft drink industry," Mintel said. "While the American Beverage Association continues to refute the findings, these studies often receive a lot of press, negatively impacting the industry."
Mintel’s researchers forecast "Total U.S. retail sales of carbonated beverages at channels including Wal-Mart Stores, Inc., are expected to perform during 2006-11 very similarly to 2001-06 — averaging a slight annual increase in current dollars, but falling after adjusting for inflation."
This article can also be found in the digital edition of Food Business News, June 12, 2007, starting on Page 35. Click