Beverage Industry

Wall Street Weighs In

December 1, 2005

Wall Street Weighs In
 By Elizabeth Brewster
As Wall Street takes stock of 2005, it’s clear that soft drinks and non-carbonated thirst quenchers have put a sparkle in industry analysts’ eyes this year, despite company performances that have been challenged recently by a downpour of pricing increases.
New 2005 products are keeping consumers coming back for more. In fact, Citigroup beverage analyst Bonnie Herzog expects a strong showing from PepsiCo for 2005 thanks in part to “more promising ... beverage innovation such as ... Aquafina FlavorSplash and Sparkling, and flavor line extensions on Gatorade and Propel,” she writes in a recent research report.
Also drawing rave reviews from analysts this year was the bottled water segment, which has continued its path of upward mobility. Volume growth soared as the category shifted focus from bulk to bottled products and sales of premium-priced enhanced waters, such as Glaceau’s Vitamin Water, took off, reports beverage analyst John Faucher at JPMorgan. “The category continues to shift away from bulk packages to multi-packs of branded water,” he writes in a recent U.S. beverages research report.
Another segment on the upswing in 2005 was sports drinks, which “continue to grow at a torrid pace with very strong volume gains and slightly positive pricing,” according to JPMorgan.
“The energy drink segment has grown 88 percent annually over the past seven years, and we project it will grow at a healthy mid-teen rate over the next three years,” writes Citigroup’s Herzog.
On the alcohol side of the aisle, beer pricing wars in 2005 have left analysts wary about the category’s prospects for the year ahead. “...We believe the national price war should abate by early 2006,” writes Citigroup’s Herzog, “but expect mini price wars in major markets to continue to wage deep into the year.”
Merrill Lynch beverage analyst Christine Farkas also foresees ongoing pricing issues for beer. “We continue to be concerned over the industry’s pricing,” she reports, “and while there are early signs of some stabilization in several markets, it is difficult to suggest with strong conviction that prices have bottomed.”
Herzog adds: “Until industry leader Anheuser-Busch focuses on implementing revenue enhancement initiatives, we think industry profitability will continue to be at risk. We see 2006 as a reset year and believe marketing and innovation investment will be up as the industry tries to save the flailing image of beer.”
The bright spots in the beer marketplace for 2005 were imports, notably Corona and Stella Artois, and craft beers — and both segments could offer opportunities for brewing heavyweights too, analysts say.
“Some of the recent initiatives, including seasonal brews and the Michelob Specialty Sampler, could provide major brewers with some firepower against their smaller, more nimble craft competitors,” Herzog reports.
In fact, brewers could gain a much-needed boost from uniting against other alcohol categories next year rather than duking it out among themselves, analysts say. “We would like to see more brand-oriented, brand building messages that do not involve extreme focus on direct competition,” Herzog writes. “Given the rise of wine and spirits, we think it is critical for domestic brewers to develop messages that can help beer compete against other categories.”
And those other categories — spirits and wine — toasted stronger volume growth in the past year compared with beer. “A competitive pricing environment, favorable demographics, a strong cocktail culture, health concerns and continued popularity of wine among young adult drinkers” have all contributed to that growth, reports Merrill Lynch’s Farkas. BI