Soft drink report

March 1, 2004
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Soft drink report

Soft drink companies labored to maintain positive results after a year wrought with job cuts, reorganization, school vending controversies and a bad rap in the fight against obesity in this country. But while soft drink consumption trends remain static in the United States, product innovation gave the category a needed boost during 2003.
Flavors and diet soft drinks paved the way to positive results for many soft drink manufacturers during 2003, according to Information Resources Inc., and ACNielsen. Pepsi-Cola Co.'s Sierra Mist experienced a 144 percent jump in volume sales, and Dr Pepper/Seven Up's DNL sales were up more than 1,200 percent during their first full year on the market (Sierra Mist's first full year in national distribution). Orange-flavored Mountain Dew liveWire, which was only available from Memorial Day until Labor Day, was possibly the most daring lightening-speed introduction and sought-after soft drink during 2003, while colas with lemon became less attractive to buyers.
In addition to paying attention to flavors, U.S. consumers also were watching the calorie content of the beverages they purchased in 2003. Diet soft drinks were the focus of marketing campaigns, led trends in beverage formulation and provided a needed boost in sales for manufacturers last year.
Among the leaders in the diet category, Diet Vanilla Coke shot up more than 397 percent in volume sales, according to IRI. Additionally, Pepsi's Diet Sierra Mist climbed to an almost 250 percent volume increase as newcomers to the market in 2003.
But it wasn't only the liquid that soft drink companies were concerned with in 2003. Pricing was a key variable in the success products had on the shelf. As Pepsi and Coca-Cola brands continued a pricing battle in store aisles, private label continued to move full-steam ahead in its quest to maintain and expand shelf space.
Coca-Cola overcomes challenges
From job cuts throughout North America in the beginning of the year to the $10-million Burger King frozen Coke lawsuit during the fall, The Coca-Cola Co. experienced a turbulent year. In the United States, the loss of 1,000 jobs and reorganization of the company's bottle/can, fountain and Minute Maid product divisions were only part of the challenges Coca-Cola faced in 2003. Due to the reorganization, a management shakeout also ensued. The company named Steve Heyer president and chief operating officer, and Daniel Palumbo chief marketing officer, and later, senior vice president in 2003. Management uncertainty is likely to continue in 2004 when Chairman Doug Daft retires from the company.
There was a silver lining in the cloud that hovered over Coca-Cola in 2003. In the first quarter, the company's retail division reported 2 percent gains in sales compared with results in 2002 due to Vanilla Coke, Diet Vanilla Coke and Diet Coke as well as continued success of the Fridge Pack, according to the company.
Year-end figures show that Coca-Cola's overall sales slipped 4 percent, with positive results reported only in the drug category of 2.5 percent. Coke with Lemon took a hit in 2003, registering an overall drop of 57.2 percent in volume sales from last year. However, the brand's cherry and vanilla renditions picked up some of the slack with 33.2 percent and 22.6 percent increases, respectively, in sales compared to the previous year. Furthermore, the introduction of Sprite Remix gave the company and the category a boost in 2003, lending to Sprite's trademark volume increase of 4 percent, according to Coca-Cola.
The company also introduced Barq's Floatz, initially in Southern states, in its attempts to revive the popularity of the trademark, and Swerve launched in school vending programs. Both products were designed to appeal to a younger demographic, while the latest innovation, Diet Coke with Lime, is expected to grab adult consumers with its unique taste.
In addition to new product introductions, packaging such as the catchy Vanilla Coke labels debuted during the summer, helped the brand compete with Pepsi Vanilla's launch. Coca-Cola also successfully wooed the Milford, Conn.-based Subway sandwich chain to drop Pepsi products in its outlets worldwide, which previously accounted for 85 percent of Subway's beverage business, and pick Coca-Cola as its exclusive beverage supplier.
Pepsi-Cola moving ahead
The Pepsi-Cola Co. had a bustling 2003 filled with product launches and organizational changes of its own. Beginning the summer selling season with limited-edition Mountain Dew LiveWire and launching Vanilla Pepsi at the end of the summer, the Purchase, N.Y.-based company recorded positive sales results in all channels, except for mass merchandise, according to IRI and ACNielsen. While Coca-Cola suffered a slight decrease in category volume
share, Pepsi reported a slight gain compared with last year. Although the brand's regular colas felt a 3.2 percent hit from last year, Pepsi flavors, including the Sierra Mist family of products, and Diet Cherry Pepsi, experienced increased sales of 144 percent and 68.9 percent, respectively.
Introduced in August, Pepsi Vanilla and Diet Pepsi Vanilla had Smith Barney analysts predicting that consumption in the vanilla cola category would continue to expand based on its 2003 performance. However, as a second entry into the market, Pepsi Vanilla may only add to Coca-Cola's success. Analyst expectations are that Vanilla Coke sales will rebound in 2004 due to increased media attention devoted to vanilla colas. And the most recent decision to launch Pepsi Edge, a mid-calorie cola, will have analysts watching with a close eye in 2004.
In other company news, Pepsi decided to capitalize on the success of tea during the past year by entering into a joint agreement with Unilever to market and distribute Lipton ready-to-drink teas. Pepsi Lipton International builds on the partnership formed early in the 1990s as a way to enhance portfolio strength for the two companies. Later in the year, the company announced it was dividing its North American operations into three core businesses. It proceeded to cut 750 jobs while consolidating into Pepsi-Cola, Gatorade and juice divisions to streamline manufacturing and supply chain operations.
Cadbury consolidates U.S. business
Dr Pepper/Seven Up Inc. was no stranger to change in 2003. Similar to the competition, the company struggled with decreasing sales and challenges due to organizational changes. As part of ongoing regional changes implemented by parent company Cadbury Schweppes plc, its three North American beverage units moved closer to consolidation. The goal: to create a united beverage group that includes Dr Pepper/Seven Up, Snapple and Mott's organizations under the leadership of Cadbury Schweppes Americas Beverages President and Chief Executive Officer Gil Cassagne. Mike McGrath, former president of Dr Pepper/Seven Up, was named president of sales for the division, and Jim Johnston, senior vice president of strategy, heads the Americas Beverage strategy group headquartered in Plano, Texas.
Although the company's overall channel sales for all brands dropped more than 3 percent from the previous year, 7 Up's DNL showed impressive results. According to IRI and ACNielsen, DNL reported a more than 1,700 percent increase in grocery store sales and a more than 1,500 percent increase in drug store sales during its market debut in 2003.
The company's focus on diet products in its advertising and marketing spending toward the end of 2003 is apparent in the continued success of Diet Dr Pepper. The diet soft drink reported a 5 percent increase in sales overall, and a 10 percent increase in the convenience and grocery channel.
Private buys
Much to the disappointment of nationally branded soft drink companies in the U.S. market, the private label bonanza continues and is building recognition among consumers on the retail shelf. Across all retail categories, excluding mass merchandise, private label colas and flavored soft drinks saw sales increases. A particularly strong outlet for private label proved to be the convenience and gas channel, averaging an almost 37 percent increase in sales compared with 2002, according to IRI and ACNielsen.
The surge in convenience store private label sales is no surprise considering Cott Corp., Toronto, Ontario, the world's largest store-brand soft drink producer, announced in April that it would tap convenience stores for future growth. Cott Corp. reported record results for 2003 and saw sales rise 18 percent to finish the year with $1.4 billion in revenue, excluding acquisitions. Its U.S. business accounted for 17 percent of the company's total growth.
Former head of Cott's U.S. division, John K. Sheppard was named president and chief executive officer in July. Sheppard plans for 2004 include taking advantage of opportunities in not only the United Kingdom and Mexico, but also in North America by strengthening Canada-U.S. ties. The company has already moved to expand its customer base in the mid-Atlantic states by acquiring North Carolina's Quality Beverage Brands LLC. The agreement also involves Independent Beverage Corp., which is expected to add approximately $45 million in annual sales.
Soft drink sales bright abroad
According to a recent report published by Euromonitor, Chicago, carbonate sales in mature markets such as North America and Western Europe have remained static during the past five years. However, there is some light at the end of the tunnel. The report points out that low-calorie soft drinks in these established markets and non-cola carbonates in other global markets maintained a healthy growth spurt during this time.
In Euromonitor's report titled "Carbonates: The battle for share in emerging markets," analysts suggest the United States, which boasted 200 liters per-capita consumption in 2003, is suffering from saturated demand as well as negative publicity about obesity and diabetes rates among children. The slide is further attributed to the consumer trend to buy functional beverages such as enhanced bottled waters — a trend Euromonitor predicts will continue into the future.
Non-cola soft drinks
Emerging regions such as Asia-Pacific and Eastern Europe have experienced strong carbonates growth during the past five years, according to the report. More specifically, countries such as Romania, Ukraine, India, China and Mexico have contributed to the regionally reported volume growth of total carbonates in both on- and off-premise. Growth rates in Asia-Pacific and Eastern Europe were 22 percent and 18 percent, respectively, from 1998 to 2003. Latin America also demonstrated more than 16 percent volume growth for other non-cola carbonates, including brands such as Antarctica and Kuat.
Euromonitor attributes the chief spur of carbonate growth to activity in non-cola carbonates, either through the launch of new flavors or the popularity of local generic brands. Multinationals have been exploiting local brands by launching their own private label soft drinks or buying into existing brands.
One example of multinational dominance in the soft drink market is Romania, which enjoyed the highest carbonate growth in the world in 2003 — almost 84 percent — as a result of flavor introductions. Beginning in 2001, Coca-Cola launched the Fanta Berries line of soft drinks in Romania, which includes three flavors: Fanta Madness, a grape-flavored soft drink; Fanta Shokata, with elderflower and lemon flavors, and Fanta Green Apple.
The company also launched Smart brand soft drinks in China in flavors such as Apple & Banana and Pineapple & Mango, which emphasized "local flavor." According to the report, non-cola carbonates in China also saw high growth over the review period.
Local flavor focus
Flavors are top of mind to multinationals entering markets throughout the world. However, attention to local products and consumer tastes are key to launching a product in an emerging market.
In Russia, where non-colas account for more than 55 percent of soft drink volumes, traditional Soviet-era products such as Baikal, Tarkhun, Kolokolchik, Ruratino and Kvas, a fermented sparkling non-cola beverage, are becoming more popular. In response, Coca-Cola has launched its own version of Kvas called Frukatim.
But it is not only in Russia where Soviet-era brands have loyalists. In the Czech and Slovak Republics, Kofola, a cola with a different flavor profile than U.S. colas, has seen a revival in sales during the past five years.
South of the border
Venezuela and Brazil also are home to local non-cola success stories. With malta in Venezuela and guarana in Brazil, multinational companies interested in entering these markets have tough competition among local producers of these market-dominating beverages.
Malta, or carbonated malt drink, which accounts for 70 percent of Venezuela's off-premise sales of other non-cola carbonates, is considered a nutritious plant-based substitute to cola carbonates, according to Euromonitor. The beverage is produced mainly by local beer producers, and currently has no international competition and no multinational presence. The leading malta brand, Maltin Polar, produced by Empresas Polar, is the third most popular soft drink brand in the country after Coca-Cola and Pepsi.
Neighboring Brazil has experienced multinational activity in the non-cola soft drink sector as interest in guaraná, a red berry from the Amazon, continues to exist. Considered a stimulant with an active ingredient similar to caffeine, guarana has been a popular soft drink ingredient in Brazil for years, and competes directly against cola carbonates in Latin America.
AmBev, the second-largest carbonate manufacturer in Brazil with a share of less than 10 percent, owns Guaraná Antarctica, which is the country's leading brand. Coca-Cola is present in Brazil with its Kuat brand, which has been marketed under the brand name Senzao in Mexico since 2001, and has planted additional acres of guarana in preparation for the increase in demand, according to Euromonitor.
Cola wars extend past U.S. border
Although it appears that small producers in global markets have the upper hand as local experts with a loyal fan base for their products, Coca-Cola and PepsiCo dominate the carbonates sector abroad through acquisition or joint venture and the financial muscle to see them realized. The two cola giants also have advertising spending power and the pull to align with national sporting and music events in these markets. Price sensitivity still remains a factor for consumers in emerging markets, and private label is also expanding its reach abroad.
Asia-Pacific top draw
For companies that want to test the water in emerging markets, future growth in soft drinks will be driven by non-cola carbonates and low-calorie colas, according to Euromonitor.

Asia-Pacific is predicted to experience the highest overall volume growth during the next six years, led by countries such as China and India. Eastern European nations of Romania and Ukraine, and Latin American countries such as Argentina and Venezuela will see approximately 17 percent growth. Throughout the world, manufacturers will be enhancing their products, differentiating their brands and stimulating customer loyalty, all while fighting price pressures in the future. BI

Global carbonate retail volume (in million liters)
Subsector 1997 2003 2008
Carbonates 117,466.8 135,971.1 149,187.7
Cola carbonates 67,979.6 77,107.2 83,427.2
Standard cola carbonates 52,985.7 57,701.3 60,429.2
Low calorie cola carbonates 12,936.1 16,146.1 18,977.7
Other cola carbonates 2,057.8 3,259.8 4,020.3
Non-cola carbonates 49,487.1 58,863.9 65,760.5
Lemonade/lime carbonates 15,363.7 17,423.6 18,770.9
Orange carbonates 11,069.3 13,168.2 14,902.1
Mixers 3,093.2 3,172.0 3,410.0
Other non-cola carbonates 19,961.0 25,100.0 28,677.5
Source: Euromonitor International — Global Soft Drinks Market Information System, 2004

Global carbonate per-capita unit consumption (liters per head)
Subsector 1997 2003 2008 Percent Growth 1997-2003 Percent Growth 2003-2008
Carbonates 20.2 21.6 22.4 10.6 9.7
Cola carbonates 11.7 12.2 12.5 8.6 8.2
Standard cola carbonates 9.1 9.2 9.1 4.4 4.7
Low calorie cola carbonates 2.2 2.6 2.8 19.2 17.5
Other cola carbonates 0.4 0.5 0.6 51.7 23.3
Non-cola carbonates 8.5 9.3 9.9 13.4 11.7
Lemonade/lime carbonates 2.6 2.8 2.8 8.7 7.7
Orange carbonates 1.9 2.1 2.2 11.9 13.2
Source: Euromonitor International — Global Soft Drinks Market Information System, 2004
2003 Soft drink sales by volumeVIEW TABLE

Soft drink volume by brand — The Coca-Cola Co.VIEW TABLE

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