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Bursting Bubbles
“standfirst”>Health-conscious consumers are boosting the sales of still beverages – and the soft drink sector as a whole – but product innovation remains the key to growth, reports Patrick Schmitt
The soft drinks sector is showing seemingly unstoppable growth in the UK – driven by a thirsty, busy and health-conscious consumer kept enthused by almost continuous product innovation from suppliers. It is a market worth more than £7 billion led by two major players, Coca-Cola Enterprises and Britvic Soft Drinks, who together account for over half of all sales. It also is an area of the drinks business that the City at least is watching closely, with Britvic’s decision to float before Christmas attracting widespread interest and speculation.
Looking at the make-up of the market, “In a snapshot, carbonates are declining and non-carbonates are growing,” according to Innocent’s head of UK sales, Giles Brook. “Growth in non-carbonates is coming from sports and energy drinks and water and juice,” he explains.
It was back in 2003 when still drinks edged ahead of carbonated ones for the first time, and the trend has continued, giving still drinks a 53% share by value of the off-trade soft drinks market. The stills sector is increasing at 5% (ACNielsen Scantrack Impulse, MAT 25 Dec 2004) driven mainly by a consumer who is increasingly health-conscious, while carbonated drinks, considered in general to be a less healthy option, have posted a 4% decline, undoubtedly affected by negative press surrounding about their role in health problems such as obesity.
This helps explain cola’s 3% fall in value during the course of 2004, and fruit carbonates’ 13% decline. Nevertheless, cola still has the largest slice of the off-trade soft drinks market, with a 23% value share. That is some way ahead of its nearest rivals, pure juice with 17% and water with 10%.
According to Britvic’s soft drinks category report 2005, the fastest-growing sub-category in the off-trade is dairy drinks, which increased in value by 41% in 2004. This is driven by probiotic drinks, with for example Actimel becoming a top 10 soft drinks brand. The sector has only a 6% share of the soft drinks market, but Britvic reports that more than half of all UK households now buy dairy drinks, further evidence as the report notes, “that consumers are placing health high on their agenda”.
Smoothie sales growth further supports this assertion, growing at 11%, if only accounting for a 1% value share (ACNielsen, MAT 25 Dec 2004). Manufacturers have marketed these drinks to appeal to the health conscious, using for example a “five portions of fruit and vegetables a day” message to attract potential punters. Innocent’s Brook, quoting the latest market statistics, notes that “smoothies are growing at almost five times the rate of chilled fruit juice, 80% versus 17% respectively”. Commenting on his own brand, he adds, “Innocent is really driving the smoothie growth, accountable for 89% of it, and Innocent is actually the number one growing chilled juice brand; YTD growth is £21 million, ahead of Tropicana, the second-fastest, growing at £12.7m in value.”
Water, after juice and cola, is the third biggest soft drinks category in the off-trade, and is also in growth, showing a 2% value increase to £453m at the end of 2004. Radnor Hills Mineral Water Company’s William Watkins describes water’s recent performance as “unstoppable” and witnesses a “move from sparkling to still products, while flavoured water is now taking up shelf space”. His company, producers of Aqua Splash, are looking to tap into the rising demand for healthy drinks with the launch of GI Fruits, so named because of the products’ low glycemic index.
Overall, the rise of still and natural drinks in the off-trade is “based around key consumer macro trends,” says Brook. “People have less time, more disposable income, the traditional family set-up including meal time is declining and more people are looking for convenient, healthy solutions to meet their different occasion needs.”
Indulgence
The on-trade is a smaller and very different beast from the take-home market. It is worth £2.2bn and is showing growth of 5% (ACNielsen on-premise audit, MAT Nov 2004). This is fuelled by different mechanics to the off-trade. Unlike the latter market, carbonates account for over three-quarters of sales in bars, pubs and clubs, and grew at 6% during the course of 2004. As Britvic notes, “Consumer demand for the healthier take-home option does not wholly translate into the on-premise, where indulgence is front of mind.” This helps explain cola and lemonade’s performance in the on-trade compared to fruit juice, which experienced a value drop of 14%. Flavoured carbonates on the other hand were up 36% (but down 13% in the off-trade). Britvic’s alcopop lookalike J20 ensured juice drinks grew by an impressive 35% in value, but all other still soft drink sub-categories declined in 2004 in value sales. Even mineral water, which soared in sales in 2003, fell by 3% to £55m, proof that 2003’s hot summer only temporarily boosted this sector in the on-trade.
Driven by innovation
In both on- and off-trade, it is innovation that has helped keep the soft drinks sector so buoyant. According to Britvic, in 2003 six brands accounted for two-thirds of new product sales, but in 2004 sales were generated by a wide range of different brands with fruit and dairy drinks leading the way. Encouraging the impetus to innovate was a more challenging market in 2004, in part due to the somewhat damp summer compared to the previous year’s scorcher. In 2004, there were more than 400 new entrants to the off-trade soft drinks market, records Britvic, including important line extensions, such as Robinsons Fruit Spring or Fanta’s Apple Splash, which generated 89% of all NPD sales within fruit carbonates. Dairy drinks’ strong performance was no doubt due to line extensions from the Danone Actimel range and the introduction of the likes of Flora Pro-Activ.
However, with Britvic’s future float, some wonder whether this company in particular will divert as much of its resources to new product development. “It must keep innovation up, and not become arrogant,” warns Stuart Whitwell, joint managing director of Intangible Business, before pointing out the importance of clever product design, using the Evian sports cap as an example: “It is cool, not price sensitive and proves little innovations can make quite a difference.” On the other hand, these large companies do tend to “launch a lot of new products and only a few stick”. But aside from line extensions and product developments, the nature of the soft drinks market is becoming increasingly shaped by a growing awareness of health issues, championed by the government. As Britvic highlights, consumers have added the likes of smoothies and probiotic dairy drinks to their repertoire, not switched from one type of soft drink to another. In the on-trade, soft drinks are well placed to take advantage of 2003 Licensing Act, now coming into effect, while Britvic even suggests climate change could further help the sector. On the other hand, it is feared that consumer spending could decline, which might affect the entire market. db
COMPANIES close-up
Although the soft drinks market is showing growth, there is some variation in performance between manufacturers. Coca Cola Enterprises, the largest soft drinks company in the UK, accounting for almost £1.5 billion of the £5.1bn off-trade market for soft drinks, experienced a value decline of 7% (ACNielsen MAT 25 Dec 2004). This can be explained by the overall poor performance of the carbonated category during 2004. The withdrawal of Dasani further contributed to the decrease.
Britain’s second biggest player, Britvic, with some £615 million in soft drink sales, suffered a slip of 3% in value sales in 2004, although it’s performance this year has been strong (see City Comment, page 76). With its float imminent at time of writing, its strategy for 2006 has attracted much speculation. As Innocent’s Brook says, “Britvic’s big challenge will be to continue to innovate in non-carbonates to offset market decline in carbonates, where they have representation with Pepsi and 7 Up. One of the Sunday papers suggested they are looking at juice and smoothies as potential launch categories.” Certainly the company’s water brands are destined for a push, both Penine Water and newly launched Drench – a water aimed at the youth market. The issue for Britvic will be, can it out-think Coke? Or rather, will the City allow Britvic to continue to be so creative in its product development and marketing? Only time will tell.
Third and fourth in the company charts, GlaxoSmithKline and Danone both posted strong figures in 2004, the former due to the success of its Hydro Active brand and the latter largely because of its Actimel range. Further, Red Bull, at number six, showed a 15% increase, mostly due to the introduction of a diet version of the brand, the first one in the stimulant market. Lastly, Nestlé Waters’ big increase is attributable to the company’s harnessing of distribution rights for Vittel and Buxton.