Still Life

Still drinks are driving growth in the soft drinks category as health consciousness continues to grow and the market becomes increasingly fragmented, says Justin Pugsley

The gradual shift from carbonated soft drinks (CSD) towards “healthier” still drinks appears to be accelerating under a barrage of negative media attention, health scares and new government health campaigns.

One of the high-profile victims of that move is none other than recently listed UK beverage concern, Britvic. Shares in the company lost nearly a third of their value when Britvic chief Paul Moody revealed that the downturn in its carbonated soft drinks business “has been more severe than anything we have seen in the past”.

The immediate ramifications of that soft patch will be to see the company’s annual profits at the lower end of analysts’ range of forecasts – £40 million to £47m. Britvic sells Pepsi, Tango, Robinsons and its own brands such as the successful J2O, and is launching a new bottled water product.

The slowdown in CSD sales “is partly because of the post-Christmas period when demand is lower. However, that normally dissipates come spring and Easter and it remains to be seen if there really is a clear change in the long-term trend,” says Charlie Bonham, research analyst with Oriel Securities.

Indeed, a possible long, hot summer could still work wonders for carbonated drink sales in general and Britvic
in particular.

So, has the combination of government anti-obesity campaigns and the recent benzene scare made CSDs a sunset sector? Not entirely, say industry experts, but the real growth opportunities are elsewhere. “CSDs still have a role because they are associated with refreshment and that isn’t going to change,” explained Gary Roethenbaugh, research director with beverage research firm, Zenith. “The share of carbonates will be eroded over time as consumers go for more still and natural beverages.”  This has caused companies to experiment with new flavours, which are often exotic. This partly reflects the fact that people travel a lot more, coming into contact with new food and drink flavours.

Meanwhile, the shift towards health-conscious products is partly a reflection of ageing populations in Western countries. This trend has been successfully exploited by numerous companies from privately held mineral water company Highland Spring through to stock-market listed French group Danone. The latter’s probiotic yogurt drink, Actimel, has certainly captured the current consumer mood perfectly and has been a huge success. Its other brands such as Evian also tap into the needs of the health-conscious consumer, all of which mean that Danone’s share price has risen 45% in two years.

Roethenbaugh talks about the soft drinks industry being driven by consumption occasions as well as by health considerations. “It’s a case of consumers wanting  something cheap on some occasions, maybe something more expensive – but genuinely healthy – on other occasions and on yet another occasion it might be about indulgence,” explains Kim Slater, the director of consulting with beverage analysts Canadean. He also notes that within the CSD sector there has been a sustained shift away from “standard” drinks to “diet” ones, which are less fattening. Not to mention the introduction of many new flavours, such as vanilla or cappuccino flavoured Cokes, with varying degrees of success.

He also remarks that some brands such as Ribena, owned by GlaxoSmithKline, are in a sense returning to their roots. Today, the brand is heavily promoted for its health benefits such as high vitamin C content. (Interestingly, under the very different circumstances of World War II it was also hailed for its vitamin C content.)

However, introducing new flavours into the market does take time. Slater explains that, in general, the favourite flavours of the past, more or less, remain the same today. For instance, orange juice is still the dominant juice flavour with newer flavours such as blueberries and pomegranates on the periphery. “Ocean Spray took 10 to 15 years to get people into cranberry flavour,” he says.

Meanwhile, the two giants of the soft drinks industry, Coca-Cola and Pepsi have had mixed success in capitalising on
these new trends. This is reflected in their share prices with Coca-Cola down around 15% in the last two years, while the Pepsi Bottling Group is roughly unchanged over the same period.

“Pepsi has had more foresight than Coca-Cola and acted better on trends, such as being willing to make the Gatorade acquisition. It saw changes in consumer trends coming,” says New York-based Robert Van Brugge, research beverage analyst with US investment and research firm Sanford Bernstein. Gatorade is a leading US sports drink manufacturer. Pepsi also owns the very successful Tropicana juice brand.

Coke fights back
However, Coke seems determined to fight back. Muhtar Kent, president of Coca-Cola’s international division recently acknowledged that non-carbonated beverages will play a key role in the company’s growth. These growth drivers include juices under the Minute Maid banner and water brand Dasani.

But Coca-Cola will regularly find itself up against Tropicana, which is well established in many international markets such as the UK.

Meanwhile, both Coca-Cola and Pepsi are pushing heavily into emerging markets and, according to Brugge, these still represent an attractive growth story for the stalwart CSD brands. On the plus side Coca-Cola and Pepsi have huge distribution networks to facilitate bringing new products to market. 

But changing consumption patterns aren’t the only challenge faced by the drinks industry. Markets are tending
to fragment, partly because they are becoming more
driven by occasions.

This fragmentation may suit innovative entrepreneurial start-ups, but for the big players it poses challenges.

It is not enough any more to rely on a clutch of stalwart brands to carry the business in a fast-moving environment. Brugge says the need to continuously innovate, to create and revamp brands could impact on the stability of revenue streams. “There are a few high-margin niche categories, but by and large these new drinks tend to be lower margin than CSDs,” says Brugge. Also, he warns that companies have to be careful not to cannibalise their established brands when introducing new ones. Roethenbaugh adds that it is important for big players to have a spread of brands positioned for the full range of consumption occasions.

However, the drinks industry is now adapting fast to changing consumer patterns. Researchers Mintel recently noted that food and drinks companies are among the world’s most innovative. Indeed, expect a lot more innovation, new flavours and exciting new soft drink products to make their way to the market.  db  April 2006