Clearing a Crowded Cold Vault

Energy drinks and isotonics are following two increasingly divergent paths, just part of the fast-paced beverage category about which convenience store operators are spending more time planning than ever before.

The crazy-quilt influx of new brands, products, line extensions, flavors and varieties is jamming cooler doors and sales floors, and calling for some hard choices.

"What’s happened is that we are seeing so many new categories and segments and so much innovation that (an already) competitive landscape has gotten much more complex with new products and even new categories," said Gary Hemphill, managing director for the Beverage Marketing Corp. in New York City. Carbonated soft drinks has "probably been the one that has been impacted the most by that because it is the biggest, so it’s logical that sales there have been down the last couple of years. We don’t have our final 2007 numbers yet, but it will be down again."

Innovation in other beverage segments is largely responsible.

"Everybody wants to give you a counter cooler, a floor cooler, and, like the rest of the retailers, I’m just out of space," said Terri Murray, general manager of Massachusetts Turnpike Operations for Gulf Oil Limited Partnership in Newton, Mass. "What are (suppliers) doing? They’re just trying to get us to keep the contractual obligations. Obviously, rebates are near and dear to my heart, so right now I’m still working with them."

Too often, said Murray, suppliers that share sales data are "telling me what I already know. I already know what sells out of my cooler. And without a doubt, they try to highlight the activity of their own products." Still, she added, "I’m an information sucker. I love to see the data, but I don’t need the data to know what’s selling at my sites."

The spring season is a particularly busy time of the year for beverages.

"I have always had good success with most all of our suppliers," said Mark Wilcox, beverage buyer for Jacksons Food Stores Inc. in Meridian, Idaho. "All the suppliers are introducing new products and merchandising support this time of the year."

The company operates 93 stores in Idaho, Utah, Nevada and Oregon.

 

Thinking and Drinking

Here is a category-by-category look at what consumers are thinking and drinking, and what operators are doing about it:

Isotonics: Information Resources Inc.’s (IRI) Sports Drinks category, with players like Gatorade, Powerade, Propel and others, saw sales top $2 billion for the 52 weeks ending Dec. 30, 2007, up about 10% compared to the year before.

Gatorade, which holds roughly 80% of the market, had a flat year, while Powerade had "some growth, but it is considerably smaller, and so was not enough to have a huge impact on the overall category," Hemphill said. He sees some innovation in the category, most notably Gatorade’s G2 line extension. "We still think it’s a very strong category, but last year was a tough year for a variety of reasons, one of which was that they were lapping some extremely strong numbers from 2006."

This year may well see a rebound year, Hemphill suggested. "I’m basing that primarily on the fact that it’s certainly a viable category, and also the fact that there is some more innovation coming through the pipelines of the leading companies."

Many in the industry "are really kind of concerned about the isotonics," said Murray. "They’re not doing as well. Of course, they used to rule. We’ve been watching them slide, and it’s continued."

For 2008, Murray plans to handle the isotonics category status quo. "Gatorade, which introduced G2, has a door, and I’ll keep that. I’m going to try and finagle not having as many SKUs. Propel definitely does better than Powerade. Right now I’ve got two shelves of Powerade and two shelves of Propel. I’m hoping I can cut them down to one each."

After Pepsi and Coke, said Hemphill, "you have very little else out there in that category. They control in excess of 95% of that market, so the remaining brands tend to be products like All-Sport, which is still out there, and a few others that more often than not don’t have national distribution." He expects it to "rebound—maybe not to the extent of double-digit growth, but high single-digit growth."

Isotonics get a full cooler door at York, PA-based Rutter’s Farm Stores chain, according to Director of Marketing Robert Perkins. Rutter’s is exclusive with Gatorade although, depending on the store and its number of doors, it sometimes includes Propel.

Energy Drinks: According to IRI, energy drinks recorded sales of more than $3.4 billion in convenience stores for the 52 weeks ending Dec. 30, 2007, up nearly 39% over the previous year’s period. Major brands include Red Bull, Monster, Rock Star, Full Throttle, Kronik and others.

"Energy drinks are doing great," said Hemphill. "They have had solid continuous growth for roughly the last half dozen or so years, ever since the category came into being in the mid to late 1990s." Growth of late has "moderated a little bit," he added, "but probably only due to the size of the category getting bigger. Growth is still double digit, still extremely healthy, and just as important the profit margins are great in the category because the price points are relatively high compared to a lot of the other non-alcoholic beverage categories."

Sales of energy drinks continue to increase, said Rutter’s Perkins, "with most of that from new entries." The newest is Bawls, a carbonated caffeine drink with guarana supplied by one of Rutter’s’ secondary distributors. In all, Rutter’s 50 stores devote a full door to its 50 energy drink SKUs because, "it really makes up a good portion of our total sales number," Perkins said.

Energy drinks are "still hot to trot," Murray said. "There is energy gum, five-hour energy drinks, and the latest thing I just saw is energy patches. We go through 100 cases of energy drinks a week. It’s a huge market."

Murray’s 11 stores offer a full door of energy drinks If space permitted she would add another half door. She received a rebate for keeping a counter-top cooler of Rock Star and has used the brand’s barrel merchandiser in the past.

Colas: Carbonated soft drinks are "still far and away the largest beverage category, bar none, in the U.S. beverage marketplace," said Hemphill. "And number one by a significant margin. I think there has been some innovation when it comes to sweeteners." Coke zero is doing well for Coca-Cola." He expects diet colas to have a big impact on sales.

"No one is talking about much of anything in soda," Murray said. "In the commercials you see they’re talking about adding iron and vitamins and minerals to their soda. I mean, it’s kind of an oxymoron. It’s like having cake for breakfast because it has flour, eggs and butter in it."

Murray said she is "not sure they’re doing themselves a favor by continuing to bring out new lines. We only have so much space. What we see is their sales reps, instead of having 20 items that they have to go in and check and order for, now have 40 to 45." After introducing a new item, she continued, "they may drop that and it will be something else. They get scattered. They may be hurting their core by bringing in all these other flavors."

Perkins agreed. "There really hasn’t been anything interesting in the soda category since Coke Zero. "We’re basically spaced comparable to what our sales numbers show."

For Jacksons Food Stores, "Mountain Dew’s new Limited Edition Aluminum can has been a big hit," Wilcox said.

Coffee: Refrigerated ready-to-drink coffee (not including Starbucks) notched sales of just over $2.5 million in c-stores for the 52 weeks ending December 30, 2007.

Coffee drinks are "an interesting segment to a lot of people," Hemphill said. "There have been a lot of efforts in that category to try and develop successful products. But the results have been mixed, and the only really successful (product) has been the partnership between Starbucks and Pepsi."

Hemphill explains that it has proven "tricky for companies to develop a bottled or canned coffee product that has mass-market appeal particularly since it’s so easy to walk into a Starbucks, Dunkin’ Donuts or the local convenience store, purchase freshly made coffee and tailor it to exactly the way you like it. People have become accustomed to ordering their coffee custom designed to their taste, with just the right amount of milk and sweetener.

"Obviously, with a ready-to-drink bottled or canned product you’re trying to deliver a product that already comes with all those things. That’s what makes it tricky."

Juices and Teas: "Oh, poor juices," Murray said. "Everyone is afraid of the sugar and high calorie content, I think. You still have to have them, no doubt about it, because they are a staple." She maintains a Tropicana cooler on the counter at each one of her sites and four overall shelves of juice, which she is trying to cut back to three this year.

"In most of our markets the juices have not kept up with the other beverage categories over the last few years," Wilcox concurred. "The teas are just the opposite and have come on strong."

 

The Search Continues

"Companies continue to look for another kind of functional breakthrough idea," Hemphill said. "Energy drinks have been a great hit, but you could probably argue they are the only area of functional-type beverages that has been a monster hit. Companies have been looking for the next big breakthrough in functionality, and I don’t think it’s quite been determined yet what that will be."

Hemphill sees "more of the same type trends" throughout 2008. Energy drinks "should be strong. Carbonated soft drinks were not expecting any kind of dramatic turnaround, and so it’s probably going to be flat to down performance."

As for energy drinks, Murray advised colleagues not to be overly concerned about having ‘what everybody wants.’ Really stick with the top dogs because there are so many brands out there pushing so many different energy drinks. You certainly don’t want things in your cooler that aren’t selling because that space is so prime."

Innovation at the cooler will persist throughout 2008. "It’s what’s been happening in the last several years, it’s what’s happening today, and it’s what is going to continue to happen in the future. Not all of them are going to be successes, but some of them will. Retailers are faced with the challenge of figuring out the best ways to merchandise their stores with the choices they have, but the limited shelf space that’s available."

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