Navigating a Crowded Cold Vault

bevEnergy drinks are boosting packaged beverage sales, while healthier drink options continue to show promise.

By Erin Rigik, Associate Editor.

Packaged beverages are a key driver for convenience stores and an area where they excel in relation to other channels.

In fact, according to NACS State of the Industry (SOI) data, packaged beverages almost caught up to tobacco for in-store gross profit dollar contribution in 2012 at convenience stores. Packaged beverages accounted for 18.8% as compared to 21% for tobacco. Packaged beverage sales increased 20% over the past 36 months and saw a 19% growth in margins during that time.

In a market share by channel survey for 2012, Nielsen Co. found that c-stores had 39.2% of packaged beverage market share, while the food channel had 52.5%, the drug channel 5% and mass merchandisers, excluding Walmart, totaled 3.3%.

Product Performance
Ken Zunker, category manager of prepackaged beverages for Texas-based CST Brands, said that beverage trends have been favorable year-to-date, driven by a strong summer push.

“Energy drinks continue to grow at a rapid double-digit pace and are commanding the lion’s share of the beverage category in most markets in terms of sales and units,” said Zunker, who oversees more than 1,040 Corner Store locations.

Super-premium waters are also growing at a high double-digit pace year by year, driven by Glaceau Smart Water. Sports drinks have rebounded a bit following a couple of slow years. “This is driven by highly competitive retail in all markets on Gatorade and Powerade,” Zunker said.

Single-serve carbonated drinks continue to be a strong segment at Corner Store, but is consistently down in units and has been losing share to other beverage categories, Zunker noted.

That observation fits with the findings of an October beverage report from Wells Fargo Securities, which noted that c-store non-alcoholic beverages were up 3% in the third quarter of 2013, with strong energy drink sales offsetting weakness in other beverage categories.

Energizing the Category
The Wells Fargo “Beverage Buzz” survey of beverage retailers surveyed more than 15,000 c-store locations across the U.S. to determine third quarter 2013 trends. According to the report, non-alcoholic beverage trends improved during the quarter, increasing 2.6% year over year. The report speculated that the uptick in the category was mostly due to the strength of the energy drinks category, which offset weakness in virtually every other beverage category.

The survey also confirmed that energy drink sales were rising, up 11% for the quarter—the best performance for the category so far in 2013. Meanwhile, other beverage categories proved flat to negative for the quarter with traditional colas showing the worst performance of any beverage category, with its largest dip (-3%) in more than year.
Wells Fargo respondents showed that energy drinks gained the most space, consistent with ongoing trends, while carbonated soft drinks—particularly colas—are losing shelf space. This trend is likely driven as much by the superior sales of the energy category as it is by the “positive margin” impact this has at the retail, as energy generally has higher margins compared to soft drinks, Wells Fargo noted.

The survey results further suggested that the current beverage pricing format is being kept artificially low to counteract weak volumes.

“We believe the combination of aggressive pricing on larger formats to drive volume and the proliferation of package sizes to drive trial has left the manufacturers in a challenged position to drive volume growth while still creating value to consumers and maximizing profitability,” the Wells Fargo report found. “This in turn has led to under-pricing in 20-ounce soft drinks, with our retail contacts believing that consumers would be willing to pay 10% more. Bottom line, manufacturers’ aggressive pricing appears below what the market will bear to fight particularly weak volumes.”

Wells Fargo also noted that weather has had the largest negative impact on convenience store beverage sales, but has continued to improve. Two-thirds of respondents to the Wells Fargo Beverage Buzz survey described weather as having a “worse” or “much worse” impact on beverage sales in the third quarter 2013 compared to the third quarter of 2012.

Eyeing New Opportunities
Butch Fulton, merchandising manager of Portland, Ore.-based Plaid Pantry, which operates 109 c-stores, confirmed that while sales have been mostly flat in packaged beverages, energy drinks are still growing. “This is a much more mature category right now,” he said. “A lot of the lesser brands have fallen out and that allows the power players to focus in on the customer and gain brand loyalty.”

Coconut water has also been doing well at Plaid Pantry. “I said five years ago that coconut water would be the next big beverage trend, and today it is one of the hottest items in the store,” Fulton said.

While the chain currently offers three brands of coconut water, Fulton expects that with time that will be narrowed down. In all beverages, Fulton noted, customers are demanding lower prices. “Our everyday price on energy drinks is two for $3,” he said.

Corner Stores are experiencing similar demands. “Customers want a deal. They are not necessarily looking for free, but they want to feel as though they received a better deal at a Corner Store than if they went across the street to our competitor,” “ Zunker said.

Special Offers
Carbonated soft drinks have been flat at Plaid Pantry stores, fitting with industry trends. “We run good price on our 12-pack cans, but we just can’t get people to buy them. We’re actually cheaper on an everyday price than supermarkets are, but people just don’t pick them up,” Fulton said.

The chain has had success with a 1.5-liter Pepsi promotion it introduced to stores earlier this year, and two-liter bottles continue to do well at the stores. “Two-liters aren’t hurting like the 12-pack cans are,” Fulton said. “It might be because we have 16-ounce and 20-ounce bottles that are resealable or maybe people just don’t want to drink 12-ounces at a time anymore.”

Both water and enhanced water are down slightly at Plaid Pantry stores. “They were on an extreme high for about five years, so those sales have slowed down now,” Fulton said.

At Corner Stores, single-serve diet drinks have seen a double-digit sales decrease due to recent bad press. Vitamin Water has also not performed well for the past two years and continues to lose space in the cooler, Zunker said.When it comes to a package beverage strategy, Zunker said that Corner Store is ensuring it has the right products for each store’s demographic. “We have taken a step back to evaluate each market we operate in, our strength in the market and the strength of our beverage sales in terms of share and growth. Then, we develop plans within those markets to grow more targeted sales and drive traffic,” he said.

Zunker would like to see beverage suppliers be willing to “step out of the box” in order to help spur more customer excitement. “We are in many different markets with many different wants and needs. We have to cater to all of them. This is not a one size fits all environment anymore,” he said. “We are in an environment that is constantly changing and our team needs to be able to change quickly as we recognize a shift in demand. We need the packaged beverage industry to also understand the consumer, the experience they expect and what drives them to purchase.”

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