The ready-to-drink tea and coffee segments of the New Age beverage category face distinct challenges. On the RTD coffee side of the business, the struggle is to develop a product with mass appeal. RTD tea manufacturers, meanwhile, are tasked with finding true product innovation.
And retailers report grappling with such decisions as where to merchandise the different RTD coffee brands, and whether to allocate space for 1-gallon tea jugs showing promise.
Sales of RTD tea showed solid advances a few years ago, but have been soft recently. Shelf-stable canned/bottled tea generated $508.9 million in sales in supermarkets for the 52 weeks ended Dec. 29, 2002, a 3.3% increase from the same period in 2001, according to Information Resources Inc., Chicago.
Lipton Brisk is the No. 1 brand, although sales were down 11.8% to $104.3 million. Rounding out the Top 10 brands are Nestea Cool, Snapple, AriZona, Diet Snapple, Nestea, Lipton Iced Tea, SoBe, Lipton and private label.
Coca-Cola Co. and Pepsi-Cola Co. are big players in the RTD tea market through their partnerships with tea marketers. Coca-Cola, for instance, distributes RTD Nestea through Beverage Partners Worldwide, while RTD Lipton is available through the Pepsi/Lipton Tea Partnership.
Cappuccino/iced coffee, meanwhile, though a smaller segment than its tea counterpart, performed better than RTD tea, generating $92.1 million in supermarkets, an 11.7% increase. The Top 10 brands are Frappuccino, DoubleShot, AriZona, Planet Java, Havana, Main Street Cafe, Starbucks, Coffee House USA, Westbrae and Mr. Brown.
RTD coffee is dominated by the North American Coffee Partnership, a joint venture between Starbucks Coffee Co. and PepsiCo. The partnership has produced the category leader, Frappuccino, a RTD coffee drink; and the No. 2 player, DoubleShot, an espresso beverage.
While there are several other brands in the market, success has been mixed, according to Gary Hemphill, senior vice president, Beverage Marketing Corp., New York, a market research company.
"Frappuccino has been the most successful brand," Hemphill said. "It has the lion's share of the category and has shown consistent growth."
Hemphill attributes the success of Frappuccino to its good taste and the Starbucks name, which is the gold standard in the coffee business. If any company can make RTD coffee work, it's Starbucks, Hemphill said.
"Because coffee is such a personal experience, whereby people tend to buy it made-to-order, the challenge is to develop coffee with mass appeal," he said.
The RTD coffee segment has opportunity, but Hemphill questioned how large it can get, saying other companies will have difficulty replicating the success of Starbucks/PepsiCo.
"There's probably a limit to the size of the market, particularly in urban markets where it's so easy to get freshly made coffee," he said.
Retailers polled by SN concurred that Frappuccino is the category leader. While they stock other brands, much of their attention is devoted to Frappuccino. In fact, the brand performs so well at Roth's Family Markets, Salem, Ore., that the retailer features it nearly every other month in various advertising vehicles, according to Tim Jennings, sales and marketing director. Specials include $3.99 for a 4-pack.
"Frappuccino is a recognizable item that people look for and like to see a value for," Jennings said.
Roth's further capitalizes on the success of Frappuccino by using the brand to boost canned coffee sales. To do so, it not only merchandises Frappuccino in the New Age beverage section, but also in the ground coffee aisle.
"We had some concerns about customers moving to whole bean coffee instead of canned coffee," Jennings said. "Since Frappuccino is such a recognizable product, we use it to drive consumers down the coffee aisle."
In the year since the new approach began, ground coffee sales have increased. Jennings noted that this also could be the result of increased manufacturer promotions.
Roth's is using another RTD coffee brand to improve ground coffee sales. It's testing a new shelf rack that Pepsi/Starbucks is offering for DoubleShot. Cans lie horizontally in the rack, and roll out for easy access. The rack is in place in three stores, and may be placed in others, depending on test results.
At Penn Traffic, Syracuse, N.Y., RTD coffee sales have improved with the availability of more brands and flavors.
"Sales started out on the slow side, but have been increasing," said Joe Ramirez, company spokesman. "It has taken a while, but they're going up."
Demand for RTD coffee is constant year-round, although some retailers report increased interest during the warmer months. This is the case at Camellia Food Stores, Norfolk, Va., where RTD coffee performs better in the summer. Judy Lane, direct-store-delivery buyer, attributes this to increased demand for iced coffees. But sales are beginning to pick up year-round, and Lane has high hopes for the segment. After all, she said, "we're a coffee-drinking nation."
One of the challenges with RTD coffee is deciding whether to merchandise brands strictly on the shelf or also in the refrigerated dairy section. To cater to consumers who want their RTD coffee chilled, Penn Traffic merchandises RTD coffee both on the shelf and in the dairy case.
"The refrigerated selections sell a little better, probably because they're an immediate consumption product, whereas shelf-stable selections are purchased for later use," Ramirez said.
Penn Traffic has seen more growth in RTD coffee over tea, which Ramirez attributes to a steady flow of new RTD coffee flavors and varieties.
"Tea sales are more steady because it isn't as novel, while many of the coffee products are newer," he said. "At the same time, RTD coffee has the name-brand recognition of Starbucks, and could be attracting new users."
Hemphill of Beverage Marketing attributes soft sales in the tea segment to the lack of product innovation. Marketers have worked to come out with different flavor combinations, like Pepsi/Lipton's Lipton Brisk Lemonade, but more needs to be done, he said.
Nutrient-enhanced teas have added some excitement to the category, although Beverage Marketing hasn't seen the same growth as in the past. One reason for this could be that it's difficult for marketers to develop a nutrient-enhanced tea that tastes good.
"Because tea has a mild taste profile, the addition of vitamins and nutrients can add a layer of flavor that isn't always desirable," Hemphill said.
But some nutrient-enhanced tea brands are doing well, retailers report. Penn Traffic has increased demand for several flavors in Ferolito, Vultaggio & Sons' AriZona Rx line of teas, which contain vitamins and herbs. Flavors in the line include Rx Stress, Rx Energy, Rx Power and Rx Memory.
"It's a small segment, but it's growing, particularly among younger customers, who view nutrient-enhanced tea as a healthy energy beverage," Ramirez said.
Camellia Food Stores has just begun stocking several flavors in the Arizona Rx line, so it's too early to judge their performance, Lane said.
Other innovations are capturing retailer attention as well. Roth's Family Markets has just begun selling Nestea Liquid Concentrate. The brand is available in 16-ounce bottles in three flavors: lemon, raspberry and green tea with honey. All three flavors are 100% natural with no artificial colors, flavors, additives or preservatives.
Sales of RTD tea overall are slightly better during the warmer months at Penn Traffic, although "there's fairly steady demand throughout the year," Ramirez said.
One of the challenges that retailers face with RTD tea is deciding which sizes of packaging to carry. Along with single-serve bottles, brands are also available in cases, and in half-gallon and gallon jugs.
Penn Traffic carried 1-gallon jugs of Arizona for the 2001 and 2002 summer seasons, and will stock them again this summer. The retailer has limited the jugs to the warmer months because it initially felt the large-size would be a seasonal item. But jugs have been so popular among consumers for the last two summers that Penn Traffic might extend their availability.
Ramirez attributes the success of the jugs, in part, to the perceived cost savings associated with larger-size products. "Some customers view the bigger size as a better value."
He cited especially strong interest in the gallon size of AriZona green tea. "AriZona green tea is showing growth, probably because of the health benefits associated with green tea."
Camellia Food Stores is also considering introducing 1-gallon tea jugs. Lane declined to name the brand. "We'll see how it does and how people like it," she said.
The jugs have strong potential to do well, although Camellia must first find space for them, Lane said. "It creates a problem with merchandising because of the larger size."
This is true for other retailers as well. Some retailers opt to separate the single-serve from the jugs. For instance, during a visit to a Long Island, N.Y., unit of Pathmark Stores, Carteret, N.J., an SN reporter found gallon AriZona tea jugs merchandised next to gallon jugs of bottled water. AriZona single-serve bottles and cases were in the next aisle in the New Age beverage section.