BEVERAGE EVOLUTION

LUCIA MOSES

Few grocery aisles are more dynamic than beverage. Americans, in search of something new, convenient, and better for them, have moved away from sugary soft drinks in favor of bottled water, energy drinks and teas with a breakneck momentum that's surprised even the most veteran industry observers.

Take bottled water, whose share of the U.S. beverage market continues to gain while carbonated soft drinks' ebbs. Beverage Marketing Corp. predicts that water's share will reach almost 29% by 2010, from about 22% in 2005, while CSD's share will drop to 38% from 43% in the same time period. Water has become so commonplace and promotions so regular that many consider it just another commodity, despite bottlers' ongoing efforts to jazz it up with bubbles, flavors, sweeteners and vitamins.

A similar phenomenon is taking place in the relatively new category of energy drinks, those sugary cocktails loaded with caffeine and other stimulants. Driven by an influx of new products promising better vitality and enhanced performance, energy drinks skyrocketed more than 80% in 2005 in terms of gallons sold.

And drinks are crossing borders as never before. There are soft drinks masquerading as coffees, sparkling water with juice, and super-energized sodas.

The result at the shelf of all this metamorphosis, observers say, is an overstimulated, overcrowded beverage aisle, where retailers have to accommodate the influx of new products and balance the space demands of big, mature categories and small, fast-growth ones. And as many retailers are finding, more products plus constant space equals stockouts.

On the following pages, four experts talk about the changes the category has undergone and how the supermarket beverage aisle needs to catch up.

Tom Pirko

President, Bevmark

Beverage is going through a hastened evolution. I don't think we've ever seen change come so quickly. We've moved away from drinks that were driven by being put out and being priced and we're going back to a new interest in functionality, so you're dealing with emotional, lifestyle issues. Energy, sports drinks, water all are sold on the basis of what they're doing for you. The more you can associate meaning with a product, the more successful you can be at selling it. So Hansen Natural is selling a whole constellation of values that are meaningful.

We've gone from a relatively static universe to an almost overstimulated environment, so if you're a wallflower, you're gone. You've got to be something extra and special. The energy drink category, for instance, is just a blur. You have hybrids, and everything's just a panoramic merry-go-round.

What I think is important is how to influence consumers at the point where they make a decision. The promotion, the marketing, has to change. Spirits understand that more than anyone. You are what you drink in the spirits business. You have to think beyond merchandising and move back to marketing. We're starting to do that.

To make people believe in brands, the merchandising side has to be coordinated with the marketing message. Pepsi's done good work with Frito-Lay. They double-deal and make sure their beverages and snacks appear together. With wine, the themes always should have something to do with food. Beverages are merging into a single business, and eventually, beverage will be part of one business with food, following the Pepsi model. What you need to do is tie what goes on inside the store with the marketing campaign and the related images that are being carried out outside the store.

We're getting back to that. Retailers are getting more and more comfortable with accommodating the brand owners. New wine sections are being carved out because it's one of the most difficult areas to sell. We're starting to look at it as a quasi-service business. The retailers are becoming more and more cognizant of the fact that they have to alter space, move things around, let manufacturers execute in the stores. The best way to do that is let a giant brander come in and say we want to put a little theater in your store.

Even if you have aisles, you still need to try to put theater on the ends. We're working on imaging displays so you can walk by a display and there are ads playing in 3-D, hovering over the shelf. One of the things we're moving forward with is communicating with shoppers with cell phones when they're in the stores. The thunderclouds from Wal-Mart are forcing everybody to try to be something else.

Corby Bleckert

Beverage category manager, Associated Food Stores

A lot of old-school thinking has to be thrown out. Teas have never been much of a seller in our marketplaces, but they're just starting to pick up. Having enough room for the energy drinks is something we're trying to overcome. Teaching our merchants water's a great category is hard, because they've been so stuck on selling the staple items.

We've made dramatic changes. We've been testing a beverage center in a few stores. We put every beverage in one area so people can find everything they need in one location. In some cases we've extended it to two aisles because one isn't enough, and there are breaks in the aisles so you can walk from one to another.

The consumer really likes it, from what we've been able to tell. Warehouse-delivered beverages are up 12% in stores with the beverage center. Before, we had our CSD aisle, then two or three aisles over you had your juice set, and you had your sports drinks in an entirely different aisle. Everything was kind of scattered.

In addition to placing them in the beverage center, we also merchandise beverages in secondary locations, on endcaps, walls of value, pallet displays, to capture impulse sales. Near our meat departments, we cross-merchandise water, energy, sports drinks, beer. And we also have a natural set that's with the natural foods.

Catering to the younger set has increased our sales quite dramatically. I've created a soccer mom set incorporating every kids' drink into one set, which is usually merchandised next to our juice set, with Gatorade All-Stars, most of the aseptics, and a bunch of other little kids' drinks.

I think our biggest thing has been space. It doesn't matter how much water space I have - it's a challenge to keep that section full. Out-of-stocks is a major issue.

We can never find enough space, with everything that's innovative coming out. What do you cut back to make room for new products? Do you cut back CSDs to make room for a new energy drink? The profitability in energy drinks is so huge, you have to weigh that as well. We created 4-foot shelf and cooler sets just for energy drinks by cutting space from CSDs, juices and other grocery categories. You have everybody fighting for space in the store. It's very tough, because you still have a lot of other items that merit the space they have. Probably one of the biggest things we'll have to focus on is SKU reduction.

Mona Doyle

President, The Consumer Network

Beverage is one of the aisles that drive people crazy. It's also one of the aisles where they say it's same old, same old. You find the interesting new products at Whole Foods or Trader Joe's or maybe convenience stores. At Trader Joe's, things are displayed so you can try new things. There's a big de-emphasis on brand. They're inviting you to try a new brand of lemonade, or strawberry soda. It's about the flavor, the ingredients. So if you talk about Vanilla Coke, that's going to be in the supermarket. But if I want something new, I have to go somewhere else to get it.

While supermarkets have the same old stuff, they're always changing the order. And if there's a sale on four or eight products in the Coke family, they assume that the consumer knows which ones they are. I don't necessarily know that Minute Maid is a Coke product. You also have to know that you can buy any of those Coke products or you're going to be paying too much.

There are a lot of assumptions made. Some people distinguish between Coke and Pepsi, and some don't. The marketers have sold the public on a big difference, but to more than a third of the public, there's no difference. There are so many varieties, it's hard to keep up. It is pretty aggravating to shoppers who are more concerned with only getting what they want.

I think they could do a lot more experimenting with different organizational approaches. It would make shopping easier for the consumer to arrange beverages by type rather than by brand and putting them all in one place. Water is considered a separate item, but consumers don't think of it that way. I think they're buying beverages and they're buying food. I don't think it's an easily solved problem. But the store is not following the consumer and giving them something consistent.

Kent Phillips

Chairman, Data Bank USA

The No. 1 problem for the industry is out-of-stocks. When you consider they're route-delivered, soft drinks should be the last product to be out of stock. The big chains, they don't like it. Soft drinks, with their new innovations and line extensions, are tying up space for products that A, people don't know anything about, and B, don't sell. Fortunately, a lot of the energy drinks and teas and isotonics aren't with the CSDs - they're with the alternatives.

Meanwhile, the flagship brands have lost space. It's approaching a point where when something new comes in, you're lucky if you get one facing per product per brand. And I think that by having so many brands, so many innovations, line extensions, consumers are actually very confused as to what they're buying.

I think there's a remedial approach. When you feature a product, you take the top three brands and promote them in strength and leave the others on the shelf. It will get consumers back into the purchasing habit they're used to. I think it will re-establish the main brands, I think it will re-establish the volume, and if consumers are looking for something different, they'll go find it. By putting all the line extensions out when you build a promotion, you're deflating the volume of your main brands.

If you were to pick a time in history that would be worst to introduce a brand, it's now. You get a display of new products in the store, you get a sign that says try me, I'm new, you put it in a nice package. But the stores are so big, it's hard to make a splash. The display size has to be big enough to attract attention. A better way is to apply the success of wine and beer. Beer's display space has probably tripled or quadrupled over the past 10 years. The beer and wine companies have just done a tremendous job in merchandising. By law, they can't pay slotting allowances, so they focus on selling. They sell value into their brands, in media and to distributors. I think you see it in the stores. They have better displays, they're more attractive, most of them are dedicated to a single brand. Retailers need to go into the stores and see what's going on.

Beverage Watch

Milk was the most frequently shopped for beverage last year, followed by soda and refrigerated juices and drinks.

CATEGORY; PENETRATION*; % OF HOUSEHOLDS REPEATING PURCHASE; PURCHASE CYCLE**; PURCHASE OCCASIONS PER BUYER***

Milk: 96.9%; 94.7%; 23; 24.8

Carbonated Beverages: 95.9%; 91.8%; 31; 20.8

Rfg Juices/Drinks: 82.9%; 72.1%; 48; 10.2

Bottled Water: 76.4%; 62.0%; 51; 8.0

Beer: 38.3%; 26.0%; 58; 7.8

Still Wine: 32.6%; 20.7%; 67; 6.0

Source: 2005 Information Resources Inc. Consumer Network Panel of nearly 70,000 households.

* Percent of U.S. households buying at least once in 2005 in club, convenience, dollar, drug, grocery, mass and supercenter channels, including Wal-Mart.

** Average number of days between repeat purchases by household.

*** Average number of times a product is purchased per buyer in 2005.