POUR IT ON

KELLY GATES

What's new? What's next?

The answers the beverage industry provides to these consumer questions will determine to a large extent how the next 12 months turn out for producers and retailers alike.

Of all the beverage categories, consumers seem most keen on functional beverages that add something -- or leave something else out. Everything from vitamin-infused water and diet soda to heart-healthy, organic wine and low-carb beer is making sales bubble at supermarkets across the country, retailers told SN.

"Sales are continuing to increase for diet soda, low-carb/low-calorie beer and energy drinks," said Marc Jampole, spokesman for Syracuse, N.Y.-based Penn Traffic. "Water continues to be one of the fastest-growing categories in the center of the store. Adirondack flavored water is our best seller, and PET multi-packs and six-packs of flavored waters are the top-selling sizes."

Des Moines, Iowa-based Dahl's Food Markets has experienced such a significant increase in water sales in the past few years alone that its 12 stores have expanded the average length of their water shelves to nearly seven times what they measured back in 2000.

"We used to have around four to eight feet of space dedicated to water in our stores, but we're now up to 20 to 28 feet. In some stores, 28 feet might not be enough," said Ross Nixon, the chain's chief operating officer. "I won't be surprised if we end up adding more space for water in the future."

Space could emerge as a key challenge in the year ahead. Writing in Merrill Lynch's 2005 Beverage Trends Report, Christine Farkas, senior tobacco and beverage analyst, stated the growing emphasis on new products is putting serious pressure on retailers and real estate.

"Shelf-space allocation for companies and retailers may become a greater challenge as product introductions accelerate," she said. "In particular, should acquisition activity accelerate in the beverage category, [stockkeeping unit] management and/or brand availability will remain a key challenge."

Such concerns aren't stopping retailers from joining the fray, however. Wild Oats Markets, Boulder, Colo., recently launched its own bottled water called Biota, a natural spring water bottled in Ouray, Colo., and packaged in a biodegradable plastic container derived from corn. Beyond that, the continual trickle of new flavors and other enhanced beverages is keeping consumers' taste buds on edge, said Sonja Tuitele, spokeswoman for the 108-store chain.

"There are some great new flavored waters, all-natural flavored seltzers, and vitamin- and electrolyte-enhanced waters, for example," she said. "We are also seeing new all-natural energy drinks, more bottled teas, and more drinks with added herbal supplements like ginseng and guarana."

Highland Park Markets in Glastonbury, Conn., recently expanded its single store, adding about 12 feet of beverage space to the location. The addition enabled the supermarket to bring in new flavors of water that have fared well so far, said Tim Cummiskey, store manager.

"We've always carried seltzers and one of our biggest sellers, Adirondack waters, but we just brought in Glaco flavored mineral water, which our customers seem to really like," he said. "They also like Veryfine's Fruit20, but instead of the singles that have been so popular here, our distributor has been sending six-packs lately. This simple change has really helped sales."

Traditional sodas like Coke and Pepsi are always popular sellers here, but a handful of upscale drinks like Jones flavored sodas have taken away a small portion of the market share in recent years, Cummiskey said.

New or seasonal flavors have helped enliven sales of those mature soda brands. Pepsi Spice received a decent response from Highland Park's shoppers during the 2004 holiday season, while the new 7Up Plus is steadily catching on, he said.

Some promotional flavors performed even better. Penn Traffic had to pull ads when one "boo-tifully" promoted beverage caught the attention of Halloween shoppers last year.

"Pepsi introduced the new Mountain Dew flavor as a limited-time product that was available through Halloween," said Jampole. "It was more successful than anticipated, and we had to pull Halloween ads on Mountain Dew Pitch Black because Pepsi could not supply additional product."

CSDs aren't the only segment of the beverage category promoting seasonal/limited-time flavors. At Finlay, Ohio-based Fresh Encounter, Eric Anderson, vice president of marketing for the 30-store chain, told SN that beer also can find success with limited-edition varieties.

For example, Samuel Adams and Great Lakes Brewery have both done an excellent job with seasonal products, including Winter Ale and Christmas Ale flavors, he said. However, Anderson said he believes many consumers shy away from fad products because they're unsure of their long-term viability. So, while a hearty holiday brew or even a seasonal soda flavor like Pepsi Spice might be a refreshing change from the core beverage brands each year, fad flavors are too temporary to make an impact, particularly in the beer category, he said.

"Consumers wear their alcohol products like a brand. A trendy malternative is like a pair of parachute pants: here today, gone tomorrow," Anderson said. "Good seasonal brands, on the other hand, are like a pair of plaid golf pants: fun, never out of style, and you can only wear them for a couple months each year."

Beer is one of the top 10 grocery categories in sales at Penn Traffic's stores, said Jampole. To appease all beer drinkers, each store's beer aisle is typically stocked with as many national brands and regional microbrews as will fit.

"We try to have a large selection of traditional beer brands, but many of the new beer mixers have also made their way into our stores recently," he said.

Nixon reported that in Dahl's stores, beer sales are flat, liquor is up, and there's always a new mixer or new flavor of wine to choose from.

"I've never seen a category with so many SKUs," he said.

Many of the new wine products in supermarkets represent lower-priced varieties that promote the idea that wine isn't just for the wealthy and sophisticated shopper anymore. New flavors, some created with the health-conscious consumer in mind, are rapidly gaining in popularity, said Tuitele.

"The trend is toward more vineyards using organic grapes for their wines, and there is a whole new segment of the wine industry that revolves around the non-connoisseur consumer who is looking for good-tasting wines that are priced between $4 and $7 a bottle," she said. "In our Henry's Farmers Market chain, we have introduced a private-label brand of wine called Rake Dance that fits this customer need and is selling very well."

Some supermarkets rely on Nielsen averages to determine which beverages will stay and which will go, but Dahl's focuses on each individual store's sales when making such decisions.

"We simply key family groupings into our computers and they spit out the movement of each type of beverage, which gives us store-specific data instead of averages," said Nixon. "We try to eliminate SKUs without eliminating variety, especially in the water category. So, we'll get rid of one or two sizes that aren't selling as well, but still carry at least a six-pack or 12-pack of each brand or whatever size is selling the best at the time."