THE TIES THAT BIND 2004-09-27 (2)

STEPHANIE FAGNANI

The carbonated soft-drink category appears to have lost some of its pop.

Reports of sluggish nationwide sales have plagued the CSD market in recent months. Perhaps most disappointing of all has been the underwhelming performance of many new products -- particularly the mid-calorie colas introduced at the beginning of summer by the leaders in the space, Coca-Cola and Pepsi.

"Coke's C2 and Pepsi Edge were pretty soft," said Marty Miller, beer, wine, liquor, soda and tobacco buyer for Niemann Foods Inc., a 30-store operation based in Quincy, Ill. "They didn't discount them quite as heavily as they would normally have, like a Vanilla Coke or Pepsi Vanilla, when you could run singles at two for $1. The repeat purchase wasn't real big. Those were poor as far as a new item launch."

Indeed, statistics comparing the performance of those exact four beverages seem to support the observation. A report from investment bank Merrill Lynch, New York, indicated that Coke C2 gained 0.5 points of volume share and 0.9 points of dollar share for the four-week period ended Aug. 8, down from the 0.7 point gain in volume share and 1.2 point gain in dollar share for the same time period in July. Pepsi Edge posted a gain of 0.3 points in both volume and dollar share for the four weeks ended Aug. 8, which represented a slight gain in volume share and a flat dollar share compared with July figures. Conversely, in their third month of availability, Vanilla Coke and Diet Vanilla Coke posted volume share of 2.2 and 0.7, respectively, while Pepsi Vanilla and Diet Pepsi Vanilla achieved volume share of 0.7 and 0.6, respectively.

The report went on to state that the overall carbonated soft-drink category saw volume decline by 4.6% last month. Yet despite this bleak news, Niemann's Miller told SN sales of direct-store-delivered beverages at his stores are up 9% year-to-date. He attributed the anomaly to the increasing use of a tried-and-true tactic at his stores: the regional promotion.

"Our chain has promoted more exclusive events with Pepsi and Coke [this year] than we have in previous years," Miller said. "We're definitely doing some pretty unique things to try to drive volume."

One such program, exclusive to the chain, featured a Harley Davidson motorcycle sweepstakes. From June 13 through July 10, consumers who purchased Pepsi products with their Max Savings loyalty shopper card were automatically entered to win the bike. The promotion ran in 14 stores, and Pepsi products were featured on a mandatory display during the event. The Harley itself made an appearance at nine of the stores during the four-week promotion, and was often the centerpiece of the displays.

Another exclusive, regional promotion at Niemann Foods tied in with a local television station and Pepsi last month during the entire two-week run of the summer Olympics. Called "Gulp for the Gold," the promotion had a scan-to-win component in which customers were automatically entered when they purchased Pepsi products. The promotion also had a spend-to-earn element in which the retailer calculated total spending and rewarded coupons for free Pepsi products at the conclusion of the promotion.

A television was placed inside the chain's Quincy unit with a direct, 24-hour, live feed of the Olympic games. Tables were set up, and daily lunch specials were provided so consumers could eat lunch in the stores while watching the Olympics.

"Coke was such a huge sponsor of the Olympics, but we are so much of a Pepsi town here that we actually partnered with Pepsi. It turned out pretty well. We're just getting results back on that to see what kind of a lift we had," Miller told SN.

Memorial Day weekend is when Heinen's Fine Foods flexes its regional muscles, and bottled water sales get a lift every year with the help of a few hot air balloons.

The retailer partners with Dannon Water to sponsor the annual Chagrin Falls Balloon Fest. As part of the event, Heinen's promotes 24-packs of Dannon water for two weeks in a large display in the front of its 15 stores, which are located in northern Ohio. The retailer also participates in the festivities and floats its own balloon emblazoned with the Heinen's name above the countryside.

"I think that when you do a community event, you really benefit your stores because you are putting money back into the community, you're supporting them, and they feel very comfortable with it," said Les Gyerman, DSD buyer at Warrensville, Ohio-based Heinen's. "Sales pick up a lot; we have a good price point," he added.

Good price points are also the name of the game at Food Lion stores when the retailer partners with national beverage manufacturers. According to Jeff Lowrance, spokesman for the Salisbury, N.C.-based chain, many upcoming promotions that feature local tie-ins will be linked to beer vendors, and marketing efforts will take the form of in-store, point-of-sale materials like bottle neckers, banners, stand-ups, display pieces and others.

With the start of football season, Miller, the official beer of the Carolina Panthers, will feature the Panther logo on its packaging. Lowrance also expects an influx of marketing materials from Coors, the official beer of the National Football League, which will feature the NFL logo and helmets emblazoned on packaging and in-store POS materials. As for Budweiser, the vendor ties in annually with the Wachovia Open golf tournament and the BassMaster Classic fishing tournament, both in Charlotte, N.C., Lowrance said.

Ted Wright, partner at the Chicago-based beverage consulting firm Liquid Intelligence, called regional promotions a "supersmart" sales strategy for all players involved, in part because consumers tend to be very selective about what they like to drink, he said.

"Some drinks are going to sell a whole lot more in some regions than others. That's for historic reasons, for flavor profiles, for ethnic makeup of the region, for age demographics -- all sorts of reasons," Wright explained.

While national-brand manufacturers have been capitalizing on regional preferences for years now, Wright said he believes grocers could do more of the same with their store-brand beverages, a sub-category that has been enjoying a new round of growth in recent years.

"In beverages, in the supermarket channel, we're starting to see companies looking at private label as a way to differentiate themselves and distinguish themselves and have intellectual property or a sustainable competitive advantage that they can keep and hold and nobody can go after," Wright noted.

For example, Wright cited a fictional supermarket chain that develops a special flavor, such as coconut pineapple, which might be popular with this chain's heavily Hispanic base. Sustainable quality, flexible price points and strong promotion can help make it "the Red Bull of 2005," and compel customers to go out of their way to shop at those stores that carry the product. In the process, the retailer captures the opportunity to convince those consumers to pick up the rest of their shopping items as well.

"With supermarkets, if you can change the traffic that you drive even just a little bit, on a per-store basis, you can gain a huge bump in your bottom line," Wright said.

Store Brands Are Bubbling

Increased prices took some of the fizz out of the domestic carbonated soft-drink market this year, resulting in one of the worst summer performances on record for many of the national brands, according to published reports.

Investment bank Merrill Lynch, New York, for example, reported that CSD volume declined by 4.6% for the four-week period ended Aug. 8, while category prices rose by 3.5% during that period.

However, store brands were right there to pick up the slack, with private-label volume increasing by 5.8% during the same period, according to Merrill Lynch.

"[With] CSDs, there is a real opportunity for supermarkets to distinguish themselves, and they are going to do it on flavor profiles," said Ted Wright, partner at beverage consulting firm Liquid Intelligence, Chicago. "The whole point of store brands [is] to build a sustainable, competitive advantage that other people cannot. The way you do that in the beginning is inside the can."

Once the contents are up to par, regional marketing that emphasizes flavor preferences is one strategy retailers can pursue to secure market share, sources told SN.

"Local tie-ins are a very easy way of creating value for the customer and for the retailer," said Edmund O'Keefe, vice president of investor relations and corporate development, Cott Corp., Toronto.

Cott, a leading supplier of private-label beverages, focuses primarily on CSDs. Its customer-centric approach has led the vendor to discover that, for example, ginger ale is a popular flavor in the Northeast, while green apple colas are favorably received in other parts of the country. Having this kind of knowledge can prove invaluable considering the growth of the private-label beverage market, he added.

Cott's own in-house research shows that 27% of the take-home soft-drink market in the United Kingdom is private label; in Canada, private label accounts for 20% of the market.

In the United States, that share is only 11% -- with plenty of room for growth.

"Our hypothesis is that, as the retail market consolidates, the top five retailers in the U.K. have 75% of the market; the top five in Canada have a 65% share; the top five is only a 42% share in the U.S. As the big get bigger, private label becomes an even more important point of differentiation and innovation and margin. That makes us very bullish on the growth opportunities in the U.S.," O'Keefe told SN.

Because the industry has matured so much, suppliers should now concentrate on helping retailers start running their private labels as a brand, designing packages that trigger "emotional tags" with the consumer, said Wright from Liquid Intelligence.