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GROCERY: Soft Drinks: Outside the bubble

Current trends leave little room for doubt: The supermarket soft drink aisle could well become the epicenter of seismic changes that will knock carbonated soft drinks off the beverage throne.

In support of this theory: The leading CSD giants, Coca-Cola and Pepsi, now offer a full array of noncarbonated offerings. From bottled water to nutrient-enhanced water, sports drinks, energy drinks, and RTD tea, the overall portfolios from both companies today show they're committed to making sure that, as the earth moves under them, they don't fall through the cracks.

CSDs will never be unimportant to grocers, the experts agree, but they also agree that noncarbonated soft drinks represent the wave of the future.

"The big thing to talk about is the growth among noncarbonated soft drinks," notes Kaumil Gajrawala, beverage market analyst for New York-based UBS. "Carbonated soft drinks will be flat to down by low single digits in 2008. That segment is dominated by the core brands, primarily Coke Classic and brand Pepsi. However, it doesn't include the entire hydration portfolio, including Aquafina Alive from Pepsi, even though it's lightly carbonated."

According to Gajrawala, the Pepsi model fits the evolving soft drink retail marketplace to a "T."

"I think Pepsi does it right," says Gajrawala. "They've got a refreshment portfolio, a hydration portfolio, and an invigoration portfolio. The refreshment portfolio includes all the core products, and the expectation is for the carbonated segment to continue to decline. Now there's a lot of new things going on that are big enough to potentially offset that in all these other segments."

Indeed, Gajrawala predicts that the entire soft drink category, which he refers to as LRBs -- or liquid refreshment beverages -- will grow in 2008. "Total LRB consumption is likely to be up by about a point," he projects. "That's massive dollars, for a retailer."

For sure, no longer do the soft drink vendors come to the store with carbonated offerings as their sole focus. With Glaceau/Vitaminwater part of the Coca-Cola franchise, and SoBe Life Water among the many Pepsi offerings -- including extensions of both the Aquafina and Gatorade brands -- both CSD giants have made gigantic investments in their noncarbonated portfolios.

From Pepsi, reformulated Aquafina Alive offers a new sweetener blend (acesulfame potassium and sucralose) in three flavors: Berry Pomegranate, Orange Lime, and Lemon. In addition to zero calories, each offers its own benefit, including added nutrients for Berry Pomegranate and a slight kick of caffeine for Orange Lime.

On the Coca-Cola side of the equation, Dasani Plus is available in three flavors: Refresh + Revive (Kiwi Strawberry), Cleanse + Restore (Pomegranate Blackberry) and Defend + Protect (Orange Tangerine). Each comes provides 10 percent of the reference daily intake (RDI) per serving of vitamin E and zinc. A fourth version, Calm + Relax (Lemon Lime) is launching nationally in supermarkets this month.

Gatorade, meanwhile, is entering uncharted waters in 2008 with the launch of its first diet variety, G2 -- offering half the sugar and half the calories of the original Gatorade, but including all of the electrolytes of the flagship brand. The product targets athletes who need to hydrate off the field.

Gatorade's water line, Propel, is also in the midst of a line extension with Propel Invigorating Water. Available in three flavors (Strawberry, Citrus and Berry), each offers 20 calories per eight-ounce serving, and contains 20 milligrams of caffeine—about as much as a cup of tea. Both G2 and Propel Invigorating Water should have an expanded presence in the supermarket channel, as the two new extensions will be leveraged by Pepsi bottlers, which will be able to provide DSD distribution.

"Extending our bottlers' distribution muscle into the Gatorade brand lineup while broadening our hydration portfolio is a great demonstration of our partnership in action," says Dawn Hudson, president and c.e.o. of Pepsi-Cola North America in Purchase, N.Y. "This is a winning proposition for everyone involved -- our consumers, our customers, our bottlers, and PepsiCo."

In addition, speculation was rampant at presstime that Coca-Cola was about to make a major investment in Honest Beverages to add Honest Tea's organic RTD teas and fruit beverages to expand its noncarb "good-for-you" soft drink portfolio.

With a category in such dramatic transition, how can retailers capture those consumers exiting the CSD segment? By offering the right variety of alternative products that will be responsible for virtually all soft drink category growth in the future.

Move fast

Category management has evolved into portfolio management, and to be effectively executed, a true partnership between retailers and suppliers needs to be forged.

"If I'm a retailer, over the next five years I'm thinking about how I can become the best portfolio manager of categories so that I can protect the core, which might be declining, and still grow [dollars and share]," reasons Gajrawala.

"No one is ever going to argue that carbonated soft drinks aren't important to grocery retailers," says Paul Weitzel, managing partner at Willard Bishop, the Barrington, Ill.-based retail consultancy. "Beverage is already the No. 1 center store category, and with this explosion in 'superfoods' and healthy consumption all around the store, grocers are going to have to find how to manage this growth effectively."

Most importantly, they'll need to find a way to communicate the attributes of what they're selling to their consumers. "With several variations of every flagship brand -- Gatorade, G2, Propel, etc. -- it's imperative that the retailer be able to explain what the benefits of each are to the consumers," continues Weitzel. "Obviously, educating consumers is an initiative that will require retailers and suppliers to work together."

Several chains, including Stop & Shop and Hannaford Bros. in New England, Giant in the Mid-Atlantic states, and Wegmans in upstate New York, already have consumer education initiatives in place. Many others have already rolled out such programs or are preparing to follow suit.

"Those that don't are going to be behind the eight ball," predicts Weitzel. "In many ways, this is like the bottled water explosion of the '90s. Retailers that were fast-moving and not only expanded space quickly, but replaced much of the bulk water with higher-margin multipacks, were able to cash in on the phenomenal growth that occurred. Those that were slow-moving lost out."

A stroll down the typical supermarket soft drink aisle today already reveals a wide array of products extending far beyond traditional carbonated soft drinks. Most of the new products offer specific health benefits.

"Consumer thirst for refreshment beverages is growing but changing," observes Gary Hemphill, v.p., information services for New York-based Beverage Marketing Corp. "New categories and brands are emerging, while older ones are experiencing slowed growth. For beverage marketers and retailers to be successful, it requires a balancing act of both the old and the new."

According to The Nielsen Company's supermarket data (for food stores with $2 million or more in annual sales), total dollars for carbonated soft drinks were down 0.2 percent for the second straight year for the 52-week period ending Dec. 7, 2007. Over the past 52 weeks, small gains in diet colas (1.4 percent) and diet lemon/lime sodas (2.5 percent) were more than offset by precipitous declines in the full-calorie varieties (-2.8 percent for regular cola, -3.1 percent for regular lemon/lime).

Flavors, por favor

Indeed, nothing illustrates how much things are changing in the soft drink aisle as much as trends in colas, which today are close to being dethroned as the top dollar generators among carbonates.

According to Nielsen data, colas, both regular and diet varieties, accounted for $5.9 billion in sales in the supermarket channel for the 52-week period ending Dec. 7, 2007. Lemon/lime soft drinks (full-calorie and diet) accounted for another $1.2 billion.

But the data indicates that the hottest segment among carbonates is "all remaining" flavors," which accounted for $5.4 billion in sales.

Much of the growth in the flavor segment can be attributed to the booming Hispanic segment of the U.S. population, which favors flavors in both its carbonated and noncarbonated soft drink selections.

"I've seen an evolution," says Paul Weiner, natural foods manager at New York-based Fairway Markets, a five-store chain in the New York metropolitan area. Weiner attributes much of that observed change to ethnic shifts, not only in favor of Hispanics, but also Asians.

"Our customers are moving away from sugar, and toward more quality ingredients, like green tea," says Weiner. "It's no coincidence that Asians have fewer heart attacks than [Americans] do."

Weiner adds that coconut and pomegranate are two of the hottest flavors today: coconut, thanks to a broadening Caribbean influence on the marketplace, and pomegranate, due to its popularity among upscale, educated consumers attracted to its antioxidant properties.

Nielsen data confirms that, with carbonated soft-drink sales down, noncarbonated soft drinks have become the darlings of today's grocery consumers. Two of the hottest segments are bottled water (including enhanced water), which has seen a 10.3 percent gain in dollar volume over the 52-week period ending Dec. 7, 2007, and ready-to-drink-tea, which grew 8.5 percent over the same period.

One RTD tea that started on the outside but has worked its way into the mainstream is Steaz, a hybrid natural green tea beverage, lightly carbonated with sparkling water. Marketed as "sparkling green tea," Steaz is just one of dozens of soft drink products available today that are challenging the definitions and boundaries that have historically governed retail management of the category. This trend has helped Steaz grow from a product available only in health food stores to more of a player in the grocery mainstream.

"We didn't know if consumers would go for our organic, low-sugar soda vs. Coke and Pepsi, but, sure enough, our brand has strong traction," says Eric Schnell, president of Newtown, Pa.-based Healthy Beverage Co., maker of Steaz. "Adult consumers love the fact that they can now buy a healthier carbonated soft drink in a mainstream supermarket."

Steaz has just launched four new Diet Steaz flavors (Raspberry, Orange, Blueberry Pomegranate, and Black Cherry) in 12-ounce glass bottles. These are the first organic-certified diet soft drinks available in the United States.

Indeed, both Coke and Pepsi seem to have taken a lesson out of the Steaz playbook, with the introductions of "healthy" CSDs of their own: Diet Coke Plus and Pepsi's Tava. Both follow on the heels of 7UP Plus, which was introduced in 2004.

Diet Coke Plus is fortified with niacin, vitamins B6 and B12, magnesium, and zinc. Tava, influenced by the flavor trend, contains no caffeine; comes in three exotic varieties -- Tahitian Tamure (Tropical Berry Blend), Mediterranean Fiesta (Black Cherry Citrus), and Brazilian Samba (Passionfruit Lime) -- and is fused with vitamins B3 and E, niacin, and chromium.

What neither Diet Coke Plus nor Tava offers are any calories, doubtless another sign of things to come in the soft drink aisle.


A new year in beverages

The big players are launching several supermarket-based initiatives in early '08 to add excitement to the soft drink category.

From Pepsi, Aquafina Alive is being relaunched. Initially introduced in January 2007, Aquafina Alive has been reformulated with a new sweetener blend: acesulfame potassium and sucralose. The line is available in three flavors, with each offering its own benefits. Berry Pomegranate offers a boost to the immune system, with 10 percent daily value of vitamins E and C per eight-ounce serving; Orange Lime offers a burst of energy, with 10 percent daily value of vitamin B and caffeine; and Lemon offers hydration. All three offer zero calories. Suggested retail price: $1.19 per 20-ounce single-serve; $3.29 for 16.9-ounce six-packs.

Another Pepsi brand, SoBe, has reformulated its fortified water line, SoBe Life Water, with new formulation, new flavors, and new packaging. Formulated with sucralose (table sugar), the new line offers 35 calories per eight-ounce serving (30 percent fewer than the original) and is available in five flavors: Pomegranate Cherry (with taurine, potassium and ginseng), Passionfruit Citrus (with guarana and d-ribose), Strawberry Kiwi (with chamomile and lemon balm), Orange Tangerine (with acerola extract, rosehip, and citrus extract) and Blackberry Grape (with theanine and yerba mate). All offer 100 percent daily value of vitamin C, 20 percent DV of vitamin E, and 10 percent DV of vitamin B12, niacin B3, vitamin B6, and pantothenic acid (B5).

Coca-Cola has rolled out Dasani Plus vitamin-enhanced flavored water beverages with zero calories per serving nationally. Dasani Plus comes in three varieties. Refresh + Revive-Kiwi Strawberry flavor with 10 percent of the reference daily intake (RDI) per serving of vitamins B3, B6, and B12; Cleanse + Restore-Pomegranate Blackberry flavor containing 10 percent of the RDI per serving of vitamins E, B3, B6, and B12, plus one gram of fiber; and Defend + Protect-Orange Tangerine flavor providing 10 percent of the RDI per serving of vitamin E and zinc. In February the line is extending with another variety, Calm + Relax-Lemon Lime flavor with vitamins E and B6, and magnesium. The produce is made with natural flavors, including green tea. Suggested retail price: $1.39 for 20-fluid-ounce single-serve bottles; $3.99 for 500-milliliter six-packs.

Gatorade has extended into the diet segment with the launch of G2, a low-calorie electrolyte beverage designed to help athletes hydrate while off the field. Available in Fruit Punch, Orange, and Grape flavors, G2 offers half the sugar and calories of the flagship brand. Suggested retail price: $1.39 per 32-ounce bottle; $6.99 per 20-ounce eight-pack; $3.99 per 12-ounce six-pack.

If there's any doubt that Tiger Woods has surpassed Michael Jordan in terms of marketability, one needs look only as far as the beverage aisle, where consumers will be able to purchase Gatorade Tiger. The first time the king of sports drinks has entered into a co-branding execution with an athlete, the product was introduced at the Target World Challenge to Benefit the Tiger Woods Foundation, held Dec.12 to Dec. 16 in Thousand Oaks, Calif. Gatorade Tiger will be available in Red Drive (Cherry blend), Cool Fusion (Citrus blend) and Quiet Storm (Grape blend), beginning in March. Gatorade Tiger, which provides the same advanced hydration (fluid and electrolytes) and performance benefits (carbohydrate/sugar energy to fuel muscles) during athletic participation as flagship Gatorade, will be available in new 500-milliliter (16.9-ounce) and 32-ounce bottles. Suggested retail price: $1.39 per 32-ounce bottle; $6.99 per 500-milliliter eight-pack.

Also new from Gatorade in 2008 is Propel Invigorating Water -- low-calorie, flavored water for refreshment and hydration, featuring about the same amount of caffeine as a cup of tea (20 milligrams), plus B vitamins that aid in energy metabolism. Offering just 20 calories per eight-ounce serving, Propel Invigorating Water is available in 20-ounce bottles in Strawberry, Citrus, and Berry flavors. Suggested retail price: $1.29 (20-ounce singles); $3.99 (four-packs).

Launched in late 2007, Java Monster plans a major push into the grocery channel in 2008. The line, which fuses the taste of coffee with the benefits of an energy drink, is available in Originale (Dark Roast with a strong coffee flavor), Loca Moca (Chocolate Mocha), and Mean Bean (French Vanilla). Two new flavors make their debut in '08: Nut Up (Hazelnut) and Lo-Ball (a low-calorie version).

In addition, Java Monster is extending into the tea category by launching a tea/energy hybrid, Chai Hai (Monster Tea and Energy Iced Chai Latte). Billed as the "first dairy tea and energy drink" and positioned as Java Monster's dairy-based coffee alternative, the product began rolling out nationally Jan. 1.

Finally, Java Monster has introduced an International line of nonalcoholic mixed coffee drinks easily cross-merchandised with other categories such as nondairy coffee creamers, ice cream, flavored coffee, coffee syrup, and baked desserts. Available in two flavors, Russian (coffee liqueur and cream flavor) and Irish (Irish cream flavor), the International line was launched nationally Jan. 1. All Java Monster products come in 15-fluid-ounce cans. Suggested retail price: $2.49 (singles); $8.99 (four-packs).

Another coffee/energy concoction, Rockstar Roasted, made the scene in late 2007 and is rolling out nationally in 2008. The Rockstar brand is distributed by the Coca-Cola system. Rockstar Roasted is a mix of espresso coffee, fresh milk, and cream, mixed with Rockstar (fused with energy ingredients such as caffeine, guarana, inositol, l-carotene, ginseng, and milk thistle). Rockstar Roasted is available in three flavors: Latte (a blend of premium coffee, cream, and sugar), Mocha (a coffee/chocolate mix), and Light Vanilla (with 50 percent less fat and 50 percent fewer calories -- 260 -- than original Rockstar Roasted). All offer 225 milligrams of caffeine per 15-fluid-ounce can.

Steaz, the sparkling green tea beverage, has just extended into the diet segment with the launch of a new Diet Steaz line in four flavors: Raspberry, Orange, Blueberry Pomegranate, and Black Cherry in 12-ounce glass bottles. Low in natural sugar (nine grams), and calories (40) Diet Steaz the first organic certified diet soft drink available in the United States, is available in single-serve and four-packs, with a suggested retail price of $1.39 (singles) and $5.40 (four-packs).

Word on the street

Kaumil Gajrawala, beverage market analyst for the Wall Street firm UBS, anticipates many new initiatives in the soft drink aisle in 2008.

"In terms of excitement, I see two big things happening in CSDs in 2008," says the UBS analyst. "Around the world, Coke Zero has been a phenomenal success for Coca-Cola. People have always liked bubbles, and they've always liked the taste of Coca-Cola. But there came a time when it wasn't worth the calories and the massive amounts of high-fructose corn syrup.

"So Coke is taking what they learned in other places, like Australia, where Coke Zero has about a four share, and is leveraging those insights into the United States market. I think Coke Zero will be the big carbonated soft drink for the Coca-Cola system. The beauty of Coke Zero is that not only is it keeping consumers in the category that were formerly Coke Classic drinkers, but it is also substantially increasing per capita consumption. Maybe you liked Coke Classic, but you only had one a day. And you don't like Diet Coke. Now you have Coke Zero and you can drink three or more a day. So I think Coke Zero is going to be big."

And just like an election that's broken down into red and blue states, a market analysis wouldn't be complete without looking at the red (Coke) and blue (Pepsi) systems. And the word on the Pepsi side, says Gajrawala, is "Max." With zero calories and nearly twice the caffeine offered in flagship Pepsi and Diet Pepsi (46 milligrams per eight ounces, vs. 24 milligrams per eight ounces for Pepsi and Diet Pepsi), Diet Pepsi Max promises to cross the lines between CSDs and energy drinks, bringing former Mountain Dew consumers back into the CSD segment a little bit older and wiser (read "upscale").

"Pepsi Max is a completely different type of product," explains Gajrawala. "It skews a little older [than Mountain Dew]. You'll notice in the advertising they'll use young professionals -- people in offices. They're targeting consumer interest in the energy category, and extending it beyond [what's] owned by brands like Monster. Pepsi Max is going after a different consumer need state, with a very clear consumer proposition: [cola] flavor, energy, no calories. I think that will be [Pepsi's] force for 2008, their big CSD."

But Pepsi has spent the past decade diversifying its portfolio so that it's perceived as a "total beverage company." That means there's a whole lot going on in its noncarbonated product portfolio as well.

"First, there's the SoBe Life Water vs. Glaceau situation," says Gajrawala. Look for new flavors from both. SoBe Life Water, now fully integrated into the Pepsi bottling system, has been reformulated using sucrose (or table sugar), and now offers 30 percent fewer calories than its predecessor.

Another brand that's lightening up is Gatorade. G2 is Gatorade's first foray into the reduced-calorie arena, with half the carbs/sugars (seven grams) and half the calories (25) per eight-ounce serving. "Pepsi found that a lot of Vitaminwater drinkers were sourced from Gatorade, so G2 will be an effort to keep them in the Pepsi franchise," explains Gajrawala.

Vitaminwater is the flagship brand of Glaceau, the Whitestone, N.Y.-based company purchased by Coca-Cola last year. Its portfolio is currently being integrated into the Coca-Cola bottling system.

"That’s what's going to make '08 so interesting in the fortified-water segment," says Gajrawala. "We'll have G2, Life Water, and Vitaminwater all going after the same consumer."

Look for plenty of news in the energy-drink category to energize grocery aisles in 2008 as well.

"The good news is that we will not see any significant price discounting," predicts Gajrawala. "In fact, Hansen's [Monster] took pricing up on Jan. 1. People don't mind paying for function."

Using the luxury auto market as a metaphor, Gajrawala argues that if a Camry were priced in the same ballpark as a Mercedes-Benz, the consumer would never think of a Mercedes as a substantially higher-quality vehicle. The same principle holds true in energy drinks, in which Red Bull has made gasoline look like the bargain of the century on a gallon-volume basis.

"If you're going to be a more functional drink, it's got to have a 'different' taste," he says diplomatically. "And it has to be more expensive. Then it must work."

Gajrawala is convinced that at the end of the day, Monster is doing the right thing by taking pricing up.

"The category has a ton of room to grow still," he says. "It still only represents 1 percent of total beverage consumption."

In fact, a product introduced in 2007, Java Monster, a coffee-flavored energy drink, promises to make more inroads into the grocery channel in 2008. Teamed with Rockstar Roasted from the Coca-Cola portfolio, it could be the beginning of an entirely new segment, according to Gajrawala.

"What we’re seeing is the fusion of the energy and coffee categories," he explains. "The whole category will be affected."

Gajrawala adds that suppliers are hoping to place these products away from the energy drink category.

"Now that’s a beautiful thing, because you've got Monster, and you know how profitable that is," he says. "If you can have another product two shelves down -- you potentially have another whole shelf of equally profitable products.

"Trade people up. That’s the key to profitability."
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