A New World on the Horizon

By Neil Kimberley

Rick Hill was an amazing boss. Between endless cups of coffee and sneaked cigarettes in his office he preached a new way for beverages to do business.

Rick had taken the dusty old Barq’s brand and created what would be called a viral phenomenon today. That was the “Soviet Union Going Out of Business Sale” – a communist memorabilia on pack promotion. He made Root Beer cool. Cool enough for Coca-Cola to buy the brand in 1998.

When Rick was my SVP of Marketing at RC Cola, we had to try to figure out how to fight Coke and Pepsi. An overwhelming prospect.

“It may take 100 years, but Coca-Cola will fall,” Rick told me. “Everyone is ultimately vulnerable because change is inevitable.”

Rick was never a guy to avoid a punchy line – or an outlandish one. I filed the thought under “Rick’s Outrageous Sayings” and moved on.

And here we are now, almost 20 years later, and Rick is starting to look less outrageous. Coke and its traditional carbonated cousins are still the dominant beverage form, but that domination is coming to an end: Based on current trends the next six years will see the dominant position held by CSDs erode. Bubbly sodas will no longer be the revenue and volume leaders of the U.S. Liquid Refreshment Beverage industry.

Back at BevNET Live in 2012, this estimate came up in conversation with other attendees, and we began to discuss the impact of this change, and the opportunities this will present to the ever-present innovators and entrepreneurs of the beverage industry. The BevNET team and I have since begun crunching the numbers and this series of columns, beginning now and going into the new year, is a synthesis of that data, my own, and discussions of The New World with colleagues, friends and associates.

We’re going to try to figure out what this new world will look like.

The Route to the New World

First let’s talk about how we got here, at the brink of this titanic shift.

Every year, the Beverage Digest team gathers high level price and volume data from each major player in the beverage industry to build a view of the U.S. marketplace that is not restricted within the availability of syndicated data from Nielsen or IRI, but provide an All-Channel view the market.

They cover the three beverage segments of most interest to people selling refreshment beverages:

• Carbonated Soft Drinks (Coke, Pepsi, Dr Pepper – but not Energy Drinks)

• Bottled Water (not packaged in bulk sizes)

• Alternative Beverages (Teas, Juices, Sports Drinks, Energy Drinks, etc.)

That data has, as we’ve all observed, already described the decline of the carbonated beverages. Despite innovations like Coke Zero, we’ve seen a 20 point fall in the share of this beverage market over the past decade.

But the past ten years have also been good for the beverage industry. Consumers are drinking more than ever – and they are prepared to pay more than ever for drinks, as well. Consumption is increasing faster than population growth, and pricing is increasing faster than inflation.

But the industry has fundamentally changed. In the past decade Carbonated Soft Drinks, that iconic American libation, have lost their unassailable position at the top of the beverage world. That slow decline is now taking shape as a major structural change. Drinkers actually embraced this new order before distributors, retailers and the largest beverage companies. But we will all take our cues from that new order.

 

The Forecast

So let’s look at a trend over ten years and project it forward.

The beverage marketplace has grown 1-2 percent annually. But CSD’s have been losing share at a rate of between 1 percent and 2 percent annually, as well. This trend was slowed at the height of Bush Recession, but has resumed in the years since. As a result, the CSD share of the Beverage market in 2012 was 57 percent: 20 share points lost since 2002.

Extend this trend out from 2012, and a combination of growth in Non-CSD Beverages, and 2017 is the date when CSD’s fall below 50 percent of the market for volume; 2018 is when it will happen in revenue. And every year that the trend continues, $2 billion in retail sales change from CSDs to the Water and Alternative Beverages categories – although oftentimes, when the fundamental cracks appear, the erosion can speed up.

All this, of course, prompts the question “So what?” The big beverage companies are already big players in Bottled Water and Alternative Beverages. Surely it’s just the same players… but with a different tune?

It would be churlish to believe that the major businesses will not evolve to respond to these market conditions. However, the record of the Big Beverage companies in competing outside their core competencies is not stellar.

The internally generated innovations of the big beverage companies have rarely been successful, and there remains a steady conveyor belt of new products and ideas coming from beverage entrepreneurs who are able to more effectively respond to emerging consumer needs.

As the market skews ever more away from CSDs as alternative beverages grow there will be between $2B-$3B in incremental demand seeking non-carbonated refreshment: that’s the equivalent of a new AriZona Beverage Co. annually.

Undoubtedly this change has been consumer-led. The large CSD companies continue to focus all their available resources against finding a way to grow their business. They have already acquired their manufacturing and distribution systems, increased their pricing, changed their packaging, tried different marketing tactics, and are in the process of attempting to create no calorie, naturally sweetened versions of their brands. But save for the recession of 2008, it appears little can arrest the decline. Meanwhile, interest is migrating to product types that are either stealing share or growing their own.

It looks like Rick was right: Change has arrived. But as a beverage entrepreneur, how do you use these changes to position yourself to win in 2017? Who can join the list of successful beverage startups that have made the New World possible?

That’s what we’re going to explore in the months to come. What the change will look like, which categories, product forms and packages are likely to benefit, and how retailers, distributors, and manufacturers are going to be impacted. What the consumer will see in the store, what the distributor will put in the cooler, what the marketer will try to get on the truck, and what the supplier will have to come up with for ingredients. This is going to be a big change, and I look forward to having us prepare for it together.