A New World On The Horizon 2

Back in the 1990s, I did a lot of consumer research, from hours sitting behind a one-way window studying focus groups, visiting countless consumers in their homes (yes,  at any point, you could hear a knock on your door and it would be me, asking to look in your refrigerator) to large quantitative Attitude and Usage studies delivering hundreds of pages of data tables.

Looking back on that experience (and with the benefit of 20/20 hindsight), two general observations can be made:

First, people in general were genuinely excited by the idea that they could get more from their beverages. They were eager and ready to embrace beverages that were primarily useful products , and “brands.”

Second, Carbonated Soft Drinks, while comfortable and convenient, were becoming irrelevant.

And that was back in the age of Snapple. Now, the twenty-first century drinker is looking for even more.  That is, a more engaging drinking experience; exotic tastes, natural ingredients, healthier attributes, and more functional potential.

Now it seems all very simple: That research experience presaged all of the biggest successes, from functional fortification in a less sweet beverage leading to Vitaminwater to more energy for modern life equalling Red Bull.

At the time, though it was a challenge to dimensionalize what “more healthy” or “more energy” would mean. In 2013 these changes have gelled into specific categories, segments and brands – and the industry continues to push the boundaries of beverage innovation further.

In the October edition of Bevnet Magazine, we discussed the issues and challenges that CSDs face. Now, lets examine the opportunities that will be presented in the New World.

A note on the following needs and segments:  If you work inside the beverage industry, it is very easy to think of the beverage business in high-walled, monolithic categories. We keep scorecard terms of Tea vs. Tea, Water vs. Water, etc. In reality the consumer interactions between categories have become more fluid (pun not intended). Even in the most sophisticated organizations, it is a challenge to stay consumer-centric. So while we’re looking at how opportunity might appear, consider a broader competitive set based on how consumers behave rather than just the close-in competition as you build your brand. Especially as categories bleed attributes functionally across lines, selling attributes may be drawn from a variety of categories as well.

BOTTLED WATER
2012 Size $14B  2018 Projection $19B  Projected Growth Rate 6%

SEGMENT DYNAMICS:
The consumer perception that “water is water” is fading as new hydration innovations appear. For the past 20 years, most consumers and the mainstream media have taken the approach that there would be no difference between municipal water from a home faucet, or an expensive source water.

Within the category, low-priced commodity water dominates with 90% of the revenue. But there are interesting opportunities at the premium end of the market. Today, consumers can increasingly taste the difference, and are willing to pay for better, more convenient water, as well as water that fulfills a functional expectation.

WHERE ARE WE GOING?
Beyond exotic source waters in glamorous packages (Fiji, Voss, Evian) multiple brands are building the functional water space: The current dominant brands – Vitaminwater and Smartwater – have created the profitable and growing “Premium Hydration” sub-category, an opportunity for more innovation and creativity. Largely unflavored, all unsweetened, sometimes more functional but all with a high-quality appearance, some examples would be: Balance Water, which adds interesting flower essences for functionality; Hint, which is focused on fruit-flavored, unsweetened water; Wat-ahh, which is bringing additional functionality to kid-focused waters and Essentia Alkaline Water, now the leading brand in the natural channel.

 

ENERGY DRINKS
2012 Size $10.0B  2018 Projection $13B  Projected Growth Rate 6%

SEGMENT DYNAMICS:
32% Annual Growth rate for the past decade has taken Energy Drinks from rounding error to $10 billion in revenue. While the current rate of growth will slow, Energy Drinks will be a significant driver in the New World, despite food politics and premium pricing.

The U.S. category is dominated by four brands (Red Bull, Monster, 5 Hour Energy and Rockstar) who have withstood competitive entries from all the big beverage companies, as well as thousands of entrepreneurs. Most of these entries lacked any differentiation, and then discovered that the high gross margins of the segment created a set of aggressive competitors who battle for every facing in every account.

WHERE ARE WE GOING?
Interestingly, the energy need is broadening from blue collar males to mainstream consumers, from soccer moms to stay at home dads and baby boomers. These new energy drinkers are asking for “more natural” and “less scary” energy.  A challenging place for the big four brands to play.

“Non-stimulant” forms of energy may also be an opportunity. However, getting consumers to believe that they have greater endurance as a result of such a drink has traditionally proved to be a challenge.

So, now the battle is on to find a way meet the demands of these late comers to the energy party.

 

JUICES/JUICE-BASED DRINKS
2012 Size $10B  2018 Projection $11B  Projected Growth Rate 2%

SEGMENT DYNAMICS:
Juices and Juice Drinks were the creative vanguard of the New Age Beverage movement twenty years ago. Consumer interest in better-tasting juice consumed away from breakfast drove considerable growth.

The big companies identified this opportunity early, leveraging traditional juice-oriented brands and adding some of the more exciting juice brands to their portfolios. Over the past decade/dozen years, Naked Juice was acquired by Pepsi to join Tropicana, and Coca-Cola acquired Odwalla, and created Simply Orange to accompany Minute Maid.

Today, it is amazing how Eliot’s Amazing Apple Juice, Snapple Mango Madness and the promise of Fruitopia seem dated today.

WHERE ARE WE GOING?
Mainstream juice product declines are being offset by the growth of a “New Wave” of premium juice offerings. These segments are fighting to convince retailers of their right to retail presence and to establish their offerings with consumers.

Juices are a segment full of activity. Formerly sleepy segments like lemonades are being re-imagined by upstart brands, and new opportunities like coconut water are blurring juice together with hydration & sports drinks, while aloe drinks, turmeric beverages and cherry juice are positioning against inflammation. Those naturally functional products are joining a new set of even higher-priced premium products like cleanses and smoothies made with HPP technology.

 

SPORTS DRINKS
2012 Size $7B  2018 Projection $9B  Projected Growth Rate 3%

SEGMENT DYNAMICS:
There is no doubt that consumers seek a beverage that can help them perform better at sports. And for thirty years Gatorade delivered that advantage. Today, if you are serious about sports, you are serious about sports nutrition, and about understanding your optimal balance of hydration, nutrition and fuel.

Gatorade responded to this by developing the Prime, Perform and Recover three-stage system in 2011, but that strategy has proven difficult to execute and has gradually been dropped, returning to advertising-driven imagery of success to sustain the brand. It’s been an interesting test case for consumers’ supposed interest in true functionality and the limits of an established brand.

WHERE ARE WE GOING?
Similar to the rapidity of progress made in technology, scientific knowledge of Sports Nutrition is moving forward quickly. Take a walk to your local Vitamin Shoppes or GNC and you will see new products being commercialized against this new knowledge. Are these all game-changing ideas? Well, no. But there may be the next great idea already sitting on these shelves.

In the past year, Beetroot Juice has received a lot of press due to its ability to improve endurance. Caffeine, once the nemesis of performance due to its diuretic impact on the body, now has received interesting scholarship related to its ability to impact muscle recovery. Protein is still predominantly used in powder form, but Muscle Milk has led the way into RTD products. It will continue to be a referendum on how consumers view  liquid protein: of the $3 billion or so spent on all protein supplement products estimated (powders, bars and beverages) only about $500 million comes in an RTD beverage form.

 

RTD TEA & RTD COFFEE
2012 Size $6B  2018 Projection $8.1B  Projected Growth Rate 4%

SEGMENT DYNAMICS:
It might be surprising, but alongside energy drinks, the other big success of the 00’s was the growth of RTD Tea, which more than doubled in size as a segment. The perfect combination of positive media coverage on the health benefits of tea, the development of value alternatives and super-premium propositions stretched the consumer perception of what tea could be.

While Snapple was the originator of better-tasting, fruit-flavored hot-filled tea, it has been AriZona that has broadened demand and become the powerhouse brand in the category driven by its great packaging, mainstream innovation (largely flavor-based, like the Half and Half phenomenon) and high-velocity everyday pricing.

At the same time Honest Tea has been the first example of a tea brand with its roots in the natural retail channel that has jumped into mainstream acceptance… weathering even the brand’s sale to Coca Cola.

WHERE ARE WE GOING?
RTD Tea is simple, healthy refreshment with enviable consumer acceptance. AriZona has found a way to build a massive tea brand in a way similar to how Coke and Pepsi established themselves: Great value and retail presence. That path will continue to present an opportunity for the company.

In the past few months there has been increasing amount of research identifying the interest of the millennial generation in teas.  The combination of low-calorie allied with great taste allied with tea’s healthy halo is attractive to this generation.

As a result, the market for high-priced, on-premise tea is expanding: Argo Tea is growing, Starbuck’s bought Tevana, and David’s Tea in Canada is growing too. An RTD brand that can capture this momentum would have a big opportunity.

 

DAIRY AND OTHER BEVERAGES
2012 Size $2.5B  2018 Projection $3.3B  Projected Growth Rate 5%

SEGMENT DYNAMICS:
From Muscle Milk to Nestle Quik to Kombucha, the “all other” space is the diverse frontier of new beverage ideas. When truly original and different beverages are created, they often come from this space.

Starting a new category is both a blessing and a curse. While retailers appreciate the differentiation, there is a challenge to figure out where to merchandise the new brand, how the new brand grows the marketplace, and the right pricing.

At Cadbury, one of my roles included reviewing brands seeking distribution through our Route To Market. I will always remember reviewing Kombucha the first time: So different from what was on the shelf, but so alien to the mainstream taste profile.

It is from this space the next big opportunity could emerge.  There are a host of physical needs that may be targeted: Brain health, bone health, anti-anxiety, appetite suppression, sexual health, etc. Certainly, there has been a focus on beverages that could be snacks, as consumers eat fewer sit-down meals and get nutrition on the go.

 

WHERE WILL WE BE IN 2018?

In answering this question, take a step back five years to 2008: No coconut water to speak of, no HPP juice, and protein beverages were just becoming mainstream. Those are three big opportunities that became multi-million dollar categories. Now, the leap forward of the next five years promises to be even more significant, because the decline of CSDs that these columns center around will create even more opportunities for “white space” beverage innovations.

Consumers are more open to different beverages concepts then ever before. They expect new ideas and are willing to give them a chance — if the proposition is relevant to them, and has an acceptable taste. That’s great news for the beverage developer – but be warned, consumers are also quick to identify anything inauthentic or copy-cat.

The other big challenges will be born of the proliferation of new product categories, brands, flavors and packages.

It will be tougher to cut through the clutter. Having a great product and great brand will not be enough. New brands will be even more innovative at generating trial, building awareness and maintaining loyalty with their consumers.

The current set of tactics that an emerging brand can employ is pretty standard: The first wave is social media allied with in-store sampling, event sampling, and guerilla sampling.  As brands become bigger, event sponsorships and celebrity endorsements come into play along with building PR capability. These are the hard yards that every brand since Snapple has employed to get to scale. It will be interesting to see if someone creative can break this paradigm and build a whole new approach.

The greater proliferation will also likely have an impact on the time horizon that brands will need to build success. More obstacles, and more pressure from competitors will push out the length of time needed — and the more time needed for success, the greater the levels of investment and resources that will be needed to support a new venture.

So, this is the New World: Fewer CSD’s, more alternative beverages, and an accelerated rate of innovation.  But to quote Gen Norman Schwartkopf, “Strategy is for amateurs, logistics are for professionals.” Building a beverage brand requires thousands of tiny wins, every day, from the distributor’s warehouse to the retail shelf to the consumer’s lips. That’s what we’ll look at in our next analysis of this New World: its impact on the industry that surrounds beverages: The impact on beverage businesses, distributors and retailers.