C-Store Survey: Energy, Water Surging; CSD Pricing Near Peak

Wells_Fargo_Securities_logoLed by energy drinks and bottled/enhanced water, C-Stores saw a 2.8 percent jump in sales of non-alcoholic beverages, despite a brutal winter for much of the country and sustained volume declines of CSDs, according to a new Wells Fargo Securities report and survey on C-store beverage trends during the first quarter of 2014.

The investment bank’s “Beverage Buzz” survey includes direct quotes from retailers representing over 15,000 U.S. convenience store locations across the U.S., many of whom described rapid and continued growth of Monster Energy and Sparkling ICE drinks while expressing pessimism about the future of both diet and full-calorie sodas.

Although higher retail pricing of CSDs marketed by Coca-Cola Co., PepsiCo and Dr Pepper Snapple have partially offset declining sales volume, Wells Fargo noted that “given the current pricing levels, many retailers believe there is limited room for further pricing in 2014.”

“Interestingly, the majority of our respondents indicated that pricing on 20-oz CSDs ($1.69 or $1.79 currently for nearly all markets) is at or near the maximum of what consumers are willing to pay,” Wells Fargo wrote. “As one respondent suggested, “20-oz has already eclipsed what customers are willing to continue to pay – once the retail hits $1.79, sales will decline drastically.”

Moreover, most C-Store retailers participating in the Wells Fargo survey see little promise or upside to the introduction of all-natural sweetened CSDs as a means of bringing consumers back to the category. The investment bank wrote that “based on our survey results, our retailer contacts almost universally believe that it’s ‘too late’ and that customers have ‘too many choices that they have already switched to.’”

While diet CSDs have proved to be the area of largest decline for the category, Wells Fargo reported that C-Store operators have a particularly grim outlook on DPS’s TEN platform, noting that the 10-calorie version of Dr Pepper “is only carried in approximately 72% of stores, with the vast majority of retailers reporting that the product is generating “weak” repeat sales.” Wells Fargo stated that many respondents have begun to removing TEN sodas from their shelves because of poor sales and reiterated its belief that DPS should discontinue the line before “following in the footsteps of countless other brand extensions that fail to become meaningful brands.”

Meanwhile, sales of Monster Energy products continue to thrive in C-Stores. Wells Fargo reported that volume sales of the brand grew by 11 percent in the first quarter as compared to the previous year. The investment bank attributed the growth to a rise in promotions and innovative line extensions including protein-infused Muscle Monster and its zero-calorie Zero Ultra products. Survey respondents believe that Monster is outpacing the rest of the energy category with dollar sales up 14.3 percent. By comparison, Red Bull grew by only 6 percent in the quarter.

Nevertheless, Wells Fargo projects the overall energy category to grow by double-digits and continue to take shelf space from other beverage categories. And with retail margins reaching nearly 40 percent as compared to 30 percent for CSDs, Wells Fargo’s retail contacts believe that there is an “opportunity to expand the energy shelf space by 50% to over 30% of total c-store shelf space.”

Remarkably, Wells Fargo reported that negative media coverage of energy drinks have not had a “material impact” on sales, and believes that “the impact for negative media coverage is at an all-time low since the negative press began in 2012,” based on its survey. ” The investment bank stated that 94 percent of survey respondents suggested there was no negative impact, with one noting that If anything it seems like it brought more attention in a positive way.”

While energy continues to be the darling of C-Stores, Wells Fargo believes that enhanced waters and sports Drinks will continue to perform well. Wells Fargo projects combined 7.7 percent growth for the categories based on the strength of flavored sparkling waters which, led by Sparkling ICE, have had “a break-out year.” While the growth of Sparkling ICE has certainly cut into CSD sales, one survey respondent sees the brand as having the potential to take market share from other enhanced waters.

“Sparkling Ice has shown steady growth,” the respondent said. “If the manufacturers of Vitamin Water and Sobe Life Water don’t wake up soon, I see stronger growth from Sparkling Ice coming.”