What’s going on inside the mind of the bull?
In a featured article from our June, 2014 issue of BevNET Magazine, we examined how sustained and rising demand for energy drinks has played a role in declining CSD sales, and the future of the categories amid a growing thirst for functionality. The story included highlights from a recent interview with John Showalter, the Director of Business Insights for Red Bull North America, who provided a rare glimpse into the strategic vision of the energy giant.
The interview offered compelling insight into Red Bull’s play for increased shelf space of energy drinks amid the rise in negative consumer sentiment for CSDs and how the company views its position among competing brands. Showalter also discussed how category trends of low-calorie formulations and flavor innovation are not only shaping the future of the energy segment, but have become highly influential in the development of new cross-functional products launched by CSD, coffee and enhanced water brands.
Here’s the interview in full:
BevNET Managing Editor Ray Latif: While sales CSDs are facing a sustained downward spiral, the energy category continues to surge. Moreover, consumers are increasingly trading CSDs for energy drinks – to what does Red Bull attribute the shift in consumption?
John Showalter: One of the biggest trends we have seen in the CPG industry over the past decade is a consumer shift to functionality. Increasingly, consumers are looking for beverages that do something for them. Energy drinks provide the functionality of an energy boost, and not only that, consumers are willing to pay a premium for it. Now that we live in a connected 24/7 society, the need for an energy boost is becoming more important. This trend is not just focused in the United States. Across the globe, Energy Drinks have gained significant traction and value in consumer’s lives. We also see this trend playing out in other drinks that provide functionality, like Coconut water.
RL: Sales of diet CSDs, in particular, are driving overall sales declines for big soda brands. Nevertheless, consumers continue to seek out low- and zero-calorie beverage options, and it would appear that there is a huge opportunity for growth of Red Bull’s Sugarfree and Total Zero products. Has the company experienced a bump in sales of its low-calorie drinks as a result of declining interest in diet CSDs?
JS: The shift away from Diet CSDs in particular has been a trend we have seen for quite a years and has been more of a slow shift and an immediate change. At the same time, the Diet segment of Energy Drinks has been gaining share of the total Energy drink category. Part of this shift has been from new, successful innovation like Red Bull Total Zero and Monster Zero Ultra, and part of the shift has been change in consumer behavior. Red Bull Sugarfree and Total Zero are both strong players in the total Red Bull portfolio and we find that both of these lines bring new users into the Energy Drink category.
RL: According to a recent Wells Fargo survey, C-store retailers believe that there is an opportunity to expand shelf space for energy drinks to over 30 percent of total c-store shelf space. How does Red Bull plan to take advantage of the increased room for energy?
JS: As a category management organization, we put a lot of thought into how retailers can optimize total beverage space. We recommend retailers take a blended approach and look at Dollar Volume, Unit Volume, Profit and future growth to plan for total beverage space. What we find is that, generally, the Energy drink category is under spaced in terms of these metrics. Expanding the Energy category footprint on shelf will meet consumer needs while delivering on volume, growth and profit for the retailer. As the Energy category expands, we have a full recommendation for how the shelf should be merchandised to optimize sales. As the Energy category continues to consolidate into the top two brands (In fact Red Bull and Monster now make up over 80% of total dollar volume in Total US), we fully expect that the shelf space should reflect consumer preferences. Top preforming Brands and SKUs should take precedence over secondary and tertiary brands that add little value to the Energy drink set.
RL: In Red Bull’s estimation, what percentage of the CSD market can the energy drink category capture and on what sort of timeline?
JS: Within the Convenience channel, the Energy Drink category is already 75% of total CSD sales (Nielsen Scantrack Convenience YTD ending 5.17.14). However, when you look at all channels combined, Energy moves to 30% of total CSD sales. However, in some of our more developed markets, Energy reaches 50% of CSD volume in all channels combined. While we do not necessarily think Energy is taking share from CSD, we do think that that the consumer is looking for more options and variety in their beverage consumption. There are a few reasons why we believe Energy will continue to out-grow total beverage. First of all, Energy Drinks over-index among Hispanic consumers and Millennials. These are the two consumer groups that are forecasted to grow the most in terms of population and spending power. (Mintel 2013 Energy Drink Report). Second of all, the consumer trend toward functionality is here to stay. As Energy Drinks become even more mainstream and reach more consumption occasions, the category will continue to grow. Finally, product, in store, and marketing innovation will deliver category growth. For all of these reasons, we believe Energy will continue to become an increasingly important part of total beverage growth.
RL: From a functional standpoint, consumers continue to view colas and other CSDs as a source of caffeine and energy. Nevertheless, CSDs are most known as refreshment beverages. At what point do the lines between refreshment and function blur, and will that shift be good for the energy category?
JS: Another one of the biggest trends we have seen over the past few years is that of category blurring. More products are coming out that span multiple categories. Think Mountain Dew Kickstart, VitaminWater Energy, and Starbucks Refreshers. While these products are not pure Energy Drinks, they claim an energy boost on the can. As you can imagine, this can get very confusing for shoppers. This makes it extremely important for retailers to make the right decision on where to shelve these products (if they carry them at all) as it would be detrimental to sales if the shopper was confused and proceeded to walk away. Part of Red Bull’s category management process is recommending what category new products should be shelved in to ensure their success. We take an objective approach that looks at the product from a shopper perspective. In our view, if the product is shelved in the appropriate category and meets a consumer need, this is good for the Energy category.
RL: Innovation has been hailed as a key to continued growth of the energy category, yet while competing brands have been relentless in their launch of line extensions, Red Bull has taken a slow and measured approach to the release of new products. Will Red Bull need to be more aggressive with the launch of new products in order to take advantage of the opportunity left in the wake of declining shelf space for CSDs?
JS: Red Bull takes a different approach in our go-to market strategy than our competitors. While our product innovation is not as frequent as that of Monster or Rockstar, we innovate in other areas, such as our marketing or Media House. Our new product launches are always based on consumer insights and delivering on unmet needs. Additionally, once we launch a new product, we fully support it with in store messaging, advertising campaigns and nation-wide sampling. While we can’t say what our future plans are for product innovation, you can bet that it will be rooted in consumer need and bring new users into the Energy category.