Rainy Holiday Doesn’t Dampen C-Store Optimism

wells fargo logoRain struck on this year’s Fourth of July in most major U.S. cities. Boston, New York City, Philadelphia and Washington all had rain. So too did Atlanta, Miami, Detroit and Chicago. But the dampened days weren’t enough to hamper business in convenience stores. In a report that combines Nielsen data and a survey of beverage retailers from more than 15,000 convenience accounts across the U.S., senior analyst Bonnie Herzog of Wells Fargo Securities finds optimism in the overcast.

Herzog writes that convenience store beverage sales grew by 5.2 percent over the holiday, up from the 2.7 percent growth of last year’s Fourth of July. While one survey respondent said that the holiday was a wash-out because of Hurricane Arthur, others considered the generally-warmer summer of 2014 and the market opportunities presented by these kinds of conditions.

“I think the c-store trade in general will have a banner year in packaged beverages,” another respondent said.

Alongside the encouraging Nielsen figures, the general optimism of retailers is neatly concentrated in the following graph:

project bev sales, wells fargo

Sources: Wells Fargo and Nielsen

The report notes that energy drinks and a combination of bottled water, enhanced waters and sports drinks helped offset the expected struggles of the carbonated soft drink (CSD) category. And even with the rainy holiday, Herzog writes that the improved weather this summer has netted positive results for the beverage industry.

“Followed by last year’s difficult first half, we are generally encouraged by improved operating conditions for the quarter and rest of year,” she writes.

Considering survey results, Herzog estimates that energy drink sales recorded 8 percent growth in the second quarter. This figure is below the category’s double-digit growth of the previous three quarters, however, survey respondents said that the category will return to double-digit growth in 2014. A significant number of respondents said that the energy category has shown the most growth of any beverage category in their channel and that leading brands such as Monster Energy continue to seize shelf space from other categories.

“In fact, our survey respondents have indicated that [Monster’s] shelf space for 2014 will be two-thirds greater than it was just two years ago,” Herzog writes.

Monster recorded 7 percent growth in the second quarter to go along with 2 percent growth in net retail pricing. One respondent said that the brand’s sales were “not as strong as we expected.” Herzog attributes at least part of Monster not meeting expectations to a decline in promotional activity, which another retailer described as a positive. Yet despite the quarter’s underwhelming sales figures, respondents believe that Monster will return to double-digit growth.

energy projected growth, '14

Sources: Wells Fargo and Nielsen

Notes on CSDs

  • Herzog writes that Coca-Cola’s pricing architecture is “best-in-class” and that the company will continue to raise prices above its competition for the second half of 2014. Survey results indicate that Coke’s average retail price grew by 1.2 percent, year-over-year, and volume grew by 1.5 percent, also year-over-year. Meanwhile, respondents didn’t have kind words for Coke’s Freestyle Machine or Pepsi’s Spire Machine. One respondent said the machine “slows down traffic flow.” Another said: “Test did not go well in my chain. Incremental cost of goods and disjointed distribution model a ‘killer.’”

  • Respondents said that Pepsi was the most promotional in nearly every category over the holiday, which could explain the 1.4 percent growth in average retail price and 1.5 percent growth in volume. While Herzog wonders if the holiday promotions align with the brand’s efforts to maintain pricing consistency with its value proposition, she writes that Pepsi’s sales have continued to improve after last year’s soft results. She remains encouraged by the momentum of the past two quarters.

  • Dr Pepper Snapple’s retail prices grew by 0.5 percent and volume grew by 1.5 in the quarter, placing the brand at the bottom of the competition. “Given the weak results for DPS relative to peak valuations, we continue to believe the risk/reward ratio for shareholders remains negative going into Q2 earnings,” Herzog writes.

Survey Responses to Consider

  • “Beverage manufacturers are becoming extremely aggressive with their desires to control retailers’ profits structures.”

  • “Water continues to trend down. ‘2-for’ deals hurt our overall margin.”

  • “Have now discontinued all TEN product/flavors.”

  • “Hot and humid and it shows with double digit increases in water and sports drinks.”

  • “More people out – basket is more items – normal for this type of weather pattern. Very cold winter and people had cabin fever and now want to get out and have fun and relax.”