As we turn the page on 2014 and look ahead to 2015, here are a few key threads I feel should be worth watching in the new year:
How will the Big 3 navigate the new skepticism on Wall Street about their prospects?
Many of us in the trenches have been surprised at Wall Streeters’ suspension of disbelief in recent years when it’s come to the Big 3 soda companies’ long-term strategies. At a time that consumers are drifting away from core CSDs, the efforts by Coke, Pepsi and DPS behind noncarbs have often seemed half-hearted and too price-driven. Their execution at the street level appears to have markedly deteriorated; in my home market, New York, which still boasts a meaningful base of independent retailers, Coca-Cola Refreshments for years has relied on telephone sales as a key outreach method. Besides limiting effectiveness on major brands, it’s not a good way to work one’s way into the nooks and crannies where new trends are incubated – say, the yoga studios that were an early retail bastion for coconut water a decade ago. Yet as obvious as some of these challenges seemed, Wall Street generally seemed willing to accept that, behind such rubrics as Vision 2020, the big players had it all under control. Suddenly they’re asking again, how come beverage volume is so overweighted to CSDs? It seems to be stimulating a scramble by top management to reinforce its bona fides in newer, healthier categories.
Will the major players’ innovation efforts bear better fruit?
At the recent NACS convenience store expo, we saw a stepped-up push toward innovation from the likes of Pepsi, DPS and Campbell Soup. Will this be sustained? And how will they manage such innovations? I’d rate Coca-Cola’s VEB unit as the most carefully thought-through incubation strategy, but its results have been mixed, and I even hear speculation that it may not survive the sweeping reorg that Coke is planning. One encouraging sign: some big players seem to be moving beyond their traditional “if we don’t own it outright, then we don’t really care about it” stance. Coke’s investments in Keurig Green Mountain and Monster Beverage may be a template for how it will try to support but not stifle innovation, and at the NACS show the DPS booth was striking for the presence afforded its so-called allied brands – those like Neuro and Body Armor that it distributes but doesn’t own. How far will they take this approach?
Will new refrigerated segments be able to jump the shark on the way to meaningful scale?
There’s been uncommon excitement – and premium pricing power – behind some of the new refrigerated entries emerging in cold-pressed juice, kombucha and cold-brewed coffee. But the route to scalability is quite challenging at the production and distribution levels. Will they really break out? As I’ve noted in this column, all three have their vulnerabilities. Some HPP juice companies are racing to get their price points down by offering diluted products, and it’s still not clear whether they’ll prove immune to the broader challenges that all juice companies face on the calorie front. Some kombucha players continue to struggle to keep their products compliant on alcohol level, and may be under-declaring their calorie counts, too. Some of the implicit claims they’re riding may be a stretch, too. And the deluge of cold-brewed coffees that are shelf stable and/or blended with dairy and sugar may be undermining some of the promise of the category to begin with, before most consumers really understand them. Still, each segment is developing a fervent grass-roots following and has bred an uncommon degree of excitement in the trade.
Will Pricing Firm Up?
Chalk some of it up to sluggish household incomes since the financial crisis. Still, the depth and frequency of price promotions has been astonishing – not just in categories one expects, like mass-market CSDs and sports drinks, but in more ostensibly premium segments like organic tea and enhanced water. Endless-seeming 10-for-$10’s behind brands like Sparkling Ice and Vitaminwater – some of the activity, manufacturers insist, undertaken by the retailers themselves – have become as prominent a feature of the retail landscape as 99-cent 2-liter bottles of Pepsi or Diet Coke. Honest Tea’s plastic-bottle line – the one that goes out on Coke’s red trucks – is too often seen at $1. But even the Whole Foods cooler can be a kaleidoscopic array of promo tags heralding 3-for-$5, 4-for-$5 and 5-for-$5 deals, even as the superpremium cold-pressed juices and coconut waters nearby are continually out of stock at prices of $5 and more per bottle. The Big 3 lately have been preaching price realization, and showing some signs of actually committing to the strategy, to Wall Street’s general approval; we’ll see if they stick to it in the new year.
Is the DSD system in crisis?
Those who read my newsletter, Beverage Business Insights, know I’ve been a fervent supporter of the value of DSD distributors. Though the system is not as robust as it once was, and has become too much a beverage-delivery system rather than brand-building system, it’s still generally the best option for brands with a chance of breaking out into broad popularity. As I often argue in my letter, DSD is like democracy: chaotic and inefficient, but nobody’s come up with a better plan. But it’s probably not overstating things to say the DSD system is in a state of turmoil. Monster’s switch to Coca-Cola in half the country could send droves of Budweiser houses fleeing from non-alcoholic brands. Red Bull continues to terminate independent shops as it moves to its unstated but obvious aim of self-distributing in major metros. Major markets like South Florida and Texas find themselves underserved in DSD, and well-known names like Buckeye and Green Shoots have been struggling. Coke and Pepsi are embarking on refranchising moves that will further roil the landscape, bringing independent operators into the mix. Big indie houses like Polar, Lenore and Kalil seem to be opening their doors to more brands, and entrepreneurs are launching new shops. And there continues to be speculation about broader deals that could put beverages and beer on the same trucks. Where will it all net out? Will DSD become stronger, or edge closer to vanishing in many markets?
Longtime beverage-watcher Gerry Khermouch is executive editor of Beverage Business Insights, a twice-weekly e-newsletter covering the nonalcoholic beverage sector.