For all the tumult and drama of 2020, one thing remained consistent: in sickness or in health, Americans drank seltzer.
This year, thanks to the COVID-19 pandemic, Americans did their drinking off-premise: with more than half of the U.S. population now having 90% of their meals at home, sparkling water has grown at nearly double the rate from the prior year, up 18.7% to over $3.7 billion. Whereas beverages dependent on c-store and food service channels saw sales declines as the outbreak spread, seltzers were well-positioned in grocery and club retailers to manage the situation, offering consumers the ability to pantry stock with multipacks and stores the flexibility to merchandise in case stacks as planograms shifted in the early weeks. In the context of business lockdowns and the shift to working from home, the value of sparkling water as a zero-calorie refreshment, one available in a wide range of flavors and brand personalities, was enhanced further.
As the category continues its interminable march, however, the path is becoming crowded, with major beverage makers marshaling their considerable resources to fight for share with the long-time independent category leaders and private label brands. Within that mix, a buzzing community of innovative startups is using flavor, function and alternative routes to market to disrupt the establishment, as consumers’ embrace of alcoholic hard seltzers teases further potential for broadening the non-alcoholic set. Yet with only a finite amount of space for products, either on-shelf or in e-commerce fulfillment centers, the need for seltzer makers to create differentiation is only getting more challenging.
VIEW FROM THE TOP
For the most part, sparkling water’s success thus far has been largely authored by a handful of independent brands that have carved out leading category positions ahead of the chasing pack. Brands like Sparkling Ice and LaCroix — up 18.1% to $492 million — have helped define the space as we know it today, but recent moves made by the major beverage brands indicate that things may soon be changing.
Two years after entering the category in February 2018, PepsiCo’s bet on the flavored seltzer craze is paying off. The company’s sparkling water line Bubly generated over $326 million in MULO (plus c-store) sales through October 4, according to data from market research firm IRI. That’s nearly a 50% year-over-year increase and well ahead arch rival Coca-Cola’s AHA seltzer, which reported $86 million in sales in its first year on the market. Bubly was recognized as a $100 million-plus launch brand in June as one of the Top 10 Food and Beverage Pacesetters for 2019 by IRI.
More than simply moving more units, though, the brand has leveraged its broad appeal and versatility to extend its presence into different areas of the beverage business. That includes flavor extensions, promoted cocktail recipes and the addition of caffeinated varieties, but also outside of the can itself: in January, Bubly will release flavored drops for use with the SodaStream platform, which was acquired by PepsiCo in 2018. As it grows, the brand’s role within Pepsi North America’s overall beverage portfolio has shifted as well. In a November report by Goldman Sachs Equity Research, analysts noted “increased confidence” in Pepsi’s ability to drive margin expansion in beverage and that the company is “entering a period of elevated top- and bottom-line growth.” Part of that growth is expected to come from an increase in favorable category mix thanks to stepped-up innovation in both energy (Rockstar, Mountain Dew) and non-energy drinks, including Bubly.
Wherever Pepsi is, though, Coca-Cola is never far away: while it’s still playing catch up to Bubly, Coke’ AHA line, launched last November, posted over $86 million in first-year sales through October 4. Yet despite more limited distribution and premium pricing, Topo Chico is resonating more strongly with consumers, enjoying 40% growth this year to over $215 million in sales. The stratification of Coke’s two sparkling water lines has come more clearly into focus as of late: while Topo Chico enters into better-for-you fast-casual eatery Veggie Grill and prepares to launch an alcoholic hard seltzer next year, AHA has been pushed to mass audiences, with volume up 48% over the four-week period ending October 31, despite a double-digit average price increase, according to Nielsen. Like with Pepsi, the growth in sparkling water has had a knock-on effect on Coke’s total beverage business. Speaking with the press during the company’s third quarter earnings report in October, Coca-Cola CEO James Quincey said that the cost savings derived from a mass cull of 200 portfolio brands — including Odwalla, Zico and Tab — would be directed specifically towards Topo Chico hard seltzer and new AHA innovations, amongst other products.
Outside of the big two soda giants, the category continues to shift. Nestle’s expansion of its S. Pellegrino label into new products — namely the flavored zero-calorie Essenza line in 9.2 oz. cans, which grew 143% this year to $35 million-plus in sales — has proven a success, while the brand’s unflavored sparkling mineral water grew about 10% during the period. That success, however, helped spell the end of Nestle Waters North America’s regional spring water brands, as the company announced its intention to sell those labels in order to focus on increasing sales of its imports. While still water provides the bulk of sales for Nestle’s regional brands, which include Arrowhead and Poland Spring, those brands also market carbonated products.
Yet the impact of one of the biggest developments in the category this year won’t truly be felt until 2021 or later. Announced in July, Keurig Dr Pepper’s long-term franchise agreement with Massachusetts-based seltzer producer Polar Beverages establishes national distribution for Polar sparkling water in 34 states via DSD. The alliance is poised to take an already high-performing brand in Polar — sales were up 18.4% year-over-year to $224 million through October 26, according to IRI — and expand its ACV (around 35%, as of August) and retail share.
According to a report by Goldman Sachs Equity Research, KDP’s top line growth estimates through 2025 are 3.8% (compared to 3.2% excluding the Polar deal). Over the five year period, Polar is projected to outpace overall category growth by 22% to 13%. Analysts noted that although there is some risk in taking a regionally popular brand like Polar into national distribution, KDP’s experience in DSD and its existing relationship with Polar, which has manufactured and moved KDP drinks for decades in the Northeast, ensures a high chance for success.
“We expect 2021 to be the year that KDP builds distribution of Polar Seltzer as they invest in tactile marketing to drive ACV of the brand — with the contribution to top line growth and EPS stepping up in 2022 and beyond,” the analysts wrote. “Furthermore, we see this as an incremental effort for KDP to collaborate with Polar as their interests are now even further aligned, especially given our expectation that KDP will treat Polar as one of its top brands given the potential opportunity. Based on their track record and given their ownership of the brands, we believe Polar Beverages has the ability to aggressively invest in its brands and innovate.”
INNOVATION & INDEPENDENTS
The ability of Sparkling Ice, LaCroix and even private label brands to pivot and adapt to the mounting charge by Coke and its contemporaries will likely define their future in the space. The good news for them is that they are both well-positioned for the challenge.
Sales of Sparkling Ice were up 27.8% to over $625 million, while LaCroix posted an 18.1% increase to $492 million. Of the two, Sparkling Ice has moved more aggressively, notably with the wide launch in November of a hard seltzer product, a move which coincided with parent company Talking Rain’s introduction of alkaline water line ESSENTIALS in October. Coming in at 80 calories and 4% alcohol by volume, Sparkling Ice Spiked will be available in a 12-count variety pack featuring the four flavors: Cherry Lime Cooler, Lemonade Refresher, Ruby Fizz and Strawberry Citrus Smash. Rather than looking outward, LaCroix has instead focused on adding more flavors, with Limoncello and Watermelon (Pastaque) being the latest.
Further afield, the breakthrough and steady rise of Spindrift and Waterloo has provided optimism that newer independent brands can still rise above the noise. For the latter, that journey culminated in August with Waterloo’s acquisition by a group of investment firms led by Flexis Capital for an undisclosed fee. Thanks to traction in Whole Foods and Costco, the brand grew sales 147% year-over-year to $44.6 million, and it’s expected to receive a healthy marketing budget to boost awareness. Meanwhile, Spindrift continues to rack up strong sales — rising 89.1% to $61 million-plus — while pulling in more capital; a new $29.8 million funding round boosted the company’s total financing to at least $71 million.
Yet in terms of truly disruptive innovation, most of the action is happening off Broadway. Much of that has come from positioning: as an example, while all selling very similar products, the colorful imagery of Ugly, Liquid Death’s snarky humor and the environmental appeal of Pathwater or Ever&Ever give each brand a unique angle to communicate to consumers. Some brands — like Nixie, Seasons Sparkling and Petal — have leaned into teas and botanicals to add some low-scale natural functionality, while others, including Hop Tea, H2OPS and Vyne, have embraced hops as a brand pillar. As seltzer’s prodigious rise continues to inform innovation across the beverage industry, expect to see the proliferation of infused seltzers (both CBD and caffeine) as well as category adjacent innovations — think low-calorie flavored seltzers with added probiotics, as in Huzzah.
RETAIL & DISTRIBUTION
The explosion in flavors and formats underscore the energy and enthusiasm behind the sparkling water category — which in turn presents one of its biggest hurdles. From LaCroix to Spindrift to Perrier, there’s a lot of brands and products for consumers to choose from, and only so much shelf space to fit them on. And that’s before mentioning private label seltzer, the category’s aggregated sales leader, representing $655 million in sales through October 26, a year-over-year rise of 13.7%.
For a retailer like Whole Foods — which sells its private label seltzer, 365 Everyday Value, as well as other brands, including Waterloo and Nixie — solving the question of space is critical. George Daines, Global Category Merchant for Beverages at Whole Foods, told BevNET that the chain closely scrutinized data when determining product assortment to ensure a balance between variety and velocity on-shelf.
“We use substitutability metrics and need states defined by our customers shopping in our stores to be able to tell us if we discontinue an item that is a lemon and we already have three other lemons, how many of those sales will go into that next best flavor,” he said. “We certainly have to be more strategic in that now more than ever as we have so many entrants in the space and so many new flavor launches, and it’s only going to be able to grow so much when you look at the actual shelf space.”
The combination of shelf space squeeze and desire to reach younger consumers has shifted some of the category’s younger brands to build an audience online before making the step into retail. Ugly and Liquid Death both leveraged their e-commerce sales to enter traditional retail, while Miracle Seltzer and U.K.-based DASH Water are using Iris Nova’s SMS-based ordering platform (as are Rishi Sparkling Botanicals and sparkling digestive tonic Olipop). On the other end of the spectrum, the potential for Coke, Pepsi and KDP’s combined DSD might to drive growth in c-stores will likely have knock-on implications for brands across all channels, depending on how they are received.
However those scenarios play out, the momentum behind the category is still gathering speed, and its positive influence on the grocery ecosystem is being felt. According to Larry Levin, EVP of Consumer and Shopper Marketing & Thought Leadership at IRI, speaking on a BevNET virtual panel in October, when sparkling water makes the basket, the average ringed price is $77; when it doesn’t, it’s only $42.
“That’s just another way for manufacturers and retailers to come together and recognize the value of this subcategory and the category in general — I think having a stat like that really shows the power of what happens when people buy in this category,” he said.