Convenience channel beverage sales were strong in the third quarter, according to the latest Beverage Bytes retailer survey by Goldman Sachs Equity Research, but ongoing supply chain disruptions are poised to put more pressure on brands and stores in the coming months.
According to the report, which surveyed convenience retailers across the country, overall beverage sales rose 10% in Q3 within the convenience channel, a deceleration from 12% growth in Q2. Foot traffic in the quarter remained flat, compared to an 8% increase in Q2, a sign that concerns about the COVID-19 Delta variant may still be keeping some consumers at home.
Beverage sales growth was led by a 13% rise in energy drinks, which also reflected a slow down from increases of 23% in Q2 and 15% in Q1. Sales of Monster Energy were up 10% in Q3 (compared to 11% in Q2), while Red Bull rose 16% (19% in Q2). Meanwhile, CELSIUS continues to grow, up 80% (from +60% in Q2).
Overall, retailers said they felt good about the strength of the beverage space, but as out-of-stock issues in non-alcoholic drinks continue to be a problem, many respondents struck “a bit more of a cautious tone” in their future outlook.
About 40% of respondents said they were “more positive” about their outlook, down from 50% in the firm’s Q2 survey. However, 60% said their expectations were about the same while no respondents said they were “more negative” on beverage sales; in the Q2 survey, that number was 14%. Most retailers were “bullish” about consumer demand remaining high and noted that shoppers were buying more take-home sized products and single-serve bottles or cans, a contrast from last year’s trend towards multipacks and larger multiserve formats.
In its report, Goldman Sachs noted that one retailer “went so far as to suggest that beverages have been one of the standout categories in what remain very turbulent times — while another noted that sales levels for beverages in their stores are nearing their 2020 peaks (something that’s very encouraging given this is coming in conjunction with the reopening of the on-premise channel).”.
While some retailers are optimistic that the out-of-stock issue can improve in Q4, many respondents anticipate the issue will continue well into 2022. The report noted that “just about every retailer we surveyed is seeing challenges across all their network of suppliers,” with some calling it the number one challenge facing the industry this year. Some have even resorted to ordering product from Amazon Business and food service distributors to supplement their inventory as DSD and grocery distributors run out.
Among the top products facing out-of-stocks were 1.5 Liter bottled waters, several Monster product lines, various Coca-Cola Company products (including 20 oz. Fanta sodas and 390 mL bottles), Gatorade and AriZona Tea. In the case of PepsiCo, retailers said they’re running at 20-30% stock-out levels, compared to a normal 1-3% stock-out. Only Red Bull was named as generally doing well at keeping cans on shelves.
“In terms of specific timing, most retailers do not expect an improvement in the supply outlook for the next 6-9 months (and are not seeing any improvements despite assurances to the contrary from their vendor partners),” the report stated. “Retailers broadly expect that the supply challenges will continue through 2022 (before they see some catch up in supply relative to demand), while others expect no improvement until later in 2022.”
Breakdowns in the supply chain have also led to price increases becoming another concern with some stores already seeing volume drop due to higher prices from major CPG brands. PepsiCo has already begun implementing increases, while Coke has largely held off on major changes. “Some retailers are also seeing price increases in low velocity products – suggesting that CPG companies are not concerned that price increases will do much to dampen demand,” the report added.
Promotions were either flat or down across the board, the report noted, and some retailers said it was difficult to judge the effectiveness of promos as some companies were still focused on product lines facing sustained out-of-stock challenges.
Innovation, however, has been a strong driver for sales even as some retailers suggested there was a surplus of ‘me too’ products in the market. Even with crowded sets, consumer interest in trying new products has increased and products like ZOA, Monster’s latest innovations and Topo Chico Hard Seltzer stood out as among the most “exciting” new items. Retailers were particularly optimistic about growing sales for C4 and Bang, but negative on Rockstar and other PepsiCo-owned lines. However, outside of energy, retailers were unsure of most non-alcoholic innovations, including products like Pepsi Nitro, which respondents said has potential but might not “resonate” with consumers.
While retailers earlier this year suggested ZOA got off to a poor start, the brand has since upped its marketing efforts — including a television ad campaign starring co-founder Dwayne “The Rock” Johnson during the Olympics — and the effort appears to be paying off. But, retailers said they hope the brand will prove to have legs on its own merits and that sales can continue to gain traction beyond its A-list spokesman’s influence. ZOA is also facing competition in a crowded category seeing an influx of innovation from new brands.
Retailers are “also mindful that competition from other newer energy drink brands such as C4 & G Fuel remains very stiff (and that repeat rates for ZOA are not as strong as they would like to see),” the report added. “Elsewhere, retailers also called out a few other new brands – including Alani Nu as well as Ghost (which is being distributed in partnership with [Anheuser Busch InBev] – especially given its ‘health’ focused brand positioning).”
In the alcoholic space, demand is also moderating as on-premise sales increase and retailers are now anticipating a shake out in the hard seltzer category.
Boston Beer Company’s Truly outperformed, up 51% in convenience during the quarter (76% in Q2), but retailers largely tempered their expectations for overall category growth. Overall, retailers now expect about 19% growth for hard seltzers in 2021, compared to predictions of 30% growth in Q2. Among new innovations in the space, retailers mainly showed enthusiasm for PepsiCo’s planned Hard MTN Dew launch and new seasonal Truly flavors, while an anticipated shakeout next year will mostly benefit Truly and White Claw.