Tapping a Trend

Healthier sales of bottled water bode well for c-stores as packaged beverages continue to drive profits.

By Anne Baye Ericksen, Contributing Editor –  Convenience Store Decisions

Flint, Mich., has been the epicenter of contaminated tap water. For more than 24 months, residents have battled authorities over how to clean up the lead-tainted water running through the city’s aging pipes. The story gained more attention when the three biggest bottled water producers, Coca-Cola, PepsiCo and Nestlé, promised to supply the city’s schools with free bottled water through the end of this year.

Last month, Bloomberg predicted bottled water sales this year would surpass carbonated soft drink (CSD) sales for the first time. This shift presents an interesting scenario for convenience stores where soda has long been a major revenue producer.

“The CSD category has the largest number of SKUs and space in the cold vault,” said David Hallman, category manager, packaged beverages for West Des Moines, Iowa-based Kum & Go. “CSD unit sales are more than double the next largest category, energy drinks.”

That said, Hallman has noticed a shift away from sodas at Kum & Go, which operates 435 stores in 11 states. “Through the first half of 2016, with same-store sales, our top performing categories are bottled water, juice drinks and sports drinks. This has been the trend for the past year and a half as consumers are looking for more better-for-you (BFY) beverage options,” Hallman said.

POURING ON THE PROFITS

Beverages of all varieties have performed well during the first half of the year. According to Wells Fargo Securities’ Beverage Buzz Survey for the second quarter, all non-alcohol beverage sales in convenience stores rose 4.6%.

“Packaged beverages continue to do very well for us,” noted Robert Perkins, vice president of marketing for Rutter’s Farm Stores. The York, Pa.-based company runs 66 retail sites. “I think that ties in with our strong foodservice. We offer some deals with fountain drinks or slushies, but some people just want a bottle of soda they can take back with them to the office for the rest of the afternoon.”

Within packaged beverages, certain subcategories continue to expand their market shares. Of course, bottled water leads the pack. For several years, this segment has been garnering traction, but 2015 was its breakout year. The Beverage Marketing Corp. (BMC) reported that non-sparkling water held the No. 2 position by volume and 67% of market share last year. Single-serve bottles of still water experienced a hike of 8.9%.

For the four weeks ending July 16, soda sales in all retail channels rose by a mere 0.2%. Wells Fargo Securities attributed the growth to a price increase of 0.9% because unit volume during the period declined by 0.7%.

Meanwhile other subcategories have registered gains. BMC reported energy drinks climbed nearly 10% in 2015. Wells Fargo Securities recently indicated energy drink sales were up by 5.2% for the four weeks ending July 16.

“Soda is still the largest subcategory, but energy is making headways against it,” said Perkins. “For example, Mountain Dew’s Kickstart introduced the 16-ounce can, which appeals to the drinker who didn’t want to buy the larger 20-ounce.”

Another strong performer is ready-to-drink coffees. According to BMC, the subcategory enjoyed 16.5% volume growth last year.

With the Summer Olympics in Rio de Janeiro, Brazil now concluded, and athletes like American gymnast Simone Biles and swimmer Michael Phelps earning Olympic Gold on the world’s biggest stage recently, sports drink sales got a needed boost, helping push category momentum even higher.

“Bottle and can teas and coffees, sports drinks, energy drinks, coconut waters and other niche categories are performing very well right now,” said Gary Hemphill, BMC’s managing director of research.

HEALTH CONCERNS

So why, after decades of maintaining a well-entrenched foothold as the leading beverage of choice among Americans, have CSDs lost so much market share? Analysts point to the expanding trend of people opting for BFY options.

“There are two product mega trends in refreshment beverages: health and wellness, and variety,” said Hemphill. “By and large, products with healthier attributes are outperforming those without. Increasingly, consumers want natural products with simple ingredients that they understand.”

There’s an increasing public health concern associated with consumption of sugary drinks. Lawmakers have buoyed the idea of a soda tax for years, but Philadelphia became the first major city to adopt such an ordinance. Beginning Jan. 1, 2017, taxpayers will pay an additional 1.5 cents per ounce of soda and other sugary drinks, which include teas, sports and energy drinks.

The movement away from sugar has some industry watchers anticipating a void that could be filled by sparkling water to satisfy drinkers’ preference for carbonation.

Protein is another ingredient attracting attention. Once viewed as a post-workout product, the appeal of protein beverages has broadened to include a more diverse fan base. Consumers use the beverages’ high protein to satiate hunger between meals instead of reaching for salty or sweet snacks. BMC anticipates protein drinks to jump from an approximate $196 million in 2015 to at least $230 million by 2019.

FUTURE OUTLOOK

Critical to optimizing this trend in the c-store environment is building an inventory that satisfies traditional soda drinkers and customers wanting a BFY selection.

“We need to make sure we have the right assortment of all categories as CSDs and energy drinks continue to be key drivers for c-store consumers, even though more and more are shifting to BFY options,” said Hallman. “Making sure you have the right assortment for your consumers is key to growing your total cold vault sales and profit.”

At Kum & Go, Hallman has granted BFY brands prominent cooler space.

“We have added many better-for-you drinks to the cooler over the past two years as consumer trends have shifted,” Hallman said. “The BFY brands we added—Bai, Dowell, Protein 20, Sparkling ICE, BodyArmor, etc.—are all doing very well, which is driving the bottled water and juice drink categories growth.”

More than just stocking a BFY selection, Hallman promotes their healthy characteristics.

“In 2016, we launched a program called &Balance through signage at the shelf to call out a product’s specific benefit, whether it be high protein, low or no sugar or 100% juice, to provide consumers more information when selecting a beverage,” Hallman said.