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Pour on the Profits

By Terri Allan

A number of factors — mainly driven by the recession — have combined for a near perfect-storm effect on the packaged beverages category in the past year. Heady growth trends for some fast-growing subcategories have weakened somewhat, while convenience retailers and packaged-beverage vendors reported enhanced trading down tendencies by consumers.

Still, retailers and suppliers alike agreed that sticking to a solid business plan, while keeping an eye out for opportunity, will help operators ride out the storm.

"Retailers are facing a number of challenges in the channel," explained Jay Ard, vice president of national sales, convenience retail at Coca-Cola Enterprises. "Traffic has been declin­ing over the past 12 months by an aver­age of 15 percent. The heavy shopper is still vital to the channel, but while the economy is negatively impacting man­ufacturing and construction jobs, these important shoppers are stopping less frequently at convenience store lo­cations on their way to work."

The reduced in-store traffic is fur­ther compounded by the fact that "ap­proximately 80 percent of those cus­tomers who purchase gas never enter the store," Ard continued.

The Price is Right
Reduced disposable spending on the part of convenience store customers is particularly noticeable when it comes to package choice, marketers and re­tailers said. And aggressive pricing is now a necessity.

Terry Johnson, director of market­ing at Uppy’s Convenience Stores Inc., the Richmond, Virginia-based opera­tor of some 40 stores, reported that 16-ounce singles of Coke and Pepsi, priced at 99 cents, are "showing large increases in sales because of the econ­omy." In many cases, consumers are trading down to the 16-ounce packages from 20-ounce servings, generally priced at about $1.59 each, Johnson said. The retailer called the new pack­ages "one of the few exciting things" happening in the packaged beverage category.

"Given the challenges in the chan­nel and the decreasing discretionary income that shoppers have to spend in­side the store, package diversification is definitely an emerging trend that is driving growth," concurred Ard.

At the other end of the packaging spectrum, multi-packs are also experi­encing growth, convenience retailers reported. For example, 20-pack cases of Nestlé Pure Life, priced at $3.99, are selling well at Uppy’s, Johnson said. "We’re selling a lot more cases of wa­ter," he continued. "And while we’re only making 50 cents per unit, it still beats losing the sale to a competitor."

Chris Peters, marketing manager at Speedy Stop Food Stores, reported that the Texas-based convenience store chain now uses "take-home [packages] as a loss leader." Indeed, Speedy Stop’s bottled water sales are growing at a low double-digit rate, due largely to aggres­sively priced multi-packs, Peters added.

"Convenience-store shoppers con­tinue to seek value-priced multi-packs of bottled water for take home," ex­plained Steve Seager, senior retail marketing manager at Nestlé Waters North America. "Half-liter case pack sales are up significantly, and have off­set some of the decline in the overall bottled water category."

Overall, Seager said, the recession has "impacted some segments of the bottled water category more than oth­ers." He pointed to a 13 percent decline in one-gallon bottle volume year to date packages, which are "often pur­chased by people who work outdoors, like construction workers and landscape specialists. This group has been hit very hard by the decline in the real estate market," Seager noted.

GPD Leader
Despite recent recession-driven trends, packaged beverages — with conve­nience store sales of nearly $20 billion in 2008 — remain one of the most im­portant product categories for retail operators.

According to NACS State of the In­dustry data, the packaged beverage segment is the convenience channel’s number one gross-profit-dollar leader in stores. Packaged beverages contrib­uted an average of $90,328 in gross profit dollars per store in 2008 (up 7 percent from $84,198 in the year prior), compared to cigarettes’ $73,008.

Packaged beverages accounted for nearly 21 percent gross margin contri­bution last year, up from 20 percent in 2007. Cigarettes’ gross margin contri­bution stood at 17 percent last year. Ex­cluding cigarettes, packaged beverag­es were the biggest in-store gross profit contributor, accounting for 21.4 per­cent of in-store sales in 2008, as com­pared to 21.2 percent in 2007.

"Non-alcoholic packaged beverages are the number-one in-store category for gross profit dollar contribution," remarked Ard. "When measuring sales per store, they are second among all products. They are also number-two for in-store category sales and gross mar­gin growth."

Packaged beverages accounted for 15.6 percent of merchandise sales in con­venience stores last year, according to NACS State of the Industry data, up from 15.4 percent in 2007. That was second only to cigarettes, with its percentage of in-store sales dropping to 32.9 percent from 33 percent in the year prior.

And on a per-store basis, average sales of packaged beverages rose a healthy 4.6 percent to $224,976 from $215,064 in the previous year. Average-store sales rose for each packaged beverage sub­category last year, the report noted. Av­erage store sales of carbonated soft drinks increased to $93,815, while alternative beverages rose to $41,846.

So far in 2009, retailers and vendors report that sales growth trends for re­cent popular categories like energy drinks have leveled out, while more ma­ture segments are seeing modest gains. Energy drinks at Uppy’s are "still doing well," Johnson noted, "but are not growing as fast as they had been."

Indeed, Nestlé Waters’ Seager report­ed that sales volume for alternative pack­aged beverages in convenience stores was down for the first half of 2009. The decline in the economy, he explained, has affected the construction and truck­ing industries, typically big consumers of the segment. Energy shots purchased at the checkout counter, Seager continued, have also "cannibalized a significant part of the [energy drink] sales."

"As retailers are facing challenges, consequently, so are we," remarked Ard. "Total packaged beverage sales declined by 0.5 percent in our second quarter, driven by base water and sports drinks. However, sparkling bev­erages, ingredient-enhanced waters and energy drinks are still growing."

Further Growth
In light of the slowed trends for pack­aged beverages, retailers and vendors agree that operators must be vigilant in looking for growth opportunities. "We continue to tweak the cooler set based on volume trends," noted Johnson.

Indeed, Ard stated, "Space is definitely at a premium. It’s important for retail­ers to understand which SKUs are driving gross profit margin contribution."

In addition to the cold box, Ard be­lieves in-store marketing and mer­chandising of packaged beverages can also help convenience retailers weath­er the storm. "While overall traffic in the channel is down double digits, foodservice traffic continues to grow, so cross-merchandising and promot­ing of packaged beverages with fresh prepared food could provide a big op­portunity," he explained.

Ard also sees opportunity for "in­novative ice cold product availability solutions in the impulse zone, right in front of the register area." And out­door messaging and merchandising at the curb and at the pump — along with clear price-point communication — is another helpful tool, Ard noted.

Citing that approximately 43 per­cent of shoppers are motivated by im­mediate hunger, thirst or craving, Ard remarked, "Packaged beverages are more important than ever to retailers to drive traffic into their stores, as thirst is a key motivator to get shop­pers in the store."

Terri Allan is a New Jersey-based freelance writer, specializing in the beverage industry. She can be reached at terri4beer@aol.com.