UNEVEN FLOW

The beverage industry has become a hydra-headed beast, with new segments and subcategories cropping up overnight. Manufacturers flood the market in an attempt to suffocate rival products, and the battle for shelf space has become a hyper-competitive contest. These new products are crossing category lines, and it can be hard to tell where one begins and another ends. In SN's annual beverage report,

The beverage industry has become a hydra-headed beast, with new segments and subcategories cropping up overnight. Manufacturers flood the market in an attempt to suffocate rival products, and the battle for shelf space has become a hyper-competitive contest. These new products are crossing category lines, and it can be hard to tell where one begins and another ends. In SN's annual beverage report, retailers attempt to pick the winners.

Bottled Water

By all accounts, the bottled water category has been the beverage home run for the past decade, and continues to grow steadily.

According to Information Resources Inc., Chicago, sales for the 52-week period ended July 14 were roughly $2.7 billion across channels. That is almost double the $1.4 billion reported for the category by IRI in 1997, the earliest date for which figures are available. Indeed, a recent study from the Opinion Research Corp., Princeton, N.J., revealed bottled water to be the summer beverage of choice among adults ages 18 and over, with 31% of those polled choosing water. Iced tea was second with 26% of the vote.

Something so simple appears an unlikely star in the current advertising climate, full of electric blue soft drinks and taglines that skirt the lines of obscenity. Retailers continue to be surprised by the segment's unabating growth.

"I can't believe what people pay for water," said Ross Nixon, vice president of merchandising at Dahl's Food Markets, Des Moines, Iowa. "The sustained growth is amazing. It's the type of category you keep expecting to see hit its peak, but it keeps going."

John Mahar, director of operations at Green Hills Farms, a single-store operation in Syracuse, N.Y., detailed a similar experience.

In Mahar's opinion, one of the biggest motivators for consumers has been an aggressive pricing structure. Coca-Cola now includes half-liter six-packs of Dasani as an alternative option during soft-drink promotions. The water is treated as another flavor on ad, and the strategy has sold a lot of water, Mahar said.

A new breed of fortified beverage has recently taken off, somewhere between water and sports drink.

Enhanced waters -- containing vitamins, minerals and other nutrients -- have been available for several years. But only recently have the major players become involved. Aquafina and Gatorade have come out with Essentials and Propel, respectively.

"Previous efforts along these lines have had mixed results at best," said Gary Hemphill, senior vice president, Beverage Marketing Corp., New York.

The only notable exception is Glaceau, he said, a line that has carved out a lucrative, if limited, niche for itself. According to Hemphill, it is too early to speculate on the long-term performance of the newer entries.

Carbonated

The soft-drink category has been in a rut for several years running. According to Beverage Marketing's Hemphill, there has only been a slight increase in case sales over the past year. Hemphill estimated the figure to be up a percent or so, optimistically speaking. Yet after three years of 0.5% growth, this may be an encouraging sign.

Hemphill's calculation was not far off. According to IRI, the carbonated beverage category witnessed a 0.9% increase in volume across channels for the 52-week period ended July 14. The food channel's figure was somewhat above par, showing a 1.8% increase during that same time frame.

Despite these numbers, the soft-drink category is still the largest beverage category in the United States with total sales of $11.4 billion, and the aisle remains a primary draw in the Center Store.

Industry observers have attributed sluggish sales to a number of factors, from higher prices to alternative beverage choices and health concerns. Soft-drink companies have responded with an arsenal of new products -- Vanilla Coke, Pepsi Blue and Code Red, to name a few. Yet retailers are skeptical as to the long-term impact of the new introductions. "The category is still fairly flat," said Dahl's Nixon. "I don't really see anything that is going to restore the growth the category saw 10 years ago."

"Dollars are changing laterally," said Spencer. "There is an initial spurt stemming from advertising, but nothing that lasts."

However, John Spencer, owner and president of Spencer's Fresh Market, a three-store operation based in Santa Maria, Calif., noted a marked increase in the sales of RC Cola and 7-Up. This has nothing to do with new flavors, Spencer said; it's a matter of price.

"They have been very aggressive in pricing for the past couple of years," he said. "The soft-drink category is extremely price-driven.

"One of the big three -- [Pepsi, Coke and RC Cola] -- is always on promotion, and that is what people will buy."

At Green Hills Farms, Mahar is taking a different approach to the category, shunning the traditional loss-leader strategy.

"The soft-drink category is somewhat of a necessary evil," Mahar said.

The price gets too low and the retailer never ends up making any money on it, he explained.

As an independent in the shadow of Wal-Mart and several large chains, Green Hills has adopted shades of the gourmet retailer as a point of difference.

"We are reinventing our business. We have gotten out of the business of buying loyalty by offering a six-pack of Pepsi for 99 cents and losing money. We are trying to romance our customers by offering them something unique."

There has not been a national-brand item featured on the front page of the Green Hills circular in 14 months, Mahar told SN.

Alternative

Some within the industry contend that soft drinks are losing share to the nebulous "alternative beverage," which encompasses anything from ginseng iced tea to Gatorade and everything in between.

Using flashy graphics and catchy slogans, manufacturers like SoBe and AriZona Beverage Corp. have been particularly successful in speaking to the teenage and young adult segments. Gatorade, Powerade and the other isotonic drinks have become ubiquitous staples of the active lifestyle.

Some retailers are reporting a cooling period for the "New Age" beverages such as SoBe, which have donned a quasi-therapeutic mantle with the use of herbal ingredients like ginseng.

Mahar has seen a distinctive cooling in these types of beverages. However, Snapple is still fairly strong, he added. Part of the problem is space, he said.

"We don't have the room for 40 varieties of one brand," he said. "We work closely with the vendors to figure out what we need to have room for."

In addition, SoBe and AriZona offer primarily single-serve options and are better-suited for the convenience channel, he said.

Dahl's Nixon also noted a decrease in sales in this segment. However, he was quick to point out that they were never very popular in his area to begin with.

Yet, speaking with retailers on the West Coast uncovers a strong regional component to this segment's success. The trend seems to have found a more hospitable climate in California.

According to Spencer, both AriZona and SoBe are doing extremely well in his stores. "People are looking for something a little different on the coast. These products have done a great job capturing the outdoor recreation market. The colorful packaging and flashy design catch the eye."

Spencer merchandises these products in two locations: an upright cooler in the produce section, as well as in the soft-drink aisle.

Whatever the plight of the New Age beverage, retailers are not questioning the value of the isotonic, or sport drink, segment. According to IRI, the isotonic category has experienced double-digit growth for several years, showing a 15.9% increase across channels for the latest 52-week period. Sales for that period were over $1 billion. Gatorade is the real workhorse, retailers said.

"Gatorade does a tremendous job," said Nixon.

While Spencer feels that Powerade may be making inroads due to an effective marketing campaign, Gatorade is still the overwhelming favorite, he said. Some of the enhanced waters may be eyeing the isotonic shelf space, Spencer added, but he has not seen any deterioration in sales.

Beer

Over the past several years, the beer category has become a reliable bulwark in Center Store coolers. Dollar rings have recently been bolstered by the consumer's preference for premium and imported options, retailers told SN.

According to IRI, the total beer category -- which includes domestics, imports and malt-based alternatives -- grew by 4.3% in volume during the most recent 52-week period. Garnering $8.2 billion in sales during that period, the category showed an 8% increase in dollars.

"People are not drinking more, they are drinking better," said Beverage Marketing's Hemphill.

Statistics from Beverage Marketing bear out his claim, as per capita consumption of beer -- excluding malternatives -- has remained relatively constant at about 22 gallons per person for the past 10 years.

Mahar has recently reset the beer cooler at Green Hills to accommodate a more discerning beer-drinker.

"We have discontinued a lot of the lower dollar-rings," Mahar told SN.

For example, whereas he used to stock several sizes of Milwaukee's Best, he has limited the selection to the 12-pack. The premiums have become clearly dominant in Mahar's area, particularly the Canadian Labatt, he said.

The microbreweries have certainly played a role in an increased awareness of beer's diversity. However, industry observers note that most of these small breweries are primarily local novelties, and have failed to gain a national foothold.

"Microbrews had a very strong run in the early and mid-90s, but sales have tapered off," said Hemphill. "There were simply more products than there were consumers, and there was a problem delivering consistent quality, marketing and distribution."

Saranac, produced at a brewery in upstate New York, does very well at Green Hills, Mahar said. On the Central Coast of California, Firestone is the brew of choice, according to Spencer.

The real winner has been the import market, Spencer said, naming Corona as one of his top sellers.

Malternatives, malt-based beverages that mimic a liquor-based drink, first appeared in 2001 with Mike's Hard Lemonade and Smirnoff Ice. Over the past year, several more have hit supermarket shelves, such as Bacardi Silver and Captain Morgan Gold.

The segment has had a lot of coverage in the national media as some have objected to campaigns they say are targeted to an underage demographic. Hype notwithstanding, those polled by SN question the segment's ability to support all the entries now available.

With sales of $3.5 million, the malternative category currently accounts for 2.7% of case share in the beer category. Hemphill does not expect that number to ever exceed 5%.

"Our best items are the Mike's and the Smirnoff Ice, probably accounting for 90% of our sales in that category," said Spencer.

According to Nixon, the category does fairly well at his store. He likens it to the wine cooler phase in the 1980s.

"Down the road, there may be two or three players that can stay the course. The percentages look good, but the base is very small," he said.