The Breeze With Beverage Digest
The Breeze With Beverage Digest
Episode 18: Who is Positioned to Win? An Industry Report Card
Beverage Digest Editor & Publisher Duane Stanford and industry expert & regular podcast contributor John Sicher dive into the most recent beverage category performance data to see what it tells them about brands, consumers, and the retail environment. Will promotions need to be ramped up to spur volume sales? Is product diversification cannibalizing core brands? Drop in on their conversation.
Hello and welcome to the Breeze with Beverage Digest. I'm your host, Duane Stanford, the editor and publisher of Beverage Digest. The Breeze is where we bring you into the kinds of industry conversations we have every day at Beverage Digest. We dissect what's happening, connect the dots and ask the most important question what does this mean? I'm joined by John Sitcher, a former editor and publisher of Beverage Digest, who has since consulted for companies including Coca-Cola, body Armor and sweetener company Pure Circle. Hey, john, how are you today?
John Sicher:Very well, Duane. ow how are you Good to be with you again.
Duane Stanford:I'm a little sad. Today, though, the Braves have been knocked out of the playoffs. Unfortunately, after going down two games, your team is faring a little better.
John Sicher:Well, as a New Yorker. We've got two teams still in contention the Yankees are in the divisional playoffs and the Mets are down to one game in the wildcard series. So you know the tears are running down my cheeks for your.
Duane Stanford:Braves Wayne. You know it's funny because the Mets were the team that we played in the doubleheader right at the last two games of the season and both of us got in because we split the doubleheader. So you know, it'd be interesting to see if the Mets keep going.
John Sicher:Well, I think we, you know, we have an election coming up, which is fascinating. I think we're probably we're not going to talk too much politics in this podcast, but boy we sure live in interesting times in America.
Duane Stanford:Yeah, that may be even a more interesting battle than the baseball playoffs.
John Sicher:Exactly, exactly, exactly.
Duane Stanford:So you know we've been talking a lot this year, john, about some pretty important downtrends in major categories like energy drinks and sports drinks. Meanwhile, you've got CSDs. They're faring, you know, perhaps better than we might have expected, given what's happening in the economy with consumers Today. I wanted to go through a few categories and just compare notes. Things are changing so quickly that I think it's good just to check in on okay, what's the latest changes? What's happening? How are we seeing our way through in some of these categories? But before we dig in, I'm just wondering do you have any overall thoughts about just the US beverage industry performance in general consumer sentiment here in October of 2024?
John Sicher:Yeah, I do. You know, I think that there aren't. In terms of volume growth, there are not a lot of bright spots. As you mentioned, csds are up a little bit. Energy is down. Sports drinks are down. Tea is down. Sports drinks are down, tea is down, juice drinks are down.
John Sicher:You know, the problem is that the population of the US grows somewhere just under 1% every year. And you know, a beverage company, a beverage brand, a beverage category has to outperform population growth to show real growth. Otherwise it's just basically holding still and if volume is down and population growth is up, it's losing per capita consumption. And what we've seen in the last couple of years Dwayne is, we've seen pricing up in a pretty healthy way, though volume has been weaker down. And the pricing growth driving revenues in the face of weak volume is certainly good for the public companies, p&l but it shows that the overall LRB category in the US is really not that healthy because volume is slipping, slipping, slipping, in these major categories at least. And it's of concern to me in terms of the future health and growth of these big companies and the categories health and growth of these big companies and the categories.
Duane Stanford:Well, you know me, I'm a hopeless optimist. But what you're talking about in terms of population, that could be a scary thing in years to come as well. I mean, I've been looking at some of the work Deloitte has done of late and they're talking about the fact that birth rates are down in the US. I mean, there's some question about population growth rates, of course, going forward. So, to your point, lrb needs to outperform population growth. But then you layer on that upcoming the potential for that population growth to taper off, with birth rates coming down, et cetera, and that adds another interesting wrinkle over the next five to 10 years that, I think, also is going to have to be contended with. So then you wonder how does that shake out? Does that make it harder for a lot of brands to come into the market? Do you know? Is there less room for brands, or what do they do to innovate their way out of that? I think it's an interesting question.
John Sicher:It is, and you know the national press, the business press, makes a lot about the inflation rate coming down. Well, the inflation rate coming down does not mean that pricing is coming down. It means the rate of pricing growth is slowing down. And you know a lot of these categories and products have gotten expensive. I went into yesterday morning I was walking up First Avenue. I went into a little convenience store and grabbed myself a 12-ounce slim can of Celsius and it was $4. And that's expensive for a single can of energy drinks.
Duane Stanford:Yeah, it really is. And you talk about that inflation growth rate declining. But you're right, what you've done is stacked pricing over a number of years and that's what the consumer's feeling now. Even though it's not necessarily increasing at the same rate, they are now, from here till whenever, going to be paying those higher stacked rates. And that's where you're kind of running into some of this kind of consumer pressure, especially in certain categories.
John Sicher:Yeah, I don't think this issue about pricing and affordability is unique to the beverage business. I mean, this is the other end of the spending spectrum. I understand, but there's an article in the Wall Street Journalist, point Dwayne, about how the fashion business is really hurting right now and part of the reason is their pricing has gotten so high. Some of these fancy fashion products and labels and companies and customers are being disaffected. Well, you know, it's one thing to pay a lot of money for a fancy fashion brand, but I also think that the energy drinks, the soft drinks, have to be affordable in order to basically appeal to consumers and potentially grow. And the question is will spending catch up with pricing as the rate of inflation falls and hopefully, income increases in the years to come? But I think short term, there's going to be an affordability issue for some of these categories we're talking about.
Duane Stanford:So then that raises the question of you know, to what extent do companies have to you know, sort of roll back some of these pricing increases over the last few years that have stacked and you know? Do they roll it back or do we see more promotional activity? I mean, that's the thing that you thing that we're watching quite closely. I think it's pretty clear that you are getting more promotional activity. It does seem fairly surgical still not across the board, not panicked, anything like that but I'm wondering, are we going to have to see if this continues with the consumer and the second half of this year does not improve to the extent that some of the major companies have talked about early in the year? Do we think we're going to have to move back into a heavier promotional environment? Or, you know, we may be in a situation where, yes, but it's still going to be surgical enough to where you can accomplish what you need to do for the consumer but still maintain your margins. I don't know. Thoughts.
John Sicher:I mean, I think it's going to be very hard for these big public companies to actually roll back pricing, I mean with volume weak. Taking pricing down takes away the price aspect of that generating revenue growth. And you know, I think, going back to your earlier comments they simply have to market better, innovate better and hopefully be able to. I mean, I would be very surprised if we see strong turnarounds in volume performance for most of these categories maybe a little, but they simply have to get enough pricing to generate decent revenue growth or it's going to be a problem, and so I don't see pricing actually going down.
Duane Stanford:You know. Let's take a look at a couple of categories. First of all, csd is big, you know, important category in the US. You know it seems to be proving that it truly is an affordable luxury, as they say, which you know often seems a bit cliched, but in this case it's proving out. I mean, you've got dollars which over the last four and 12 and 52 week period, dollar sales have been rising. Over those periods Volume has been rising at retail. This is at retail in the US and this is according to some Nielsen data by Goldman Sachs. Pricing growth has been steady through those periods. That seems pretty resilient. Will that last? We hope so.
John Sicher:Certainly we hope so, the companies hope so. You know, certainly we hope so, the companies hope so. I mean, I was looking at a slightly different set of data. I was looking at third quarter data, which takes in most of the third quarter at retail and CSD volume is up about 1%, coke's up a little bit, kdp's up a little bit more, pepsi's down. You know, as I said earlier, I simply think these companies have to figure out a way to generate at least slightly more volume growth, because I think pricing growth may be more and more difficult in the next two or three years.
Duane Stanford:John, let's take a quick break from the conversation so I can tell the audience about our Beverage Digest newsletter. If you're interested in going deeper on the topics that we discuss on this podcast, I encourage you to subscribe to our digital newsletter and archive, where you will unlock exclusive insights that you won't read anywhere else. Plus, you'll get valuable data snapshots for the industry's most critical categories. See where growth is happening before anyone else. And let me tell you about a couple of other Beverage Digest products. Our fact book gives you a detailed look at annual sales trends covering all channels. That includes retail fountain up and down the street, everything. The data covers all major brands in all major categories, dating back to the 1980s. Now do you want to see detailed, territory by territory maps of the Coca-Cola and PepsiCo systems? We've got those in our the Coke and Pepsi Systems Resource Guide. Understand these two critical distribution networks from the ground up. And don't forget Beverage Digest's Future Smarts Conference, where top industry leaders discuss and debate the most critical industry topics all in a single day. This is your ticket to network with industry thought leaders and get set for your next critical deal.
Duane Stanford:And one last note if you're interested in sponsoring this podcast, we'd love to have you. Just send us an email and we'll get started. So I'm looking at the CSD data. Some of the companies Coca-Cola their volume is improving. Pepsico they're down. Coca-cola is up, pepsico is down. They've slipped a little bit in the latest four-week period this is ending September 21st versus the 12-week period. I mean, you really still see this sort of opposite ends of the spectrum with those two companies right now. When it comes to carbonated soft drinks specifically, right between between coke and pepsi right between coke and pepsi right right.
John Sicher:Right, I mean, coke is coke is doing a pretty good job with brand coke. Um, you know pepsi is struggling and I'm not entirely sure, du, I understand why. I mean, certainly Mountain Dew has been hurt by energy drinks. You know, back many years ago when I was started covering this industry, you know Mountain Dew was the original energy drink before Red Bull and Monster ever appeared on the horizon, and I think that the energy drinks have taken some of the positioning and growth, some of the positioning and a lot of the growth away from Mountain Dew. You know, brand Pepsi has not been as strong as it can be and should be. And I'm guessing you know, for many, many, many years I covered this industry, as have you. I've done it a little longer than you have. I've seen the pendulum swing back and forth and you know it wouldn't surprise me to see Pepsi start performing better in the next year or two. You know, I think they have to.
Duane Stanford:Quite frankly, yeah, they really no choice, and I have seen of late what I believe to be some greater resolve in that regard. Now, the caveat for me, though, is that, at the same time that you know, you sort of see this kind of new effort around, a new leader at Pepsi, pb&a to, you know, try to win back some share and improve those, those, some of those trends, to try to win back some share and improve some of those trends. You've got this issue with Frito-Lay, which is sort of the engine of that company, and you're always competing for investment dollars between the beverages and the snacks portfolio, and right now, the snacks portfolio is pressured because consumers are pricing is getting pretty high, that stacked pricing, same thing happening there, and so I wonder if that is going to end up delaying some of the gains we might have otherwise seen. I don't know, don't have an answer there, but I think that's definitely something to watch.
Duane Stanford:Keurig Dr Pepper is another. Really. I mean Keurig Dr Pepper. Their volume is up 3.1% in the latest four-week period. I mean they seem to be firing on all cylinders when it comes to their US refreshment beverages portfolio.
John Sicher:Yeah, they've done a good job with CSDs for many, many, many years. They're not such a good job with their non-carb portfolio, but right now their CSD portfolio is such a big part of their business and they know how to do CSDs. I looked at some data. You may have looked at more recent data, but Dr Pepper and Canada Dry are both doing very well and you know they're getting a nice volume growth. Now the data that I looked at, the Q3 data, has KDP's volume up about 2.7%, which is fantastic volume up about 2.7 percent, which is fantastic.
John Sicher:Um and uh, um. But, as I said, going back to pepsi for a minute, um, you know, I wonder whether or not um to the to the point you were making about snacks and beverages. You know, some years ago probably, uh, 2012, 13, I can't remember which year, maybe you do there was an effort made by an investment firm to split beverages off from snacks and it didn't happen. But I wonder whether, if Pepsi doesn't get their beverage business, pepsico doesn't get their beverage business performing more strongly the next year or two, whether someone, perhaps even the company, might take another look at that, because, you know, the PepsiCo beverage business is really a terrific business. It's got great brands with Pepsi and Mountain Dew, you know Lipton, aquafina, you know the Starbucks joint venture. It's a great business and it should and can be performing better. So I wonder whether we'll see some noise arising in the next year or two or three about taking a look at structural change again.
Duane Stanford:Yeah, I think that strategy is pretty embedded right now and there's you know we've talked before about various reasons why it would be challenging to you know maybe re-franchise the bottlers. Now, of course, spinoff, you know that's always a possibility too. I think there's going to be noise around that as long as you see some of these share trends continue to play out for that portfolio, for that portfolio. So you know, speaking of which, what we know about PepsiCo too is LRBs. They look at their full LRB portfolio and that's what they judge themselves on primarily. And Gatorade obviously is a huge part of that portfolio, extremely important to the company, and you know that's been pretty challenged this year as well.
Duane Stanford:When it comes to their North America beverage portfolio, you know their volume's been down. Dollar sales have been down, I will say, in the most recent numbers you are seeing improving trends, so that's got to be good news for that company and people who are watching that Bottlers as well. You know they've gone from, you know, volume loss of about 3.3% in the 12, in the down 4.5% in the 12-week period to down 3.3%, you know, and then they got even better in the two-week period, which you know it's kind of hard to look at that period too deeply. Same thing with volume. There, you know, the trend has improved most recently. So that'll be one to watch to see if they've kind of squared away some of the issues that they've had that we've talked about in other podcasts. But what are your thoughts there?
John Sicher:You know, look, I think Gatorade is one of the great consumer brands not just a great beverage brand, but a great consumer brand. It's not just a great beverage brand, but a great consumer brand, and I think that the fact that Gatorade has been losing volume is a real head-scratcher. I think probably part of the reason is what we talked about in prior podcasts, and that is, people are simply looking for other ways to hydrate. They're looking for new kinds of beverages. We've talked about the gut health beverages, poppy and olipop. We've talked about Celsius. You know, I think what's happened probably is, but I'd love to hear your point of view, dwayne, is I think that Gatorade does not have a brand problem. I think it's just sort of some of its business and some of its consumers is ebbing away into other brands and categories and you know, again, as we talked about with Pepsi and the CSD business, pepsico has got to put a stop to that through other, better marketing, better innovation, but it can't afford to have Gatorade in a downward trend for an extended period of time.
Duane Stanford:I do think there's a lot more competition now. I think you're exactly right. I mean I'm hearing, you know, my tennis buddies. They're starting to talk about Element spelled L-M-N-T, and it's like 1,000 milligrams of sodium per single-serve powder stick. You've got AG1 now doing some stuff in this side Athletic Greens and you've got a number of things that keep popping onto the scene, which I think is something that PepsiCo is going to have to figure out in terms of how to keep those athletes who are drinking it for the reasons they need to in that in this category with them.
Duane Stanford:But also pricing. I mean we talked about the stacked pricing. I mean I think that's really hit. Gatorade, I mean if you, you know, before the pandemic, you know, maybe even during the pandemic, you know you were seeing, I mean you could routinely buy a 32, then a 32 ounce bottle of Gatorade for a dollar. You know you could go to Kroger and get that pretty routinely. If you can get it for $2 a bottle now, you're doing good. So I mean that's pretty significant pricing increases.
Duane Stanford:So you're probably going to be whittling yourself down to some degree to the really, you know, heavy users and some of those kind of here and there users have likely gone to the wayside and you're always balancing that, of course but perhaps it's gone a little bit too far to that side of the pendulum and so you know you've got some troubles. But again they seem to be, you know, digging out of that and you know they had their conversion in large stores to their DSD network. You know there's been some pain points here and there on that. That's supposedly, you know, getting worked out. You know you had some production issues and that's capacity issues. You know I think there's still some kind of noise around some of that that they're working through. But you know it's good for PepsiCo to see that trend improving you know, I think that, look, you know, something is going on.
John Sicher:I mean, as I, you know, the beverage business, our North American beverage business that we cover, you cover, that I covered for many years, you cover now has some of the great, great brands in it. I mean there are brands like Coke and Sprite and Pepsi and Mountain Dew, red Bull and Monster Gatorade. I mean these are great, great brands. And you know, I think that pricing is causing consumers to take a second look, to think twice about what they're buying, to take a second look, to think twice about what they're buying, and I think that opens the door for some of the kinds of products that you just talked about.
Duane Stanford:Let's take a look at energy too, john. I mean we've had a little bit of good news in the most recent data after a pretty challenging first half of the year. Dollar sales are improving in the energy category in the four-week period. There was a slowdown, you know, in the 12-week uh period, volumes improving in the four-week four-week period as well, after a slowdown before. Pricing growth is improving, uh, you know, through all three periods. So obviously pricing is having an impact, as we've talked about you know. This four week data looks a little better, as I said, you know. Is this reason to be hopeful?
John Sicher:Yeah, look, I think energy drinks, look, I think energy drinks are dipping right now because of they've gotten expensive, but I think that I think energy drinks are probably going to return to volume growth. The question is, where will the volume growth come from? Will it come from Red Bull and Monster and Celsius, or will there be new entrants basically knocking at the door in that category too? You know, again, I think that, and I have no research to prove this, but I think there's something going on with the American consumer in that there's an interest in experimentation, there's a dissatisfaction with existing brands. They want to look elsewhere, they want to experiment, and these big companies have to basically find ways to bring these consumers back into and keep them in their franchise. So I think energy drinks will probably continue to get some growth, not the kind of growth that we saw over the last 10 years or so. The question is will Red Bull and Monster be the contributors to that growth or will it be a new entrance that people can experiment with?
Duane Stanford:to that growth, there will be new entrance that people can experiment with. Yeah, you know, one of the you know some of the noise around energy drinks now has been the extent to which a traffic slowdown in convenience stores is contributing to the issue here. Of course, you know, as you well know, energy drinks are very C-stores, are very important to the energy category and you know you hear various reports. I don't think it's extremely clear the extent to which traffic across the board is hurting or which categories it's hurting. I'm really interested in, you know, getting the NACs the National Association of Convenience Stores in Las Vegas. They're doing their big annual show, looking forward to getting around and talking to some C-store owners and trying to get a better handle on that.
Duane Stanford:But you know there seems to be, you know anecdotal and some empirical evidence, even from NACS a recent report that they did that traffic is down, consumers are more pressured in those channels and you've seen more private label growth in various categories, new store brands being created by convenience store chains to basically respond to this with consumers. Wrote about it some in this week's issue that we published this morning. But you know I guess the question is, you know, is this a traffic problem right now, to some degree with energy, and you know how do we feel about that going forward.
John Sicher:I'm not sure I understand why there should be a slowdown in convenience store traffic. I mean, gas prices are high but relatively stable. I believe People are out, they're driving around. I'm not sure why that would be, but I wanted to. If I may, I want to ask you a question.
John Sicher:At least in the Northeast and I'm sure it's true in most parts of the country everybody today carries with them a refillable water bottle and I wonder to what extent, and how big an extent, that's cutting into ready-to-drink beverage growth, because I think that basically people aren't just putting water in those refillable bottles, they're putting in noon tablets, putting in powders. Um, and I wonder whether or not the beverage companies have to figure out a way to allow consumers duane to customize not just their flavors, like the dirty sodas, but also figure out a way to drink their beverages out of the packaging they want to drink them out of, rather than the conventional packages that are sold by the, by the bottlers via dsd. I mean, I smell that something may, something may have to happen there, where the beverage companies may have to figure out a way to enable consumers to get even carbonated soft drinks at some point in time in the packaging they want to use, not the packaging necessarily that the soft drink companies want to sell.
Duane Stanford:Yeah, I think they're all experimenting with that. They see that same issue and they want to make sure that they're ahead of all of that. You know you see them responding, of course, with single-serve powder sticks and you know all kinds of hydration brands. You know, what I really want to go do is try to find some research and if anybody out there knows of this research or hasn't already, I would like to look at. You know some specific research on consumers who use reusable water bottles and the percent of them that actually just drink water from them all day or enhance their water.
Duane Stanford:I've been sort of surprised lately as I just ask around anecdotally of people that I see carrying bottles my daughter, her friends, people out you know out and about and you know me I like to flavor my water. I'm just not a plain water guy. I mean, I'll drink plain water but I like to flavor my water, so I'm more prone to want to. You know, if I'm using a reuser bottle which I don't religiously I would want to flavor that water. A lot of people don't. A lot of these consumers who carry these just fill up their bottle with whatever water they can find. There's lots of other places now, but I'd love to see some research in order to really kind of better answer your question about okay, how big of a risk is this really? I think the companies definitely know that it's a risk and they're doing things to make sure they're prepared for it. Now, how fast they need to move don't really have a good handle on that yet.
John Sicher:Look, you know, many years ago Coke had a product with Keurig called Keurig Cold, which made Coke Diet, coke, sprite, carbonated soft drinks in a tabletop machine. Pepsico now. That did not work out. Pepsico now has SodaStream. It's just, you know, the more you read about consumers wanting to customize products and beverages, foods that they buy, the way they want to have them, you know, I think that one road to potential stronger growth and it's not going to be easy with these bottling systems is to figure out how to let consumers drink, buy and drink their beverages in the kinds of packages they want to use. And you know, in our podcast in 2029, maybe we'll be talking about this again, but you know, I think something might be happening there.
Duane Stanford:Yeah, yeah, I think it's a good point. I mean speaking of that, you know sort of somewhat related and this will be our last category before we wrap up, and that's bottled water. You've seen the bottled water trends up in the last four-week data after a dip in the 12-week data. When it comes to dollar sales volume, sales Pricing is down generally in water. You know it was down in the four-week period but it's kind of back to where after a dip in the 12-week period, kind of back to what you've seen for the last year. But in general, bottled water has been performing pretty well. Now, that's probably not a huge surprise given all the trends we're talking about when it comes to pricing and some of the more premium products and people needing to cut back on consumption, you know, as their pocketbooks are a little tighter because they're trying to afford groceries and lots of other things in this inflationary last few years. So you know, I guess my question is to you is it a surprise at all or does it just make sense?
John Sicher:It makes sense, I think. I think a lot of it has to do with both the popularity of bottled water, you know it's refreshing and has no calories and it's much cheaper than these other categories we're talking about. So, to the extent that there's price sensitivity among consumers who are buying ready-to-drink beverages, I think some people are going to basically turn to bottled water because of the affordability factor. I agree with you. I like what I drink flavored, whether it's sports drinks, energy drinks, carbonated soft drinks. I drink some water. I don't love water, but it's a hugely popular category right now. But I think it's going to benefit from some of the price issues we've been talking about, at least in the near future, continue to benefit.
Duane Stanford:John, as always, it's been a pleasure hanging out with you and talking beverages. You know I'm a little sad about my Braves, but I'm going to be magnanimous and say good luck to your Yankees.
John Sicher:I was hoping I could goad you or persuade you or ask you to say that I thank you. The Yankees will probably fold before they get into the World Series. They have too many times in the past. But fingers are crossed all over New York City.
Duane Stanford:All right, we'll be watching from afar. Thanks again, john, good to talk to you.
John Sicher:Take care Edwin.
Duane Stanford:The Breeze is produced by Beverage Digest. Visit our website to learn more about our products and subscribe to our newsletter Bye.