Drinking Outside the Box

by Jane Mundy

word count: 2,181

Canadians have a helluva thirst for cold beverages and by all accounts, it won't be quenched anytime soon. The beverage industry is enjoying increased sales in every category, and according to Refreshments Canada in Toronto, we drink more than 10 billion litres of non-alcoholic ready-to-drink beverages a year. The industry is also undergoing significant changes, mainly due to public demand for healthy, nutritional products. This demand is somewhat reflected in decreased carbonated beverage sales and increased water sales. According to a recent Euromonitor report (The Market for Soft Drinks in Canada, 2004), drinks offering refreshment and good taste along with a nutritional component will play a dominant role within the Canadian beverage market.

 Euromonitor also reported that bottled waters expect to achieve 11 percent growth in volume over the report's forecast period (2003-2008). Although ACNeilsen reported that flat water sales increased by 33% in Alberta in 2002, overall beverage sales for the convenience channel were not as strong as expected in 2004. However, Desmond White, national accounts director for the Coca-Cola bottling company of Canada, explains that  "this was primarily due to a record cool summer and the high gas prices which impacted disposable income in the gas/convenience channel." He also reports that carbonated soft drinks (CSD's) are the second category in  convenience after tobacco.

Also on the upswing are alternative beverages such as sports drinks, energy drinks, flavoured milks and soy drinks. The biggest reason for the demand shift is our population's demographics -- blame it on the baby boomers. And their kids aren't consuming as many soft drinks; rather they are reaching for more juices and healthier drinks in general. Cold coffee drinks are holding their own, according to Raj Gill, 7-Eleven's Canadian Product Manager, and energy drinks are picking up speed. Tea consumption is also on the rise, which is to be expected with an increase in health-conscious products, especially green tea.

Along with a move to healthy products, the major beverage companies have introduced new products: Vanilla Coke, Pepsi Blue, Kool-Aid Switchin' Secret and Crystal Light Singles. But it's the alternative beverages to watch for in the Canadian market, especially those with "functional nutrients". Again, this is due to aging baby boomers accepting and demanding "food-as-medicine" components such as anti-oxidants in iced green tea. (look for Danone Yoghurt's  Silhouette Smoothie: just launched and currently only sold in retail grocery stores, it is an "on-the-go, drinkable healthy snack" and marketed as a nutritious breakfast. Danone hopes to launch into C-stores within the next six months).

Michael Petcherski, Business Development Manager at Danone Naya Waters, agrees that water is currently the fastest growing beverage in the market and, based on US sales, Danone is optimistic that its flavoured spring waters will sell. "Water sales have seen double digit growth over the last five years and the trend will continue into the next decade", Petercherski predicts. He also points out that water retailers are using bottled water as a loss leader to attract consumers into their stores. "Used to be carbonated colas, but now they are willing to lose money on water to drive traffic," he says. Simon Ginsberg at New Attitude Beverages agrees. He predicts water wars with the big soda guns Pepsi and Coke. "Some retailers are swinging back to larger margins in upscale product rather than sell a lot for a lower profit margin" says Ginsberg. It doesn't make sense to do lots of work for little return and use up valuable space.

Even though we are drinking one billion litres of bottled water a year, Canada still lags behind the US and Europe where bottled water is a way of life. Canadian restaurants don't employ water sommeliers --yet-- although some upscale eateries in Toronto charge ten bucks for a bottle. The majority of Canadians grew up on tap water. BC is a harder sell in terms of water compared to Ontario where sales are highest, possibly due to the Walkerton crisis. Vitamin and nutrient enhanced water is the growth area.

Jim Delsnyder, Sales Director at Ontario-based Nestle Waters, saw water sales increase 30 percent from last year. Growth areas were prevelant in the west "but Quebec is the least developed and I predict it will play catch-up in the next few years" he says. "Although prices are dropping and retailers are getting less margin for the product than they used to, C stores make better margins than national retailers such as Wal-mart and Zellers, especially on single bottles. Delsnyder believes the company's new product Nestle Splash, a flavoured water without sugar (sweetened with Splenda), will get more people into the bottled water category. "Household penetration on bottled water is now 52 percent and 85 percent in the US, so we are six years behind the US in development" he says. The upside is that the interest in water shows no sign of slowing down. Desnyder believes that "the good thing about flavoured water as a category is that it will be purely incremental because these people aren't already drinking water, they are drinking CSD's and coffee.

Simon Ginsberg at New Attitude Beverges says  "It's trendy to walk around with a bottle of water, it evokes a healthy image, and bottled water manufacturers make sure it gets into Hollywood's hands," he explains,  which is exactly what happened at the recent Academy Awards:  case loads of XLC Vitamin Juice drinks in single sizes were delivered to the right people. 

And the winner is…

The energy drink category got a major jolt with the launch of Red Bull, and lots of new entries such as Hype are driving growth in sales throughout Canada. "All other energy drinks are picking up so Red Bull isn't cannibalizing, it has brought more focus" says Raj Gill, Product Manager for 7-Eleven's Canadian Division "Sales aren't down on anything" he adds, "and sales increase from Red Bull is incremental; all isotonics and juices are performing well and above last year."

And hot off the press: Canada - the Water is the latest product on the market and 7-Eleven is getting first crack at it. With a bright red PVC sleeve and a clear bottle, it caters to new Canadian patriotism. Sales aren't expected to be high in the US.

Meanwhile, UrbanZen Tea claims to "revitalize from within". John Palacios, vice president of sales and marketing in Missisauga said that consumer reaction at the F&B show in Toronto was extremely positive. They want healthy product and UrbanZen iced tea is all natural, sweetened with cane sugar and also has a lower sugar count compared to other iced teas. Palacios claims that it refreshes and quenches thirst. In the sports drinks category, once upon a time there was only Gatorade. Now Propel and X-Factor. both vitamin-flavoured waters, are selling well in all 7-Elevens.

Mac's convenience stores boast Froster's slushie drink as their number one seller. "Beyond that we sell granita beverages, but still only two or three percent of Froster's sales" says Ron Thompson, Marketing Manager for Western Canada. Mac's claim to success is that they were able to invest 12 barrels into every new Mac's store, and eight barrels on renovated stores. "The cola flavour is the biggest seller" says Thompson, "but it's all about colours and flavour variety -- the young demographic mixes and the older demographic wants a variety to choose from."  He also explains that "we have a machine from Taylor manufacturing company which is a low pressure unit…we are concerned about overrun so the product is more fluffy and dessert-like: a slush drink. (Not to be confused with 7-Eleven's Slurpies or Bart Simpson's Squishies).

Mac's has a unique marketing initiative. Froster.ca adds a gaming component to the product and is gaining popular momentum. "We have 50,000 people that we direct market to with an on-line contest and registration" says Thompson. They also designed a new logo designed with the help of Froster crew and customers.

Rob Jervis of Western Canada's Harlan Fairbanks says that frozen cappuccino and Hawaiian Punch flavours are the biggest growth market in slushes "The margins are similar to any other product but the retailer is selling a higher dollar value," Jervis says. Slush machine sales are also up.  The newest slush  is Hi-Rev, which is high in caffeine and is available frozen, hot and cold and.  like the Red Bull product, has found a niche with young adults, particularly  students cramming for exams.

 

Placement and product positioning

"Obviously, beverage manufacturers, be they large, small, new or established, are approaching retailers with new products," says Desmond White. "With fixed cold space, retailers need to be diligent in their listings and space allocation.  [Coca-Cola] suggest retailers look to companies that will support their products with promotional efforts, media and sales personnel, to ensure these new products are supported with consumer communications." Jim Delsnyder advises "Don't fall into the trap of putting Nestle Splash [and other flavoured waters] into the bottled water category and taking space from this fastest growing category". Rather, put it next to the alternative beverages and flavoured carbonated soft drinks. Delsnyder also suggests you take a good hard look at the spaces that aren't selling. Space that is set aside for isotonic drinks should only used that way for a few months of the year, namely July and August. Raj Gill reports that Slurpies are also strongly seasonal while Ron Thompson claims that seasonal changes don't affect Mac's a lot. "At 30 below in Calgary, it may vary by 20 percent at the most…it's a strong brand, even when it's cold outside.

Palacios suggests that UrbanZen tea be placed close to bottled water and thinks it is advantageous for C-stores to create a healthy, all-natural section in their coolers where consumers are looking for upscale and healthy product. Raj Gill says small retailers "have to configure space and location for new entries in the marketplace…usually CSD's are allocated to three cooler doors and non-carbs (water, juice, isotonics) are given four doors". But it is the retailer initiative, basically a store by store rationalization based on what sells, what they need to get rid of. "We give them a recommended planogram so each store has the ability to track their own sales and customize their layout based on what sells best in their own store" says Gill. Product placement sounds good in theory, but is not always realistic. . McGill Grocery Store doesn't have the space that a 7-Eleven or Mac's does, but the Mah brothers have nine cooler doors packed to the gunnels, running the entire length of their C-store. "It's all about market share and Coke has the biggest share", Harry Mah explains, "next is Pepsi…both deliver to their respective cooler but Coke has better infrastructure for customer service." So all Coke products including its water are lumped in together and it's a scramble trying to find a particular item, unless you're a regular customer.  

Packaging

At 7-Eleven, energy drinks will be sold in 473 ml cans. Froster's slush products come in four sizes: 12, 18, 28 and 40 ounce. "We tried to remove 12 ounce from our mix but we had an uproar… it was a niche market for little kids and parents wanted smaller sizes so we couldn't up-sell" says Mac's Ron Thompson. No super-size me there.

John Palacios's goal to merchandise UrbanZen is to have POS material at the front of the store such as small signs, perhaps on the front door and also on the way to the cooler, then another small sign on the cooler glass door and eventually UrbanZen's own glide rack: "we will develop our own glide rack with our own colours, so now the customer will have four visuals before purchasing" he says.

As for space, Palacios is confident that C-stores will fit in new products. "Independent owners are looking for up-to-date products, namely items relating to energy drinks and healthy beverages," he says. All are selling well. "Ontario was the last segment to get going, but in Montreal and Vancouver, they have been popular for a few years" states Palacios. In the past few years, retailers have shown that they are more willing to try new products, and even with limited space they realize it's a good idea to maintain the status quo and find space for new products.

The Mah brothers have seen some changes in the 28 years their McGill Grocery store has been in business. "Customers know what they want and the young crowd try the new things" Harry Mah says. Carbonated drinks sell the most and surprisingly to Harry, so does water. (His family only drinks tap water.)Even at three dollars a can, energy drinks are popular, especially Red Bull (apparently it pairs well with "club drugs" and there is now a Red Bull Martini). One thing the Mahs' customers don't want is cold coffee drinks, but he thinks demand might pick up with warmer weather. Overall, the biggest change in almost three decades has been increased sales, more fruit juices in bottles and more variety in soft drinks and specialty drinks. That's good news for C-stores.