A view on the potential Changes in the beverage business

1. 38 BEVNET MAGAZINE NOVEMBER/DECEMBER 2013
from hours sitting behind a one-way window studying focus
groups, visiting countless consumers in their homes (yes, at any
point, you could hear a knock on your door and it would be me,
asking to look in your refrigerator) to large quantitative Attitude
and Usage studies delivering hundreds of pages of data tables.
Looking back on that experience (and with the benefit of
20/20 hindsight), two general observations can be made:
*First, people in general were genuinely excited by the idea
that they could get more from their beverages.They were eager
and ready to embrace beverages that were primarily useful
products , and “brands.”
*Second, Carbonated Soft Drinks, while comfortable and
convenient, were becoming irrelevant.
And that was back in the age of Snapple. Now, the twenty-
first century drinker is looking for even more. That is, a more
engaging drinking experience; exotic tastes, natural ingredients,
healthier attributes, and more functional potential.
Now it seems all very simple:That research experience pre-
saged all of the biggest successes, from functional fortification in
a less sweet beverage leading to Vitaminwater to more energy for
modern life equalling Red Bull.
At the time, though it was a challenge to dimensionalize
what “more healthy” or “more energy” would mean. In 2013
these changes have gelled into specific categories, segments and
brands – and the industry continues to push the boundaries of
beverage innovation further.
In the October edition of Bevnet Magazine, we discussed the
issues and challenges that CSDs face. Now, lets examine the
opportunities that will be presented in the New World.
A note on the following needs and segments: If you work
inside the beverage industry, it is very easy to think of the bev-
erage business in high-walled, monolithic categories. We keep
scorecard terms of Tea vs. Tea, Water vs. Water, etc. In reality
the consumer interactions between categories have become
more fluid (pun not intended). Even in the most sophisticated
organizations, it is a challenge to stay consumer-centric. So
while we’re looking at how opportunity might appear, consid-
er a broader competitive set based on how consumers behave
rather than just the close-in competition as you build your
brand. Especially as categories bleed attributes functionally
across lines, selling attributes may be drawn from a variety of
categories as well.
BACK IN THE 1990s, I DID A LOT OF CONSUMER RESEARCH,

2. NOVEMBER/DECEMBER 2013 BEVNET MAGAZINE 39
BOTTLED WATER
2012 Size $14B 2018 Projection $19B Projected Growth Rate 6%
SEGMENT DYNAMICS:
The consumer perception that “water is water” is fading as
new hydration innovations appear. For the past 20 years, most
consumers and the mainstream media have taken the approach
that there would be no difference between municipal water from
a home faucet, or an expensive source water.
Within the category, low-priced commodity water dominates
with 90% of the revenue. But there are interesting opportunities at
the premium end of the market.Today, consumers can increasingly
taste the difference, and are willing to pay for better, more conve-
nient water, as well as water that fulfills a functional expectation.
WHERE ARE WE GOING?
Beyond exotic source waters in glamorous packages (Fiji,Voss,
Evian) multiple brands are building the functional water space:
The current dominant brands – Vitaminwater and Smartwater -
have created the profitable and growing “Premium Hydration”
sub-category, an opportunity for more innovation and creativity.
Largely unflavored, all unsweetened, sometimes more functional
but all with a high-quality appearance, some examples would be:
Balance Water, which adds interesting flower essences for func-
tionality; Hint, which is focused on fruit-flavored, unsweetened
water;Wat-ahh, which is bringing additional functionality to
kid-focused waters and Essentia Alkaline Water, now the leading
brand in the natural channel.
ENERGY DRINKS
2012 Size $10.0B 2018 Projection $13B Projected Growth Rate 6%
SEGMENT DYNAMICS:
32% Annual Growth rate for the past decade has taken Energy
Drinks from rounding error to $10 billion in revenue.While the
current rate of growth will slow, Energy Drinks will be a significant
driver in the NewWorld, despite food politics and premium pricing.
The U.S. category is dominated by four brands (Red Bull,
Monster, 5 Hour Energy and Rockstar) who have withstood
competitive entries from all the big beverage companies, as well
as thousands of entrepreneurs. Most of these entries lacked any
differentiation, and then discovered that the high gross margins
of the segment created a set of aggressive competitors who battle
for every facing in every account.
WHERE ARE WE GOING?
Interestingly, the energy need is broadening from blue collar
males to mainstream consumers, from soccer moms to stay at
home dads and baby boomers.These new energy drinkers are
asking for “more natural” and “less scary” energy. A challenging
place for the big four brands to play.
“Non-stimulant” forms of energy may also be an opportuni-
ty. However, getting consumers to believe that they have greater
endurance as a result of such a drink has traditionally proved to
be a challenge.
So, now the battle is on to find a way meet the demands of
these late comers to the energy party.
JUICES/JUICE-BASED DRINKS
2012 Size $10B 2018 Projection $11B Projected Growth Rate 2%
SEGMENT DYNAMICS:
Juices and Juice Drinks were the creative vanguard of the New
Age Beverage movement twenty years ago. Consumer interest
in better-tasting juice consumed away from breakfast drove
considerable growth.
The big companies identified this opportunity early, leveraging
traditional juice-oriented brands and adding some of the more
exciting juice brands to their portfolios. Over the past decade/
dozen years, Naked Juice was acquired by Pepsi to join Tropi-
cana, and Coca-Cola acquired Odwalla, and created Simply
Orange to accompany Minute Maid.
Today, it is amazing how Eliot’s Amazing Apple Juice, Snapple
Mango Madness and the promise of Fruitopia seem dated today.
WHERE ARE WE GOING?
Mainstream juice product declines are being offset by the growth
of a “New Wave” of premium juice offerings.These segments are
fighting to convince retailers of their right to retail presence and
to establish their offerings with consumers.
Juices are a segment full of activity. Formerly sleepy segments
like lemonades are being re-imagined by upstart brands, and
new opportunities like coconut water are blurring juice together
with hydration & sports drinks, while aloe drinks, turmeric
beverages and cherry juice are positioning against inflammation.
Those naturally functional products are joining a new set of even
higher-priced premium products like cleanses and smoothies
made with HPP technology.
SPORTS DRINKS
2012 Size $7B 2018 Projection $9B Projected Growth Rate 3%
SEGMENT DYNAMICS:
There is no doubt that consumers seek a beverage that can help
them perform better at sports. And for thirty years Gatorade
delivered that advantage.Today, if you are serious about sports,
you are serious about sports nutrition, and about understanding
your optimal balance of hydration, nutrition and fuel.
Gatorade responded to this by developing the Prime, Per-
form and Recover three-stage system in 2011, but that strategy
has proven difficult to execute and has gradually been dropped,
returning to advertising-driven imagery of success to sustain the
brand. It’s been an interesting test case for consumers’ supposed
interest in true functionality and the limits of an established brand.
WHERE ARE WE GOING?
Similar to the rapidity of progress made in technology, scientific
knowledge of Sports Nutrition is moving forward quickly.Take
a walk to your local Vitamin Shoppes or GNC and you will see
new products being commercialized against this new knowledge.
Are these all game-changing ideas? Well, no. But there may be
the next great idea already sitting on these shelves.
In the past year, Beetroot Juice has received a lot of press due
to its ability to improve endurance. Caffeine, once the nemesis
of performance due to its diuretic impact on the body, now has

3. 40 BEVNET MAGAZINE NOVEMBER/DECEMBER 2013
received interesting scholarship related to its ability to impact
muscle recovery. Protein is still predominantly used in powder
form, but Muscle Milk has led the way into RTD products. It
will continue to be a referendum on how consumers view liquid
protein: of the $3 billion or so spent on all protein supplement
products estimated (powders, bars and beverages) only about
$500 million comes in an RTD beverage form.
RTD TEA & RTD COFFEE
2012 Size $6B 2018 Projection $8.1B Projected Growth Rate 4%
SEGMENT DYNAMICS:
It might be surprising, but alongside energy drinks, the other big
success of the 00’s was the growth of RTD Tea, which more than
doubled in size as a segment.The perfect combination of positive
media coverage on the health benefits of tea, the development of
value alternatives and super-premium propositions stretched the
consumer perception of what tea could be.
While Snapple was the originator of better-tasting, fruit-
flavored hot-filled tea, it has been AriZona that has broadened
demand and become the powerhouse brand in the category
driven by its great packaging, mainstream innovation (largely
flavor-based, like the Half and Half phenomenon) and high-
velocity everyday pricing.
At the same time Honest Tea has been the first example of
a tea brand with its roots in the natural retail channel that has
jumped into mainstream acceptance… weathering even the
brand’s sale to Coca Cola.
WHERE ARE WE GOING?
RTD Tea is simple, healthy refreshment with enviable consumer
acceptance. AriZona has found a way to build a massive tea
brand in a way similar to how Coke and Pepsi established them-
selves: Great value and retail presence.That path will continue to
present an opportunity for the company.
In the past few months there has been increasing amount of
research identifying the interest of the millennial generation in
teas. The combination of low-calorie allied with great taste allied
with tea’s healthy halo is attractive to this generation.
As a result, the market for high-priced, on-premise tea is
expanding: Argo Tea is growing, Starbuck’s bought Tevana, and
David’s Tea in Canada is growing too. An RTD brand that can
capture this momentum would have a big opportunity.
DAIRY AND OTHER BEVERAGES
2012 Size $2.5B 2018 Projection $3.3B Projected Growth Rate 5%
SEGMENT DYNAMICS:
From Muscle Milk to Nestle Quik to Kombucha, the “all
other” space is the diverse frontier of new beverage ideas.When
truly original and different beverages are created, they often
come from this space.
Starting a new category is both a blessing and a curse.While
retailers appreciate the differentiation, there is a challenge to
figure out where to merchandise the new brand, how the new
brand grows the marketplace, and the right pricing.
At Cadbury, one of my roles included reviewing brands seeking
distribution through our RouteTo Market. I will always remember
reviewing Kombucha the first time: So different from what was on
the shelf, but so alien to the mainstream taste profile.
It is from this space the next big opportunity could emerge.
There are a host of physical needs that may be targeted: Brain
health, bone health, anti-anxiety, appetite suppression, sexual
health, etc. Certainly, there has been a focus on beverages that
could be snacks, as consumers eat fewer sit-down meals and get
nutrition on the go.
WHERE WILL WE BE IN 2018?
In answering this question, take a step back five years to 2008:
No coconut water to speak of, no HPP juice, and protein
beverages were just becoming mainstream.Those are three big
opportunities that became multi-million dollar categories. Now,
the leap forward of the next five years promises to be even more
significant, because the decline of CSDs that these columns cen-
ter around will create even more opportunities for “white space”
beverage innovations.
Consumers are more open to different beverages concepts
then ever before.They expect new ideas and are willing to give
them a chance -- if the proposition is relevant to them, and has
an acceptable taste.That’s great news for the beverage developer
– but be warned, consumers are also quick to identify anything
inauthentic or copy-cat.
The other big challenges will be born of the proliferation of
new product categories, brands, flavors and packages.
It will be tougher to cut through the clutter. Having a great
product and great brand will not be enough. New brands will be
even more innovative at generating trial, building awareness and
maintaining loyalty with their consumers.
The current set of tactics that an emerging brand can employ
is pretty standard:The first wave is social media allied with in-
store sampling, event sampling, and guerilla sampling. As brands
become bigger, event sponsorships and celebrity endorsements
come into play along with building PR capability.These are the
hard yards that every brand since Snapple has employed to get to
scale. It will be interesting to see if someone creative can break
this paradigm and build a whole new approach.
The greater proliferation will also likely have an impact on
the time horizon that brands will need to build success. More
obstacles, and more pressure from competitors will push out the
length of time needed -- and the more time needed for success,
the greater the levels of investment and resources that will be
needed to support a new venture.
So, this is the New World: Fewer CSD’s, more alternative bev-
erages, and an accelerated rate of innovation. But to quote Gen
Norman Schwartkopf, “Strategy is for amateurs, logistics are
for professionals.” Building a beverage brand requires thousands
of tiny wins, every day, from the distributor’s warehouse to the
retail shelf to the consumer’s lips.That’s what we’ll look at in
our next analysis of this New World: its impact on the industry
that surrounds beverages:The impact on beverage businesses,
distributors and retailers.