Comment - Soft Drinks & Water - Crisis Looming Down Under?
Despite a relatively healthy economy, Australia may still throw up some hurdles for soft drinks & water companies
In his latest column, Ray Rowlands, of independent research agency Drinksinfo, looks at the soft drinks market in Australia: a sector in a country that many had previously thought could ride out the global economic downturn.
Despite the nation’s relatively strong economy - compared to most of the Eurozone, that is - many Australian consumers are reported to be behaving as if the country was in the grip of financial crisis by spending less on discretionary items this year than they did in 2011. This is despite positive GDP growth and a low unemployment rate which stood at just 5.2% in July, according to the Australian Bureau of Statistics.
In the same month, slackening consumer confidence saw new home sales declining for the first time in four months, as reported by the Housing Industry Association. Retailers have also complained of worsening trading conditions with retail sales declining by 1% in June over the previous month. So, how is this current scenario likely to affect the country’s beverage industry?
Currently, Australia has one of the world’s highest per capita consumption rates for soft drinks at over 200 litres. That puts it on a close par with the UK. Also in line with the UK, CSDs provide the backbone of the Australian soft drinks market. However, even before recent events, Australian carbonate volumes have been struggling to increase, with annual growth averaging less than 1% for more than the past decade.
Apart from approaching maturity, the category has, more recently, had to contend with the stigma of an unhealthy image leading to consumer migration to alternative drinks.
Following the detrimental impact of the coldest summer in 50 years at the beginning of 2012 that had already dampened demand for fizzy drinks, recent consumer-induced events could well accelerate declining volumes. (The market had already suffered a minor drop in 2011).
This would be particularly harmful to Coca-Cola Amatil (CCA). As the Australasian bottler for the Coca-Cola portfolio, as well as selling its own brands (e.g. Kirks), the company is responsible for three out of every five litres of CSDs sold in the country, according to its own website.
CCA is obviously concerned by recent events, with MD Terry Davis conceding in August that the consumer environment in Australia was looking pretty subdued. Fortunately, CCA is not totally reliant on carbonates for its survival - though the category is responsible for 75% of the company soft drinks business.
CCA also has a strong foothold in the bottled water market with Coca-Cola’s Pump brand and its own Mount Franklin amongst the brand leaders. Bottled water is better placed to withstand a cutback in consumer spending, due to the heightened publicity of its health virtues.
But, at the same time, there is a growing action group that is trying to ban bottled water on environmental grounds. Increasing emphasis on planet-friendly packaging would help counter such a response. Though not specifically targeting the bottled water market, Coca-Cola has been at the forefront of such a development. Its new PlantBottle, containing 30% plant-based material, was introduced into the country at the end of 2011 and was in-store by the following February. Although there is some debate as to the real environmental impact of this hybrid container, it will no doubt appeal to the more ecologically-minded consumer.
CCA’s future position is further cushioned by an active interest in numerous other soft drink categories including juice products, sports & energy drinks and even the water cooler market. However, some if not all of these categories could well be negatively affected by the growing consumer gloom, especially premium priced brands.
Meanwhile, there is no denying the company’s heavy reliance on CSDs for its survival; only so much more revenue generation can be squeezed out of this lumbering giant.
Product diversification provides one means of softening the blow of decreasing CSD sales. CCA was, at one time, in partnership with the global brewing giant SABMiller, until the latter bought out the Foster's Group a year ago. Now, CCA is planning to re-enter the premium beer sector through a brewing joint-venture with privately-owned Casella Wines. However, Australian beer consumption is already in decline and, based on CCA’s earlier foray into this market, the impact on overall company performance will be limited.
No matter what the outcome of increasing consumer thriftiness, CCA is probably one of the best-placed soft drinks companies to ride the wave, not only due to its own financial muscle (first-half year net profits were up by 61%) but also those of Coca-Cola Co, which holds a 30% share in its Australian bottler. Fortunately, a number of other Australian beverage suppliers can also now rely on overseas support. Leading juice producer Golden Circle was bought by the US-based Heinz Corporation in 2008, whilst its rival Berri is owned by the Japanese Kirin Group. Indeed, Australia's soft drinks market has become something of a battleground for Japan's drinks giants. Schweppes, the second largest soft drinks player, was snapped up Asahi Breweries of Japan in 2009, to be joined by P&N Beverages last year. Even Suntory has a minor foothold via Auckland-based Frucor Beverages, acquired in early 2009.
Drinksinfo estimates that three-quarters of the Australian soft drinks market by volume is now in foreign hands (plus most of the beer market. in addition to a large chunk of the dairy industry) with retailer brands absorbing another 5% to 10%. It is the remainder of the industry, largely represented by small, independent companies, that is potentially most at risk from any downturn in demand.
None of these niche players individually holds more that a 1% market share, which consequentially not only limits their monetary reserves but also restricts their appeal as takeover targets.
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