Which soft drinks categories have gone sour in the downturn?

Which soft drinks categories have gone sour in the downturn?

Nearly three years since the collapse of Lehman Brothers, Richard Corbett assesses what we have learnt about the performance of 21st Century soft drinks in a recession.

After the hammer blow of the global financial meltdown of 2008, here in West Europe we are slowly lifting ourselves up from the canvass. Recovery is a drawn out process and, collectively, we hope that those bankers still in work have learnt from the experience. There are few certainties in life; taxes, death, Sepp Blatter winning the Presidency of Fifa and another great economic upheaval, another bust.

With the latter in mind, what has the drinks industry learnt about how consumers drink during times of economic uncertainties?

First, let me divert you briefly to beer. The first myth to be exploded after the crash of 2008 was that brewers always do well in a recession; you may feel like filling yourself full of beer when you lose your job but sadly you cannot afford to. More importantly, a key theme across Europe during recent times has been a slump in footfall in pubs, bars and restaurants; something that has accelerated in the hardest-hit markets during the economic downturn.

‘Cocooning’ is the term given to consumers across West Europe who opted to stay at home to entertain friends and relatives or to not go out at all. The knock-on effect of ‘cocooning consumers’ has not been as pronounced on soft drink volumes as it has on alcoholic drinks.

As a rule, when people stay at home they invariably drink more soft drinks than they would if they go out. If you out to a bar or a restaurant you will customarily buy your chosen refreshment in a unit size of between 20-50cl, but if you are sourcing your drinks from a supermarket then you will often be pouring from one-litre carton or a two-litre bottle. In volume terms, the weight of purchase in supermarkets is already significantly higher than in the on-premise.

As the recession took hold, private label products raised their profile, fuelling a frenzy of promotional activity among branded rivals. As a result, soft drinks lost volume in one channel but gained in another.

Of course, you cannot generalise and some soft drinks are more vulnerable than others, while some will even prosper in adverse conditions. Not surprisingly, still bottled waters are more susceptible to price sensitive consumers - many of which, rightly or wrongly, believe that they can turn on a tap to deliver a similar experience.

Drinks research group Canadean has reported that the West European still water market has shrunk by 2% in volume since its 2007 peak. That said, you could perhaps be forgiven for predicting a steeper decline.

At the other end of the scale, you have the squash category, which offers the most economical soft drink experience. Prior to 2008, sales had bumbled along, but a whiff of a crisis and interest in them has increased. This mature category has risen by 3% in volume since 2007, in contrast to the same period prior to the credit crunch when consumption had barely moved, according to Canadean.

One category that does seem to be immune to the conditions is energy drinks and this juggernaut continues to roll and roll. Energy drinks are as premium-a-form of soft drink as you can get and it might have been expected that they would lose their buzz as belts tightened.

Energy drinks remain a young category, though, and it should be remembered that Red Bull was only launched in Austria in 1987; the category as a whole remains very much in the growth stage of its lifecycle.

Innovation remains vibrant and the shift to larger unit sizes has contributed to the healthy growth levels. It is no wonder that Coca-Cola-Enterprises announced in February that it has identified the category as a key growth opportunity, adding that the European market is still small. We should not be too startled, given consumer lifestyles, that the concept of a short-term cure for tiredness is likely to grow and grow.

Sadly for the wider soft drinks sector, nearly three years since Lehman Brothers went down we are not in a position finalise our conclusions on consumption patterns in a recession, because the process has not run its course.

Inflation has reared its ugly head across Western Europe with the inevitable consequences for disposable incomes. Orange concentrate prices have jumped, while sugar prices hit a thirty-year high back in February, meaning it is more expensive to produce soft drinks. The surge in PET prices since August last year also means that it is also more expensive to bottle them.

In markets where we are seeing more pronounced signs of recovery, there is evidence of a revival in on-premise traffic. According to the Swedish statistics office, this is certainly the case in Western Europe's fastest growing GDP market, where turnover for restaurants in March 2011 showed an increase of 6.5% compared to the same
month a year ago.

Only when we see busy bars and restaurants across the whole of the region will we be able to conclude that drinking patterns are back to normal. In many in Western Europe markets this seems a long way off.