Comment - Soft Drinks & Water - Looking into the Crystal Ball for 2013
This month, it's Richard Corbett's turn to take a guess at what the future holds for the soft drinks and bottled water categories.
Well, the Mayans were clearly wrong, and here we are, already well into 2013. January is a time of year when we make plans and think about what the year ahead has in store for us. So, I'm going to stick my neck out and propose what I think will be the main issues for the soft drink marketplace in the year ahead.
(Making any predictions is always hazardous - as someone once told me: “Forecasting is to say what will happen in the next 12 months and then, after the 12 months, explain why it didn't.”)
The fortunes of the soft drinks sector are, to a large extent, underpinned by the welfare of the global economy and, while the financial markets may have picked up, there remain plenty of long faces in the world's business community. Prospects for the economy overall remain fragile, with the BRIC economies having slowed in 2012 and the issues in the Eurozone seemingly kicked down the road. The prognosis for the influential US market looks to have improved now they have not fallen off the fiscal cliff, but remain muted. There is no magic wand solution and I believe this will be borne out in the near-term demand for soft drinks.
According to the latest global forecasts from beverage research firm Canadean, the global soft drinks market will expand in 2013 at a similar rate to 2012. That would equate to a 4% increase in total volumes. On the face of it, that would be a fairly healthy rise. But, before you reach for the (other) fizzy stuff, there are a few sizeable caveats.
Most of this growth is driven by developing markets where commercial refreshment is priced significantly lower. This dilutes the average price of soft drinks, with implications for the value growth of the market as whole. Further downward pressures on the average price of soft drinks come from the fact that, in the developed world, the on-premise channel, where soft drinks command significantly higher prices and margins, remains depressed. Meanwhile, in the supermarkets, money-sensitive consumers are finding the lure of low-cost, private label alternatives more attractive.
The industry can also prepare for more regulation and taxation in 2013, as soft drinks that fall the wrong side of the health debate are put under continued political scrutiny. The association between CSDs and rotund children makes soft drinks a soft target for governments in cash-strapped, developed markets looking to balance their books and distract electorates from their economic woes. Regulations often follow bad publicity and energy drinks, in particular, look vulnerable after a bumpy ride in 2012, with a multitude of negative stories around the world, most notably in the US.
Many observers are now speculating about whether the drip-drip of unhelpful coverage will burst the bubble of the energy drink category. I remain optimistic for the category, and would argue that energy drinks will maintain their status as the best-performing soft drink category. The sector has outrun bad publicity before and has generally prospered from being 'on-the-edge' and a little bit risqué; indeed, that is how they often position themselves. The youthful audience of the category is also more immune to health scares than other age segments.
I am not so optimistic for the packaged juice category, though. Canadean is forecasting a better year for the category, but no growth. The biggest handicap for packaged juices is that, in most developing markets (outside of Eastern Europe), consumers tend to buy their juice from street vendors and not supermarkets. Packaged juices struggle to compete on taste with freshly-squeezed juices, and opportunities are limited. Not surprisingly, in Asia, per capita consumption is less than 1 litre. At the other end of the scale, juice consumption looks to have matured at 25 litres per capita in North America and 16 litres in West Europe. The objective for juice operators in these parts is to add value because adding volume is becoming increasingly harder.
In contrast to juice, packaged water benefits most from the fast-prospering parts of the world. Increased urbanisation is pushing up demand for clean water, and packaged-water sales will again drive global soft drink volumes in 2013; rising by between 6 and 7%. At the turn of the century, according to Canadean, West Europe made up 44% of world packaged water sales, and Asia 14%. In 2013, it is expected that Asia will make up more than a third of sales and West Europe little more than a fifth. This is a long-term process.
It will be still water, and not sparkling water, that is the engine for water growth. Sparkling waters are niche in developing markets and looked to have peaked in developed markets. Sparkling waters are also now threatened by the re-emergence of SodaStream. Back in April last year, I wrote a piece on the at-home carbonation machine, and how the company has undergone a revival. The firm is now more sophisticated, aiming its product at a more grown-up audience than previously. I think SodaStream will be one of the year’s winners, and it seems I am not alone – the company’s share price has jumped by more than a third since the piece I wrote was published.
No doubt, next year, I will be explaining why my projections were wrong. But, forecasting soft drinks demand is notably difficult. The weather is often the most influential factor and you cannot forecast that over the long term. Ultimately, when it is hot, demand for soft drinks goes up more than when it is cold. A hot summer in key markets, and everything changes.
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