The View from A Farr – Challenging climate
Rising raw material prices and fuel costs, new regulatory pressures and adapting their businesses to meet environmental concerns represent a daunting cocktail of challenges for soft drinks companies to cope with. And, Annette Farr writes, while the soft drinks industry has a reputation for resourcefulness and adaptability, the current conditions look set to stretch this to the limit.
If there's something that soft drinks producers pride themselves on, it is their ability to respond quickly to the challenges they face. In recent times, this has meant addressing the obesity problem, developing natural and healthy drinks for today's health-conscious society, seeking out and bringing to market exciting new ingredients and flavours, and staying on course - quite literally keeping their heads above water - during the worst British summer since records began.
There have been regulatory pressures too, notably the smoking ban and restrictions on advertising and selling soft drinks in schools. Meanwhile, companies have had to respond to environmental concerns by making significant changes to the way they manufacture, package and distribute their products.
Commenting on the recently published 2008 UK Soft Drinks Report, Jill Ardagh, director general of the British Soft Drinks Association, said: "While 2007 was undoubtedly a challenging year for the industry, the growing focus on health and well-being presented new opportunities. Drinks providing natural refreshment alongside those offering functional benefits hit the mark. Health and well-being should continue to be key drivers of growth in the UK soft drinks industry. 61% of soft drinks are now low calorie or no added sugar and this trend is set to continue."
Innovation has focused on providing added value, for example through the addition of extra vitamins, minerals and other nutritious ingredients, and the use of natural and fresh fruits and flavours, many with a functional proposition. And, at a corporate level, companies are actively addressing climate change issues, switching to lighter weight packaging concepts, using recycled material and monitoring their carbon footprints.
Now there is a new global challenge: rising food prices. Due to a combination of poor harvests, leading to shortages in commodity markets and fierce competition, it is being reported that a typical family's weekly shopping bill in the UK has increased by 15%.
Mounting fuel costs are exacerbating the situation. According to the Road Haulage Association's Jack Semple, fuel costs now account for 40% of UK companies' operating costs, and as a result "fundamentally sound businesses face going bust". Companies and consumers alike are going to have to budget carefully and cut back on the luxuries in life.
Last year, smoothies outperformed all other categories of soft drinks, growing by 44%. These are premium healthy drinks, priced accordingly, which are bought because they not only taste good but are also good for you. Indulgent drinks, unashamedly aimed at offering a treat for consumers, have appeared. The number of 100% juice drinks has swelled with many manufacturers switching to the use of natural flavours and fresh ingredients. All these initiatives come at a price.
As raw material costs rise, along with energy and distribution costs, will soft drinks producers be able to provide consumers with affordable, healthy and natural drinks?
The leader in the UK smoothie market, innocent, says compromising on quality is not an option and that everyone in the market is facing similar challenges. "Consumers see value both in terms of quality and price. We feel we've got the right balance here," says Giles Brook, innocent's commercial director. "At innocent we are absolutely certain on what specific varieties of fruit we use. And this won't ever change."
Brook adds: "It does mean we are looking really hard across our entire business to see where any savings might be made, from ensuring the lorries are always full when they move stock around, to ordering stuff ahead of time at a particular price, to challenging ourselves on whether each purchasing decision is a good one. Sometimes good decisions for the environment are also good financial decisions, for example investing in research so we can lightweight our packaging and therefore buy less raw material. Consumers have consistently shown us that they are prepared to pay, if they believe they are getting good value and those products are convenient and healthy."
As uncertainty around the economic climate continues, giving consumers value for their money will be the challenge for 2008.
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