Euromonitor International considers the year ahead for soft drinks and water producers

Euromonitor International considers the year ahead for soft drinks and water producers

Rounding off our preview of 2011 is this, the second and final part of Euromonitor International's look at what the year holds for the soft drinks and water categories.

Developing international brands with local preferences

Major soft drinks companies ended 2010 with a slow recovery from the global economic downturn and are hoping for a more optimistic picture, particularly in developed markets, from mid-2011. Euromonitor International forecasts that the global soft drinks market will achieve a net increase of US$68bn over 2010-2015, with China, Brazil, Russia, Mexico, India and Indonesia accounting for 73% of global growth. Major companies with global ambitions should, therefore, aim to be a part of these countries’ growth stories. Both The Coca-Cola Co and PepsiCo have pledged substantial capital investment in China, Russia, Mexico and India and they are building up their production and sales infrastructure in these markets.

In terms of brand strategies, apart from growing their international brands, multinationals are not only increasingly developing local products to cater for local preferences they are also offering these drinks under their international brands. To this end, multinationals’ regional R&D centres, which are close to local consumers, are expected to play a growing role in creating and formulating new drinks in the years to come. Coca-Cola’s Minute Maid Pulpy orange juice has achieved stellar growth in China and the company is transferring its valuable experience gained from the country and the product concept to other Asian countries.

Indonesia – a booming market which deserves a closer look

In terms of growth opportunities in specific countries, Indonesia, with a soft drinks market valued at US$5bn in 2010, is worth looking at. The country has attracted significant foreign investment in recent years and is expected to see good macroeconomic growth in the coming years. Expected rising disposable incomes and standards of living are likely to result in increased consumption of commercially-packaged drinks. Euromonitor International’s latest data shows that the absolute value growth of the market is predicted to be US$2.3bn over 2010-2015, a figure equivalent to the projected combined increase achieved by the US, Canada and the UK. A look at Indonesia’s soft drinks market tells us that, apart from Danone’s dominance in bottled water through off-trade volumes, Coca-Cola, PepsiCo and Nestlé are all minor players in the overall market and they should now look to expand in the region through acquisitions.

In the latter part of 2010, rumours surfaced again with regard to Danone’s possible complete or partial divestment of its bottled water unit. On a global scale, Indonesia is an important bottled water market for the French giant, with Aqua ranked seventh by off-trade volume in the world’s soft drinks market in 2010. However, Aqua ranked 87th by off-trade value. If Danone is looking to divest its majority stake in Aqua Golden Mississippi Tbk PT (AGM), potential investors wishing to expand into the country or strengthen their position should seize this opportunity. However, any investors will have to be mindful of Indonesia’s underdeveloped retail infrastructure in which independent small grocers account for over 36% of off-trade volume sales; supermarkets/hypermarkets command 17% but their share is growing consistently year-on-year. In addition, unpredictable natural disasters can also bring uncertainty to the country.

Juice acquisition targets

Euromonitor International’s data shows that, of all soft drinks categories, fruit/vegetable juice is set to generate the highest absolute global value growth - of around US$20bn - over 2010-2015. This contrasts bottled water’s US$16bn in the same period. Due to the nature of the drinks, fruit/vegetable juices can offer manufacturers plenty of room for new product development in terms of flavour, packaging and category segmentation. As things stand, the juice battleground will also involve the sourcing of concentrated juices and raw materials. In order to achieve a sustainable and reliable supply of raw materials, some manufacturers may look to develop their own industrial fruit plantations or co-operate with local farmers on a large scale, or even take a stake in an entity further up the supply chain.

Acquisitions remain the quickest way to gain access to a distribution network, resources and strong brands. Apart from Coca-Cola and PepsiCo, second-tier companies such as Britvic, Eckes, Japan's Asahi, Kirin, Otsuka and Suntory, Tata Global Beverages and some private equity firms are preying on lucrative targets. Euromonitor International has identified the following juice companies which may offer good returns over the long term: Grupo Jumex (Mexico), Parle (India), Dimes (Turkey), Aujan (Saudi Arabia) and Alifard (Iran). 

Additionally, major companies restructuring their business lines and refocusing on their core businesses are looking to divest some soft drinks assets which may well create buying opportunities for potential investors during 2011. 

M&A – a mixed bag

2009/2010 saw a mini boom in M&A activity. Private equity firms picked up speed somewhat, and this is expected to continue far into 2011 as the market moves away from the financial crisis. However, Euromonitor International does not anticipate that M&A activity in 2011 will return to the boom period prior to 2008. There now appears to be a shortage of large-scale targets, particularly in developed markets. Furthermore, at the time of writing, the credit market remains relatively tight. 

The austerity measures of some Western European governments may continue to affect the job market and consumer confidence may still be low throughout 2011 or at least part of the year. Therefore, some investors may be cautious when making deals in these countries as they may be concerned about the potentially longer-than-expected time to achieve a decent return. Soft drinks companies relying on branded drinks will also have to face the growing challenge from private label which is fairly strong in several countries such as Germany and Spain. Nevertheless, globally, several fast-moving companies such as Hansen Natural and Rockstar will continue to attract interest from potential buyers as energy drinks are expected to continue to grow.

It is worth noting that the accumulated cash from the east is expected to play a growing and influential role in global M&A activity across categories. Japanese companies, Indian giants and major sovereign wealth funds (China, Singapore and South Korea, etc) are looking to diversify their investment portfolios and are eyeing established international FMCG brands. They could be interested in the same targets, which could push up prices.

Apart from acquisitions, joint ventures and distribution agreements will remain a common method of market entry. Tata (Indian-based), Britvic (UK-based), Eckes (German-based) and GlaxoSmithKline (UK-based) are actively expanding abroad to seek a balanced geographical spread and are looking for suitable partners for a smooth entry. Integration of different businesses and working practices and cultures will be ongoing challenges for them.

More complex competitive landscape

The non-alcoholic drinks market is becoming increasingly complex and the competitive landscape is changing, with a few major players looking to diversify into non-core areas and threaten existing players. Tata Global Beverages is expected to make some strides (introduction of new soft drinks products, acquisitions or joint ventures) in the soft drinks market as the company is trying to transform itself from an Indian tea specialist into a global beverage player. 

PepsiCo has recently announced its intention to acquire the majority stake in Russia’s dairy and juice maker Wimm-Bill-Dann (WBD), which will facilitate its ambition in good-for-you foods and beverages in the Eastern European region. WBD and Lebedyansky will offer a good growth platform for PepsiCo going forward.

Coca-Cola, meanwhile, which is aiming to double its revenues by 2020, may well acquire certain hot drinks assets in major markets over the next 12 months. To achieve this corporate goal, investment will likely be channelled towards certain key geographies and used to broaden its overall beverage horizon to fight for share of throat.

Major Japanese food and beverage companies are expected to continue their shopping spree around the globe in order to achieve their corporate goal to become true multinationals. The aborted merger between Suntory and Kirin in 2010 will result in even more fierce competition between the two and others. Asahi is awaiting approval to acquire Australia’s Pure & Natural Beverages and hopes to get the green light in the first quarter of 2011. Japanese companies’ aggressive activities on the global stage have inevitably raised their profile and alerted the soft drinks market. 

Soft drinks are staple beverages in developed markets and are becoming staple beverages in major emerging markets. These drinks appeared fairly resilient in many markets amid the global economic slowdown of 2008-2010. The soft drinks market will continue to be attractive to various investors and competition will always exist. Strong players need to be ready for the potential challenges ahead.