As we welcome in the new year, we invite Euromonitor to cast its eye over what 2013 holds for the drinks industry. In the first part of this month's management briefing, the global market research and analysis provider looks at the soft drinks category.

2012 was the third consecutive year of global value growth for soft drinks. While many tie this growth to a broader recovery from the global economic recession, the plethora of choice available to consumers –in both emerging and developed markets alike – continues to dictate the taste and function of today’s beverages. As global manufacturers move into 2013 and beyond, understanding how to navigate the sea of consumer options will determine their success.

Local palates influence consumer choice

The growth in global volumes has been driven in large part by consumers in developing nations. As spending power in these markets continues to grow, many consumers move from unpackaged beverages such as water, lemonade or fresh juices, to packaged drinks. In the past, choosing megabrands like Coca-Cola or Pepsi meant joining a global culture. But, manufacturers are learning that today’s consumers are starting to make choices based on regional taste instead of just global identity. Consumers in China, for instance, are now able to choose from, not only Coke and Pepsi, but Hangzhou Wahaha’s Future Cola, or Master Kong’s Iced Tea, or Jiaduobao, a canned, ready-to-drink herbal tea that sold almost 1.4bn litres in 2012 (compared to 2.5bn for Coca-Cola).

The proliferation of local brands and familiar flavours in developing nations is a trend that global manufacturers cannot ignore. Whether it is kvass-based drinks in Eastern Europe, guarana carbonates in Latin America, or lemon-lime drinks in India, large companies are starting to realise the potential for beverages similar to the unpackaged varieties that epitomise local culture. The result is a diverse portfolio of soft drinks.

The Coca-Cola Co, in particular, realised the potential in 2008, when it examined its performance in Russia. Competitor Ochakovo MPBK ZAO quickly took market share from Coca-Cola due to the popularity of its Kvas Ochakovo, a kvass-packaged beverage popular with many Russians. In response, Coca-Cola developed Kruzhka i Bochka, their own take on kvass. Though still nascent, the product grew every year and reached sales of almost 40m litres  in 2012. Add this to the 1bn-litre performance of its flagship Coca-Cola brand and the company remains entrenched as the leader of carbonate sales in Russia.

Global brands and marketing campaigns still have tremendous value, but tapping into local cultures with sub-brands allows conglomerates to compete with local manufacturers. As these developing markets are the key growth areas for soft drinks, expect 2013 and beyond to see manufacturers acquire or formulate beverages more familiar to local taste.

Developed markets: niche is nice

As new players enter the field, brands must become more distinct. In the past, manufacturers met consumer demand of “what can my beverage do for me” by introducing functionality. Now, beverages are standing out by speaking to consumer lifestyles, answering the question “what does this beverage say about me”. Mass appeal, while still valuable and profitable for large companies, is being spurned by strategies that target specific individuals or groups: gender-specific beverages are now commonplace; regional marketing is now part of the norm, and drinks that reflect specific popular cultures and lifestyles are seeking distribution. 

For example, Dr Pepper Snapple Group’s Dr Pepper Ten featured a unique formulation paired with a male-targetted marketing strategy. The diet soda’s blend of high fructose corn syrup and artificial sweeteners created a drink that was low in calories (ten per 12oz) yet still had a texture and taste closer resembling the full-flavoured variety. But, most interesting of all, the marketing campaign focused exclusively on men with its gun-metal grey colour scheme and controversial tagline of “it’s not for women”. This concept of “drink as identity” has carried over into Dr Pepper’s most recent ad campaign, which focuses on consumers’ identity. The 2013 launch of “/1” or “one of one” centres on the concept that “each one is unique” and spotlights both celebrity and everyday people for their individuality.

Many new product launches take a similar stance to this “individual consumer” approach. Whether it is gender specific, as is the case with Dr Pepper 10 and HER energy drinks, or lifestyle focused, with Greater Than’s coconut water sports drink targeting athletes seeking natural hydration, niche positioning will continue to be an important marketing tool for the future. The ability to sell a story along with a beverage to an individual, as opposed to a group, will be the key to connecting with consumers seeking a match.

Natural versus Artificial

While sales in categories such as sports and energy drinks have skyrocketed due to their added functionality, high-calorie, high-sugar, full-flavoured carbonates have struggled. Low calorie sodas appeared as an alternative, but the aftertaste of artificial sweeteners left many consumers wanting. In response, manufacturers reformulated their blend of sweeteners, including mid-calorie offerings. Yet, differing consumer perceptions on health, in particular the comparison between natural and artificial, will continue to take their toll on diet soda. Diet cola carbonates in particular are expected to see a 30% global volume decline between 2012 and 2017. 

This battle of health perception will continue to rage in the coming years. Many consumers are still calorie conscious – avoiding sugary drinks that lead to weight gain, even when offered in healthy blends such as 100% fruit juices. On the other hand, many seek natural products and view the artificial sweeteners of diet soft drinks as anathema. A compromise may come from 100% fruit and vegetable juice blends: A category that performed poorly in the past. Although high price points and high calories deterred many, the use of vegetable juices as part of these blends can lower calories while still allowing for natural ingredients. Should new technologies and increased competition lower prices, 100% fruit and vegetable juice blends could grow over the next five years. 

Beverage police

Meanwhile, many governments have taken action against carbonates and energy drinks for perceived unhealthy attributes. 2012 opened with the passing of a soda tax in France and 2013 has begun with Canada restricting the amount of caffeine permitted in energy drinks.

Energy drinks in particular have come under fire. While the category is still one of the fastest growing in the world, the recent teen deaths linked to energy drinks have caused many nations to investigate the beverage. In Mexico, the sale of the energy drinks combined with alcohol was outlawed in 2011, while in 2012 a law passed making it unlawful for anyone under the age of 18 to purchase the drink.

Similarly, studies done in Canada following the death of three male teenagers led to the country capping caffeine content at 180mg-per-8oz serving in early 2013. The late 2012 death of a 14-year-old girl in the US, who suffered a heart attack after drinking two energy drinks, has caused some Congressmen to call on the FDA to examine potential health risks.

Such concerns are echoed across the globe with governments from the UK to India all taking a closer look at the drink’s impact on health. Obesity has also been a large concern for lawmakers. France successfully taxed sugary soft drink manufacturers a year after Hungary imposed a similar tax. And, while the federal government in the US has yet to impose similar legislation, municipalities have acted, led by New York City’s ban of the sale of sugar-sweetened drinks in cups larger than 16oz at restaurants, theatres, and sports arenas.

While the efficacy of these laws is still in question, there is little doubt that high sugar and high-caffeine drinks are within the crosshairs of officials. But, consumer demand of energy drinks still remains high. And carbonates, while declining, still represent the backbone of the soft drinks.

Moving forward, manufacturers of these beverages must continue to address their market strategy and formulations. While energy drinks have flourished as the 'bad boys' of the soft drink industry, regulations will require a change in image if manufacturers want to maintain growth. Red Bull’s disassociation from alcoholic drinks, despite historic success with the pairing, has been an initiative for years now. Monster and Rockstar have incorporated new low calorie or natural ingredient formulations. And, Starbucks introduced a natural energy drink using green coffee bean extract. Carbonates are continuing to experiment with different blends of sweeteners and offering 100 calorie serving sizes. But if these drinks are to weather this wave of governmental inquiry, changes must continue. 

All these trends, 1) increased interest in local flavours and customs for emerging nations; 2) increased emphasis on functionality and identity for developed nations; and 3) increased scrutiny as to the health and wellness of beverages on behalf of consumers and governments, underscore the perils of navigating a fragmented market. As such, manufacturers must pay even closer attention to the regions and customs of the nations where their product is sold. This, in turn, will lead to an even more fragmented market moving forward, although global parents will still dominate, based on the ability to offer many sub-brands.