Notwithstanding a disappointing performance from carbonates in 2006 as a result of a C02 shortage, recent years have seen strong growth in the South African soft drinks market. Richard Corbett of research group Canadean analyses current market trends and assesses future growth potential.

At 116 litres per capita, overall soft drink consumption in South Africa is modest but the growth rate over the last decade - ten years ago each South African drank just 85 litres of soft drinks - may spark envy in the more mature markets of Western Europe.

What is more, according to research group Canadean, there is plenty of potential for further growth. South Africa is a country young in both outlook and populace, a melting pot of 47m people, representing a diverse collection of cultures and languages where a varied range of influences is likely to determine the direction the soft drinks market will take. Soft drinks are on the up and now account for nearly one in every three litres of commercial beverages traded in the country.

However, in spite of recent growth, 2006 was not a vintage year for soft drink stakeholders, something that can be traced to the carbon dioxide shortage towards the end of the year. The CO2 shortage reduced the availability and production of carbonates during the peak summer season, limiting South Africa's leading soft drink category, which makes up more than half of all soft drink sales, to a rise of just 1%. However, 2007 results should see the carbonates growth rate accelerate to 6%.

Of note in the carbonates category has been the rapid rise in sales of low-calorie brands, carbonated juice and clear carbonates. These products tick the right lifestyle boxes, with the more affluent segments of South African society driving demand.

The carbon dioxide issue was not all bad news for some areas of the industry, with many drinkers turning to packaged water as an alternative. The resulting boom triggered an expansion in category sales of more than a third. The water market has reached a sufficient level to warrant new regulations, introduced in July 2007. These clearly set out the three permitted categories of water (natural, defined by origin and prepared) and what information must be on the labels.

For a country with a warm climate, South Africans have a low take-up of packaged water: the 4.8 litres per capita is well below that of the global average of over 20 litres and even less than the rest of Africa's average of 5.5 litres. The muted demand for packaged water can be accredited to the high quality of the municipal water, which has limited the opportunities for both bulk and packaged water categories. As a result there is a bias towards single-serve formats, with much of demand concentrated on the impulse/on-the-move channel and not at home.

Strong growth is, however, anticipated in future, helped by the involvement of water giant Nestlé, which entered the market in July 2000 by buying two local mineral water brands, Valvita (subsequently rebranded as Nestlé Pure Life) and Schoonspruit. Flourishing tourism and the wellness trend will also be major contributors to the prosperous future for the category.

Another key feature of the South African soft drinks market is the prominent share of dilutables. These accounted for a little under a third of all consumption in 2007 and together with carbonates these two categories make up well over 80% of soft drink sales. On the global stage, South Africa is the second biggest market for squashes - only the UK sells more volume. In per capita terms, South Africans are the fourth biggest drinkers in the world of squashes. Squashes offer the best value to consumers; the average litre consumed at home costs just ZAR1.2 (US$0.16) - significantly less than a litre of carbonates at ZAR 7.8.

The success of the category is a reflection of the poverty found in many parts of the country, squashes being the most accessible soft drink category for the less well off. Despite receiving very limited marketing support the category is still recording consistent growth of around 3%.

Cadbury Schweppes' sale of Bromor Foods to food and healthcare company Tiger Food Brands in August 2006 for ZAR1.16bn makes it the leading producer of squash/syrups, and it might be expected that the new owner will invest more in the marketing of its new portfolio of brands.

The popularity of squashes illustrates how price sensitive a marketplace South Africa is and it is this factor that alienates much of the audience from the more luxury categories like iced tea, sports and energy drinks. The average litre of an energy drink trades for more than ZAR30. These categories make up as little as 2% of soft drinks volumes and while increasing annually, look set to remain very much on the periphery of the soft drinks scene.

Behind carbonates and dilutables, juice and nectar drinks are the most prevalent, accounting for 8% of soft drink sales. The rich abundance of freshly squeezed products on the street limit the long-term potential of these drinks and although 2006 saw them benefit from the CO2 shortage, the global rises in juice concentrate prices look set to impact on future growth rates in the short term.

The key soft drink target audience of 24 years and under makes up 52% of the population and that represents a considerable opportunity for the industry; a hot climate and improving economic conditions should provide the right environment for the soft drink sector to prosper in the years ahead. Canadean's research and analysis suggests demand for soft drinks in South Africa is very much on a long-term growth curve but the dominance of the carbonates and squash categories looks unlikely to be threatened.

Source: Soft Drinks International

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