With a young population and increasing demand for a wider variety of soft drinks, the Middle East represents a strong growth opportunity for soft drinks producers, both international and local. Simon Maddrell of Euromonitor International picks out the 100% juice and bottled water categories as strong growth areas.

The soft drinks market in the Middle East is proving increasingly dynamic with a great potential for growth, underpinned by the young population and increasing consumer demand for a wide variety of non-alcoholic drinks. While carbonates are the most popular soft drinks in many countries, Euromonitor International has identified the bottled water and fruit/vegetable juice sectors as the key growth categories over the next few years.

All domestic markets in the region have recorded rising consumption of bottled water, driven by the health and wellness trend. While UAE has the highest consumption level at 123 litres per head, Iran is expected to see a rapid increase over the next few years, albeit from a relative low base. In many countries, the growing demand for bottled water is due to the poor quality of tap water.

Understandably, still bottled water is the most consumed in the region, given that it is used for cooking in many markets. New product launches have centred on packaging formats rather than formulations. Over the past couple of years, some manufacturers have begun introducing bottled water specifically aimed at children.

Carbonated water is found in some markets, with growth in sales slow but steady. In Saudi Arabia, sales of flavoured water and carbonated water are still marginal and the main consumers are foreign expatriates. Saudi consumers view these products as a niche despite the fact that the price difference between carbonated water and still water is not huge, especially true for local brands. In Israel, many consumers are not yet accustomed to the taste of flavoured water. Functional water is not visible in most of the countries and Israel is the only country registering a consumption of 4.4 litres per head. Functional water is likely to remain a small niche in the short to medium term.

Fruit/vegetable juice, on the other hand, is a dynamic growth category, with local companies typically playing an instrumental role in their own domestic markets. Saudi Arabia and Israel have the highest consumption levels at 34 litres and 33 litres per head, respectively.

In Saudi Arabia, local production of juice has been greatly encouraged by the Government and local players have upped investment. Currently, juice drinks are the most consumed, but demand for 100% juice has gathered pace with the rising health trend. As 100% juice continues to be marketed as more nutritious than juice drinks this category is expected to overtake juice drinks in the short term.

Local manufacturers dominate the Saudi juice category. Together, Al Rabie AlSaudia Dairy Co., Almarai and Al Othman Agricultural & Processing Co. accounted for 46% of retail volume sales in the 100% juice category in 2007. Reasonable prices and good quality of domestic brands have made it difficult for imported brands to compete. That said, Danone managed to grow its retail sales of 100% juice from 6m litres in 2001 to 19m litres in 2007, suggesting there is potential for international players which have the right products and pricing structure.

Similarly, Israel has seen dynamic activity in the 100% juice category over the past few years. As Israel is a major fruit-growing nation, there is a large variety of high-quality fruit and vegetables available. Nevertheless, the unit price of 100% juice remains high compared to the average earnings and the main consumers are high and middle-income earners. Euromonitor International believes the relatively low per capita consumption of 4 litres represents a growth opportunity for juice makers.

By contrast, carbonates are expected to see slower sales growth in the region over the next few years. In Saudi Arabia, for example, carbonates are set to record a total volume CAGR of 4% between 2008 and 2012 in contrast to 5% for bottled water. Although government guidelines and restrictions are not as stringent as those found in some Western European markets, some countries have started to limit or ban sales of carbonates in schools. In Iran, for example, the Government started to ban the advertising of carbonates from late 2006.

Key players are expected to increase their efforts to sustain consumer interest and they are also expected to focus on the healthy side of their product lines such as diet cola and fruit carbonates. They will need to continue to invest significantly in marketing and above-the-line promotions but, looking forward, volume sales of carbonates are unlikely to register a decline in the short to medium-term.

PepsiCo and The Coca-Cola Company account for nearly 40% of soft drinks retail volume sales in the Middle East, and Saudi Arabia is the main geographical focus for both American giants. Aside from their core activities in carbonates, they are trying to break through in the bottled water category and both have achieved certain levels of success. However, they both remain rather weak in the juice category and may look to experiment with the juice drink versions of their respective Minute Maid and Tropicana brands in the Middle East, having achieved a certain degree of success in Asia.

Unlike their high-profile operations in Latin America and Asia Pacific, water giants Nestlé and Danone are minor players in the Middle East. While Danone's Evian is present in Saudi Arabia, its high retail price limits volumes, though sales are increasing slowly year on year.

Overall, prospects in the Middle East are good for the major multinationals. The on-trade channel, for example, is likely to offer potential for growth. Most Saudi consumers, as well as a good proportion of expatriates, have high levels of disposable income, which creates strong demand for soft drinks consumption in the foodservice channel. Additionally, Saudi Arabia is the number one tourist attraction for Muslims around the world because of the Hajj pilgrimages. The number of Saudis under the age of 30 will be around 20.3m by 2020, a potentially strong consumer base.

Nevertheless, multinationals face some challenges, including government initiatives designed to protect local companies and give them some competitive advantages. While multinationals lead the overall regional Middle Eastern soft drinks market, local players are strong in their own domestic markets. Some local players, such as Iranian Zamzam Beverage Co., are themselves also expanding internationally. Although the business environment in the Middle East remains complex, trade liberalisation is expected to continue which will benefit international players.

Saudi Arabia recently joined Dubai and Bahrain in allowing foreigners to invest directly in local companies through the stock exchange. Similarly, the Gulf Cooperation Council (GCC) is strengthening capital markets through modern laws and exchanges. The fact that Coca-Cola doubled its investment in Bahrain to US$10m in 2007 indicates that multinationals are wasting no time in further penetrating the region.