The cutback in domestic tourism caused by this year's SARS outbreak will have a detrimental effect on the Chinese soft drinks market but the category will still continue to grow at a rate faster than that for all commercial beverages, says a new report.

Soft drinks are now one of China's quickest growing categories, according to industry analysts Canadean, and their growth from 12% of total beverage volumes a decade ago to a predicted 19% this year is attributed to rising disposable incomes and increasing health awareness among consumers. It is also attributed to a positive attitude towards producers from the government.

Soft drinks volume grew at twice the rate of all commercial beverages last year with an increase of almost 10%, mainly driven by packaged water, fruit based still drinks and iced/RTD tea drinks. Packaged water, the market's largest sector, has shown consistent double-digit growth over the last decade although this is expected to falter somewhat this year owing to SARS. However, the longer-term outlook is for further expansion as many of the major multi-nationals are now involved, and sales, which are currently made mainly through groceries, are increasingly transferring to convenience stores and supermarkets due to the popularity of large volume packs.

The 14% growth in still drinks sales during 2002 is attributed to the growth of brands like President, Mr Kon and Coca-Cola's new introduction, Qoo, which generated a like for orange flavours within the sector. A further 12% rise is expected this year, after launches of fruit drinks by the major players. Ironically the SARS outbreak and its impact on general health consciousness could boost sales.

The same cannot be said for iced tea where an apparently healthy 18% growth rate predicted for this year covers the fact that the sector is already under fire from still drinks and expected to suffer further from the dent to tourism dealt by the epidemic. Longer-term health concerns have also caused a serious slow down in what was until last year the largest sector: carbonates. This has now been beaten into second place, partly by consumers' perception of packaged water as more beneficial, and partly by the saturation of urban markets.

While the Chinese market remains fragmented, say Canadean, there is a trend to consolidate among producers, with the top ten leading companies now holding more than half of sales. Most of the leaders are either multinationals, local firms who have joined forces with foreign companies, or Taiwanese. International players are expected to increase their participation after the recent ending of a government obligation, which required them to develop local brands within a fixed time frame.

Consolidation also characterises distribution. Convenience stores, small grocers and kiosks may amount to around 95% of retail outlets with a considerable level of soft drinks sales, but hypermarkets and supermarkets are becoming increasingly widespread, helping erode the share of traditional retailers.