Vending operators who stay informed about the trends shaping the fast-changing beverage market can best position themselves for success in the largest segment of their businesses. Ross Colbert, global beverage strategist for Rabobank has wide-ranging global overviews and insight on the beverage category and the market forces affecting it. Rabobank is a global leader in food and agribusiness financing. Colbert recently discussed the application of trend information to the industry's ability to capture its share of the business with Vending Times.
"It's been the best of times and the worst of times for the beverage market," Colbert said. "It has weathered many headwinds, including volatility in the supply chain with higher input costs for key commodities." When he delivered his presentation in April, sugar prices had spiked 150% since 2008, corn prices had climbed 85%, and coffee prices had risen 42% since June 2010.
Packaging and distribution costs have also skyrocketed, with oil prices up 150% since January 2009 and aluminum costs up 25% since January 2010. "Juice pricing has also sent shockwaves through the beverage industry over the past year," said Colbert. "And we will continue to see volatility in input costs for the near term."
One of the biggest overarching trends in the global beverage market is that consumers are trading traditional carbonated soft drinks for "better for you" alternatives amid rising concerns over obesity. The wellness movement is fueling growth in ready-to-drink teas and waters, and as consumers seek more enhanced products with functional benefits, beverage companies are responding by increasing their use of fortifications such as vitamins, minerals, caffeine and antioxidants. Global beverage players also are meeting new consumer demands by introducing a tier of low- and mid-calorie beverages.
Another trend Colbert noted is growth in private-label beverages during the recession, due to their lower price point and increased consumer comfort with the category. "Pressure is being placed on pricing as discounters, club stores and national grocery chains gain market share, and large retailers are discovering the margin opportunity in private label," he said.
Colbert also cited the impact of the rise of both the Asian consumer and Asian beverage players. "There's two-way demand as Asian consumers look for new products and Asian companies enter Western markets," he said. "Asian players, like Suntory and Tata, are seeking to acquire recognizable Western brands to bring back to their home markets, and also are looking for platforms to enter Western markets."
The beverage expert also pointed out that the boundaries between beverage categories are blurring as many new products cross the lines between carbonates, juice, dairy and even alcoholic beverages.
Likewise, the steps in the supply chain are blurring as global beverage players seek to enhance efficiency by purchasing their bottlers, which Colbert referred to as "backward integration."
Another trend influencing consumers' choice of retail outlets for their beverages is their increasing comfort with retail formats that operate outside traditional stores. Colbert said "non-store" sales have been growing as a percentage of total retailing, from 5% in 2003 to 7% forecast for 2013, driven in large part by growth in Internet retailing.
On the downside, Colbert said vending by contrast has only limited potential to benefit from developments in other retailing channels, and sales in this channel are also being squeezed by competition from other forms of convenience retail and foodservice outlets. Colbert said the increased competition has resulted in vending's share of total retail sales falling below 1% in 2008, a trend that is forecast to continue.
Colbert estimated the global vending market at $64 billion, and said beverages represent more than half of vending sales at $34 billion, dominated by packaged drinks. "Unpackaged" drinks -- primarily hot beverages -- represent only $3.1 billion of total vended beverage sales, he added.
(The Vending Times 2011 Census of the Industry states that vended packaged cold drinks generated $23.7 billion in 2010, or 56.2% of sales; hot beverage vending accounted for $2.9 million and vended cup cold drinks represented $243.4 million.)
The beverage market analyst said global vending sales are dominated by three regional markets: Asia-Pacific, North America (has been static) and Western Europe (has declined slightly in recent years).
The influence of these three large blocs is declining, but very slowly, from 96% of global sales in 2003 to a projected 92% in 2013. Growth in the immediate future will be limited, Colbert predicted, and will be driven by smaller, emerging regional markets, particularly Eastern Europe and Latin America.
"Lack of suitable locations, low-value coin denominations and strong competition from convenience retail and informal sellers act as constraints," the global markets expert explained.
A principal factor slowing global vending growth is the shift to global urbanization. Colbert explained that the proportion of the global population living in cities has been rising steadily, and in 2007, urban inhabitants outnumbered those in rural areas for the first time. As urbanization rises, it puts additional pressure on rural vending to find ways to become more cost-effective in order to survive.
"Rural vending could become more economically viable as telemetrics enable greater operational efficiency," said Colbert. "This will give vending the potential to offset the decline of rural retail outlets, such as post offices and small independent stores."
Vending accounted for 0.6% of the $11 trillion global retail market in 2008, according to Colbert. "The worldwide vending market experienced solid growth in the early part of the 2003 to 2008 period, but decline in the important tobacco products category meant that, by 2008, global sales volume had returned to 2003 levels," he noted.
Colbert said global vending sales are expected to continue falling through 2013, as the economic slowdown affects impulse purchasing in a number of key markets, and tobacco products vending is hit as more national smoking bans come into force.
Packaged drinks is the largest product category within vending, and its importance is rising. The category represented 43% of global vending sales in 2003, and since has risen to nearly 50%; the trend is forecast to continue until packaged drinks sales account for more than half the market. However, Colbert forecast growth in packaged drinks in vending to slow through 2013, reflecting low growth in major markets and a downturn in sales of carbonated beverages.
Keying in on the global opportunities for vending, Colbert observed that per capita spending for vended packaged drinks has scope for growth in a number of emerging regions, particularly Eastern Europe. "The fast-growing Latin American market is also noticeably underserved in terms of packaged drinks vending," he added. "However, because of the dominance of packaged drinks in the Japanese market, Asia Pacific sees a disproportionate amount of soft drinks sales generated through vending."
In North America, per capita spending on packaged drinks is expected to plateau in 2013 at an average $525 per person per year, according to Colbert. In vending, the projection for per capita spending for 2013 is $26 or $27, down slightly from 2008.
"Spending on packaged drinks in vending is a very low fraction of the whole category in North America," observed Colbert. "The upside is a big growth opportunity."
COFFEE VENDING GROWTH
Colbert said unpackaged drinks -- primarily hot beverages -- are forecast to climb 3% in value over the 2008 to 2013 period, the strongest growth among vending categories. One driver is the growing "premiumization" trend as vended coffee has become more upscale and consumers take notice and approve, and another is increasing penetration of emerging markets.
Unpackaged drinks (typically, drinks delivered in disposable cups) is one of the smaller product categories in public vending -- projected to represent 9% of the category by 2013 -- but the large number of machines in closed environments such as offices ensures a steady flow of R&D within the category, according to Colbert.
Total coffee vending sales are growing strongly in emerging markets, Colbert reported. The fastest-growing among them are Argentina, Thailand, Russia and Ukraine. He projected that, in 2012 and 2013, developing regions will drive coffee sales; Asia-Pacific, Latin America and Eastern Europe are forecast to account for nearly 70% of global value growth.
He predicted that Russia will be the most dynamic market through 2013 as Russians are developing a taste for coffee instead of tea. This is demonstrated by a sharp rise in the number of specialty coffee shops in that nation.
"Within more developed markets, premiumization has helped to drive sales within key coffee-drinking nations such as the U.S. and Italy," said Colbert. "Key coffee brands -- Starbucks in the U.S. and Lavazza in Italy -- have begun building presence in the vending market, signaling vending's improved image. The quality of coffee through vending has improved, and consumers are discovering it."
Demonstrating strong demand for packaged beverages, c-stores saw volume rise 4% in 2011, while dollar volume climbed 2% to 3%. "In c-stores, packaged beverage volume and value are up, which has a lot to do with lower gas prices. People are traveling more, so there's more velocity in c-stores," the global markets expert said.
In c-stores, sports and energy drinks were the two big winners in 2011, with volume up 13.8% and 16.1%, respectively. Both categories will continue to drive sales moving ahead, Colbert predicted.
He explained that sports drink growth was largely driven by Pepsi's success in repositioning Gatorade as a performance beverage and breaking the line into the "G Series," offering pre-, during and post-workout formulations. "Gatorade suffered from the perception that it was just a refreshment beverage, but Pepsi was successful at repositioning it as a line of performance beverages and bringing back its core users," Colbert noted.
Monster, Red Bull and Full Throttle accounted for most of the energy drink volume in c-stores in 2011, he added.
Carbonated soft drink volume, which has been slipping in c-stores in recent years, dipped 0.7% in 2011, as consumers pushed back against Coke and Pepsi raising prices an average 2.8%.
"Volume-wise, Coke, Pepsi and Mountain Dew are still doing well, holding the top spots in c-stores as far as volume, but Red Bull was the winner in 20011 as far as dollar sales," said Colbert.
Ready-to-drink tea volume grew 8% to 9% in 2011; Colbert cited Brisk and AriZona as two of the fastest sellers. He also predicted that Coke's Fuze will have a stronger presence in the vending channel, now that the company has ended its joint venture with Nestea and will put more emphasis behind the tea and vitamin-enriched noncarbonated fruit drink brand.
"The message to vending operators is that they need to consider offering these drinks in the vending mix," said Colbert. "Tea is increasingly perceived as a health and wellness product by a wide demographic. Zero calorie is important; Vitaminwater Zero is hugely successful for Coke largely because it is zero calories."
He emphasized that vending is well-positioned to exploit the continued growth of energy and sports drinks, and added that another beverage to add to the vending mix is coconut water (particularly the Vita Cocoa brand), because this beverage is becoming more mainstream.
Colbert also cited growth in bottled water in 2011, following declines in 2009 and 2010, and said the upward trend is forecast to continue in 2012. The category has, however, hit a headwind in colleges and universities, with 70 or 80 of them to date banning single-serve bottles due to concern over their environmental impact.
"Overall, that won't have a big impact in retail," said the beverage expert. "But in vending, it may be more pronounced, since operators serve college campuses -- and the trend will surface in corporate settings as well, because of the perception that bottled water is not 'sustainable.' Coke and Pepsi are repositioning with bottles made of plant-based materials that are fully recyclable, which is helping."
Colbert cited SandenVendo's Pouchlink machine, designed to deliver popular high-juice-content and flavored water beverages to consumers in flexible, re-closable squeeze pouches made of 100% recyclable material, as an appealing solution for locations seeking sustainable solutions. He also noted that the vender, which uses concentrates supplied in bag-in-box containers and fills and seals a pouch on demand, enables a lower cost of drinks, higher margins and lower service overhead.
Colbert stressed that vending operators must exert control over the beverage category by choosing the right locations, the right equipment and the right product at the right price.
"Consumers want choice; they're spoiled by having lots of choices available," said Colbert. Not only are more and more packaged beverage varieties entering the market, but Coca-Cola's Freestyle fountain machine, which offers consumers 100 customizable drink selections, is conditioning foodservice and c-store customers to expect more choices. And PepsiCo has a competing system in the works, according to Colbert.
"The challenge as a vending operator is to make sure you have the right choices and selections for the location demographic, whether it's an office, factory, school, airport. It's not one size fits all," he advised. "Operators need to do their homework, understand their consumers and what they're willing to spend, and act on that."
One certain trend to follow is to offer more "healthy" or functional drink options as the popularity of carbonates declines. Colbert also emphasized that consumers respond to both value and premiumization, which often play upon one another. "Many will buy 'value,' and occasionally trade up to reward themselves with a premium beverage," he noted. "Vending operators have to offer a spectrum of products and prices."
He stressed that if consumers are predisposed to using a card, vending operators must acknowledge that, just as c-stores do, and offer a cashless payment option. "Consumers are not carrying lots of cash, especially smaller bills, so recyclers are also important," he pointed out. "And if it's in a family setting where they may buy multiple vends, like an amusement park or a bowling alley, you need to have credit card readers to simplify the process of making multiple purchases."
Colbert recognized the up-and-coming micromarket model as an appealing way to offer more choice and bring the c-store shopping experience to their customers in their workplaces. "Since you can offer more beverages, and more choices, you can increase the number of price points, and charge more," he commented.
The beverage expert's final word of advice to vendors was to maximize their success with beverages by leveraging new technologies that allow them to analyze sales, product by product, optimize space to sales, minimize out-of-stocks, manage inventory better and run more efficient routes.