Vending Channel Sharpens Focus On Cold Drink Trends As Water Usurps Soda

Posted On: 7/3/2017

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TAGS: vending, bottled water sales, Beverage Marketing Corp., PepsiCo, Coca-Cola, , Cantaloupe Systems, Elyssa Allahyar-Steiner, soda sales, vending statistics, David Lothian, Pepsi Hello Goodness, Lifewtr, Scott Corley, countertop Freestyle machine, Michael C. Bellas

Bottled water overtook carbonated soft drinks in 2016 as the largest beverage category by volume in the United States, following a decade-long streak of staggering growth, according to the latest research from New York City's Beverage Marketing Corp. In vending, water does not hold the No. 1 spot for beverage giants PepsiCo and Coca-Cola, but it is a top-three seller for each. Vending executives from both companies say the historic milestone is just the latest indicator that the trend toward healthier, purer, natural beverages of all shapes and sizes is irreversible.

It's been no easy challenge for workplace refreshment providers to stay attuned to the ever-expanding array of new-age beverage choices and emerging categories. But those who continue to pay close attention to the macro trends and up-and-coming brands and categories are positioned to strike the right balance, including the tried-and-true top-brand sodas that still have a following, to satisfy today's masses.

Change Drivers

Millennial consumers are the driving force stimulating the monumental shift away from traditional soft drinks. But even more significant for vending, is that this generation of young professionals is coming aboard, joining the industry and taking on decision-making roles. They're taking a lead in accommodating the changing preferences of their own generation in vending and micromarkets without being restricted by prior assumptions, and they're inspiring others to follow suit.

Elyssa Allahyar-Steiner, Cantaloupe Systems
Elyssa Allahyar-Steiner

Elyssa Steiner, director of marketing for Cantaloupe Systems and chairperson of the National Automatic Merchandising Association's Emerging Leaders Network, observed that a key factor behind food and beverage choices for millennials is their concern about what they put into their bodies and where it comes from. They also are willing to spend more for "healthier" beverages and are conditioned to making cashless purchases.

"The vending industry has been very resistant to change. For generations, operators knew that Diet Coke and Coke and Pepsi and Mountain Dew always sold so they didn't look to change their offerings," Steiner remarked. "I'm a millennial and I don't drink soda; I primarily drink water and I'm surrounded by people in my age group who drink huge amounts of low-calorie or no-calorie sparkling waters, along with other healthier drinks like coconut water. If operators aren't carrying those types of beverages, especially in young, tech environments, they are missing a trend they should jump on."

At her previous marketing post at Avanti Markets (Tukwila, WA), Steiner said her best advice to micromarket operators was to people-watch at the stores, like Trader Joe's and Whole Foods, where the younger generation shops. "Vending and micromarket operators can learn a lot that way about different products that are not carried in vending and bring them in," she said. "Younger people in purchasing roles are getting creative when buying product. They know what they want so they know what their vending customers want."

Steiner added that millennials' affinity for technology and data is bringing more young software developers and analysts into the vending space, building upon an industry movement well under way to drill down deeper to demystify the beverages consumers want.

"Not only are millennials entering vending in general, but there are more young women coming in than ever before because the industry is embracing technology at a more rapid pace than ever, providing new kinds of jobs," Steiner pointed out. "They're analyzing consumer preferences and trends. Five years ago, you wouldn't see jobs like 'consumer insight specialist' and 'data analyst' in vending."

Steiner said NAMA's Emerging Leaders Network alone has 140 members, up from 90 a year ago, reflecting the influx of young professionals into the industry. The group is comprised of individuals under 40 years of age who are committed to developing a legacy of leadership.

New Generation, New Choices

vending, David Lothian, Pepsi
PepsiCo's David Lothian
David Lothian, PepsiCo's senior director of vending sales and strategy, said he has witnessed the millennial's growing presence in the industry. PepsiCo's top-selling beverages in vending by sales volume are Mountain Dew, Pepsi, Aquafina, Gatorade and Diet Pepsi. But even more significant, according to Lothian, is that its highest-growth brands are Gatorade and Mountain Dew Kickstart -- a "next generation" version of the popular soda that is lower in calories and contains real juice. Another fast-growing brand is Lipton Pure Leaf iced tea, introduced in 2005.

"The big macro drinks are stagnant and with the next-generation beverages, growth is only accelerating, and that's clear in vending and micromarkets," Lothian said. "It shows where consumers are moving. PepsiCo is innovating with lower calories, removing sugars. People are looking for real, natural and transparent labels, with ingredients they know and we're innovating with that in mind."

The drink manufacturer is not only attuned to what consumers are drinking, but is also on a mission to understand to where they are headed. "We have to get to what's next ahead of them before they do by continuing to diversify our portfolio," Lothian said.

Among its latest innovations is the Lifewtr brand, launched earlier this year. It's a premium purified water that is pH balanced with electrolytes. Its label is designed to captivate today's highly visual and novelty-focused consumers with designs by different artists that will change several times a year. Also new is Izze Fusions, a low-calorie sparkling beverage made with real juice, with only 60 calories per 12-fl.oz. can with no artificial sweeteners or flavors.

Other increasingly popular drinks in PepsiCo's expanding portfolio are its Stubborn craft soda made with real sugar and natural ingredients, functional KeVita Kombucha sparkling probiotic drink and Gatorade Organic.

"Consumers want premium drinks that are healthier and will pay a premium price," Lothian said. "Naked juice, for example, sells like crazy out of our Hello Goodness machines for $2.99 to $3.99."

Distinctive package designs and graphics help capture the devotion of today's consumers, according to Lothian. He said PepsiCo is making the necessary adjustments to ensure it can accommodate all shapes and sizes in vending machines.

Pure Leaf's square bottle design, for example, was difficult to vend from glassfront cold drink venders, so the company worked with machine manufacturers to make the necessary modifications. All new PepsiCo-branded machines since early 2015 now accommodate Pure Leaf and the company has been retrofitting legacy machines in the field for itself and third-party operators with a shelf devoted to Pure Leaf. Lothian said the brand remains a strong overall performer, and is especially solid in vending where PepsiCo products have gained greater market share in the glassfront machine category.

"We need flexibility in equipment to be ready for future demand and we're pushing manufacturers to think about innovation as much as we are," he said. "Our OEM partners need to push the envelope, and we do enough consumer research to help out."

PepsiCo's turnkey, high-profile answer to meeting the demands of a new generation in vending is its Hello Goodness machine, which includes dedicated beverage machines and snack and drink combination models that are merchandised exclusively with its products that meet the program's nutritional criteria. PepsiCo launched Hello Goodness in early in 2016 and has so far sold about 25,000 machines. The program is evolving with new products, vending equipment enhancements and micromarket solutions.

According to Lothian, the program's product array and better-for-you branding are bringing in new vending customers, and draw more visits from existing ones Participating vending operators say that Hello Goodness has helped win bids, especially in high schools, colleges and healthcare facilities.

Coming Down The Pike

At the National Automatic Merchandising Association's OneShow in Las Vegas, PepsiCo previewed a prototype of a machine concept dubbed "Hello Goodness Select." The next-generation machine is designed to further uplift the consumer experience. The machine's elevator delivery system serves a purchased beverage through a self-opening door positioned closer to waist level, compared to the traditional lower bins. It also has a larger touchscreen and enhanced user-interface than the original machine.

Hello Goodness Select, Pepsi, vending
MORE GOODNESS TO COME: Pictured here is a design rendering of PepsiCo's latest Hello Goodness vending machine suite. Hello Goodness Select uses a new product elevator that delivers a purchase to a waist-high self-opening door. Its larger touchscreen displays an enhanced user-interface. PepsiCo showed a prototype of Hello Goodness Select during April's NAMA OneShow.

"The goal is to continue to reinvent the experience for the consumer," Lothian said. "Our design team is working with a manufacturer on the concept, which is very early in the process."

Lothian said PepsiCo is considering developing a "category optimizer" tool that will provide planogramming guidance based on the products that are bestsellers in other retail channels in proximity of a vending machine's location.

"We see Hello Goodness sales numbers by item with Crane's Navigator [telemeter] built in," Lothian explained. "With other machines, we're blind to that information. How great would it be for one tool to tap into all c-stores and grocery stores in an area and inform us how well each of our products is selling around our machines at a micro level and then better tailor the machine assortment?"

Rival Coca-Cola Co. has developed new messaging -- including "Take a Better Break" and "Hydrate Your Day" -- for its vending machines and micromarket coolers that are merchandised exclusively with better-for-you beverages.

Coca-Cola, Scott Corley, vending
Coca-Cola's Scott Corley
Scott Corley, Coca-Cola's vice-president of foodservice on-premise and vending, emphasized that consumers have more than 800 Coca-Cola beverages from which to choose, 250 which are zero- or low-calorie options. In vending, its leading brands by sales volume are original Coke, Dasani, Sprite, Diet Coke and Coke Zero, according to Corley. Its fastest-growing brands are Monster energy drink, and interestingly, CSDs Sprite and Fanta, along with Smartwater. Minute Maid is also on the list, thanks to the recent launch of a sparkling variety.

"Water, coffee and energy drinks, teas and juices are all still going up," Corley said. "And our venturing and emerging brands test kitchen is always bringing new beverages to market."

Building upon Dasani's popularity and the explosive growth of bottled water in general, Coca-Cola introduced Dasani Sparkling in 20-fl.oz. bottle last summer and added a 12-fl.oz. slim can in early 2017. It is leveraging the powerful Dunkin' Donuts brand with its new ready-to-drink coffee that hit the market early this year. Yup! milk joined Coke's beverage menu in 2016 and has taken off in vending and micromarkets, according to Corley. It's shelf stable and available in chocolate, vanilla and strawberry. Honest Tea and Gold Peak tea also remain fast-selling favorites in the vending channel. In May, Minute Maid juices were made compliant with the American Beverage Association's voluntary school-friendly guidelines.

Reaping More Rewards

Coca-Cola's vending machines are equipped with new technologies. Most significant is the Coca-Cola Vending Pass, a new program that allows the company to fully integrate its My Coke Rewards loyalty program into consumers' Apple Pay or Android Pay digital wallets to create a frictionless experience.

Consumers who download and add Vending Pass to their mobile wallets earn credits each time they make a vending purchase using Apple Pay or Android Pay. After 10 purchases, they get a complimentary beverage. Patrons who have Apple Pay and Android Pay are prompted when they're in front of the machine to simply text "vend" to enroll in My Coke Rewards. If they're already enrolled, they touch the phone to the machine to make a purchase or redeem rewards.

Another technological leap for Coca-Cola is Bluetooth beacons in its vending machines. Beacons coupled with its loyalty program can "push" messages to consumers within 30 feet of a vending machine. For micromarkets, Coca-Cola is testing a Bluetooth controller that plugs into its coolers that lets it gather information from My Coke Rewards users' smartphones to relay messages that direct them to the cooler.

"It can send a message that says, 'John, are you ready for a break?' that pops up on their phone," Corley said. "Bluetooth gives it that push ability. Before it was only reactive when they paid at the machine."

Coca-Cola also designed a new single static cling that illustrates payment methods and loyalty options. "It's a cleaner, more targeted message that puts the payment, loyalty and choice message all together," Corley explained.

Corley said micromarket beverage sales are outpacing traditional vending volume, because of the variety the self-checkout stores can accommodate, the number of occasions employees visit them and the role beverages play as a complement to fresh meals. Micromarkets also benefit from being unrestricted by package formats, including premium glass bottles of Coke, which Corley said have been popular sellers.

Coca-Cola is also testing smaller-footprint countertop coolers in micromarkets, including a Dunkin' Donuts-branded one and another devoted to water and branded with messaging around the hydration need state. "It's a good way to test product and have it earn its way to a larger cooler," Corley said.

Coca-Cola has also had boosted bottled water sales in micromarkets by merchandising ambient Smart Water and Dasani on racks that employees bring back to their desks to consume at a later time.

vending, Coke, Scott Corley, Freestyle mini
DOWNSIZED: Coca-Cola's Scott Corley shows off small-footprint Freestyle fountain beverage machine for midsize restaurants and cafeterias at recent NAMA OneShow in Las Vegas. New compact model allows consumers to mix and match 60-plus drinks, compared with the 125 possibilities in original full-size Freestyle.

In other news, Coke is now offering a smaller-footprint Freestyle fountain beverage machine for midsize restaurants and cafeterias that allows consumers to mix and match 60 plus drinks, compared with 125 in its original, full-size machine.

The Big Beverage Picture

The overall U.S. liquid refreshment beverage market grew more quickly in 2016 than in 2015, which in turn saw acceleration over 2014's growth, according to New York City-based Beverage Marketing Corp. The market's performance was the strongest seen in several years, BMC reported. Beverage-specific factors, such as the growing bottled water segment, as well as more general ones, like the continuing economic recovery, contributed to the increase in liquid refreshment beverage volume, which reportedly approached 33 billion gallons in 2016.

Bottled water surpassed carbonated soft drinks to become the No. 1 beverage by volume, as the category's natural, calorie-free and convenient traits increasingly appeal to U.S. consumers. Pricing remained aggressive, which also contributed to bottled water's performance. Its growth accelerated, which is unusual for a category of its magnitude, BMC noted. Volume grew 8.6%.

Niche categories again outperformed many traditional mass-market categories, as has been the case for several years. Ready-to-drink coffee and value-added water advanced forcefully in 2016, BMC reported. Large, established segments such as carbonated soft drinks and fruit beverages remained level.

Value-added water outperformed all other segments with a 12.3% volume increase in 2016. However, the segment accounted for a tiny share of total liquid refreshment beverage volume -- less than 2% of all volume. It was the second smallest, ahead of only RTD coffee, which had the second-fastest growth rate of any segment in 2016. Energy drinks advanced by 4.8%, but remained modest in size. Despite their growth, no energy drink, RTD coffee or value-added water brand ranked among the leading trademarks by volume. No fruit beverage brand did either.

Gatorade (including all brand variations) was the sixth-largest liquid refreshment beverage trademark last year. Exceeding one billion gallons for the first time in 2011, Gatorade dipped below that level subsequently, returned to that level in 2015, and neared 1.1 billion gallons in 2016.

Although carbonated soft drinks slipped into second place, they continued to account for four of the five top beverage brands by liquid volume in 2016. Total category volume dipped by 0.8% from 12.6 billion gallons in 2015 to 12.5 billion gallons in 2016, which lowered their market share to less than 38%.

Coca-Cola and Pepsi-Cola retained their long-held first and second positions among the top 10 beverage trademarks in 2016. Mountain Dew and Dr Pepper ranked third and fourth, but only Dr Pepper grew. Seventh place Sprite also grew.

Bottled water had four entries among the leading trademarks in 2016. All of them grew, and three of them moved well in advance of the overall liquid refreshment beverage category, according to BMC. Four companies accounted for all of the leading refreshment beverage trademarks: Pepsi-Cola had four brands, Coca-Cola, three; Nestlé Waters North America, two; and Dr Pepper Snapple Group had one.

"The beverage industry has undergone a seismic shift," said Beverage Marketing Corp. chairman and chief executive Michael C. Bellas. "Bottled water's emergence as the No. 1 beverage type clearly signals a fundamental change in what consumers want from their beverages."

BMC beverage 2016 data