Carbonated Soft Drinks. Executive Summary UK June 2011

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2 Jonny Forsyth Senior Drinks Analyst The market has been helped by a number of levers: people are drinking less alcohol meaning that soft drinks as a whole have been gaining in share of throat ; the British climate has improved since 2000 creating a greater demand for refreshing drinks; people have become less concerned about being healthy since the economic downturn; and the product is more competitively priced than all its competitors but for bottled water (which is available for free at home, so hardly a like-forlike comparison). 1

3 Market value ( m) Carbonated Soft Drinks The Market FIGURE 1: MARKET SIZE AND FORECAST FOR VALUE SALES OF CARBONATED SOFT DRINKS, ,000 6,000 5,000 4,000 ( m) 4,448 Best case ( m) 5,929 Mintel forecast ( m) 5,214 Worst case ( m) 4,499 3,000 2,000 1,000 Confidence intervals Est. Actual Forecast 95% 90% 70% 50% SOURCE: SYMPHONYIRI GROUP/MINTEL ESTIMATE Since 2006, the carbonated soft drinks market has shown all the signs of being mature, with volume sales remaining constant over this period. The market does, however, remain a huge revenue driver: worth 4.45 billion in Mintel forecasts that helped by its value indulgence proposition, strong branding and the increasing popularity of low-calorie variants the market will see an improved performance over the next five years, with volume sales increasing by 8%. A problem for the market is its huge reliance on the take-home channel (88% of total volume sales) and in particular the major multiples (80% of take-home volume sales). This has meant that over the past ten years, prices of carbonated soft drinks have grown considerably below the rate of inflation and subsequently of other goods. With inflation currently running high and the cost of raw materials increasing significantly, the bigger brands such as Coca-Cola and Pepsi have become more aggressive in pushing higher prices. However, although Mintel forecasts the market will grow by 17% in value sales between 2011 and 2016, the expected high levels of inflation mean that in real terms the market will actually shrink by 4%, putting further pressure on margins. The on-trade is a growing opportunity for the market as pubs become more food-oriented and as people increasingly look for alternatives to alcohol when out in licensed premises, be it bars or restaurants. As a result, volume sales in the on-premise channel will reverse the decline seen from , with Mintel forecasting a 7% increase in volume sales between 2011 and

4 Low-calorie carbonated soft drinks rather than standard variants are now the key drivers of sales, having increased by 21% in value sales between 2008 and 2010, with value sales rising to over 1 billion. Market Factors A key challenge for the market is the rising costs of raw goods such as sugar, something which has meant that in 2010 carbonated soft drinks (as with soft drinks as a whole) saw their largest price increase in over a decade (7 pence per litre sold). While its cheap price point has helped the market to perform well during the economic downturn, it has also commoditised the category and diluted the brand equity built up though significant levels of marketing activity. Figure 2: Trends in yearly price inflation (RPI) changes for UK soft drinks compared to all items, throat ; the British climate has improved since 2000 creating a greater demand for refreshing drinks; people have become less concerned about being healthy since the economic downturn; and the product is more competitively priced than all its competitors but for bottled water (which is available for free at home, so hardly a like-for-like comparison). The combination of high inflation and low wage rises has meant that UK consumers are more cashsqueezed than at any time since the onset of the economic downturn, meaning discretionary spend is becoming even more constricted. However, Mintel s research shows that carbonated soft drinks have been less impacted than more expensive luxuries among both adults and kids. Ethical branding remains key and is an area that the large carbonated multinationals need to continue developing. Consumers may not be the best role models themselves when it comes to being green and/or ethical but they increasingly expect companies to do the legwork for them. Companies, Brand and Innovation Coca-Cola dominates the market in sales. Not only does it command three and a half times the value sales of nearest rival Pepsi in the take-home market, but it also scores significantly higher among consumers on the key brand dimensions: trust and differentiation. Source: Office for National Statistics/Mintel The market has been helped by a number of levers: people are drinking less alcohol meaning that soft drinks as a whole have been gaining in share of This is unsurprising given its huge levels of marketing spend. Not only are Coca-Cola products more discounted in supermarkets than any other soft drink brands, but Diet Coke and Original Coke alone have invested 45 million in above-the-line spending in the carbonated soft drinks market in the past three years, more than whole competitive sectors such as bottled water. 3

5 Figure 3: UK take-home brand share of the carbonated soft drinks market, 2010 counting combined with the popularity of the taste of low-calorie colas. While more people drink low-calorie colas (46%) than standard (40%), the reverse is true for low-calorie fruit-flavoured carbonates (26%) versus standard versions (32%). The core consumer of low-calorie carbonates is year-old female consumers. In contrast, standard versions have a core target audience of year-old men. Source: SymphonyIRI Group/Mintel estimate The story is very different in the on-premise channel where Pepsi has caught up with Coca-Cola in terms of sales, helped by Britvic s excellent on-trade distribution network. However, this market represents just 12.2% of all volume sales in the market. Pepsi Max has, however, breathed new life into its parent brand, providing Pepsi with TV support after some years of abstinence in this medium. Coke Zero is struggling to have the same impact and has launched an ad offensive to steal share of year-old males from its rival. In-home usage of carbonated soft drinks dominates, with people twice as likely to buy the product to drink at home as for when outdoors and/or out and about. Given that UK consumers have one of the longest commutes in Europe and young people spend much of their time out and about, on-the-go occasions are an area that can be targeted much more efficiently, in the same way as bottled water has achieved. Another opportunity is to increase consumption at work. Currently only 28% buy carbonated soft drinks to drink at this location but there are currently 31.8 million workers in the UK and the majority of them spend more time at work than anywhere else during the week, and are often keen for small indulgences which break up the day. Own-label has seen a 7.6% decline in take-home value sales over the past three years, reflecting how consumers have been particularly drawn towards brands they see as a guarantee of quality during the economic downturn and the fact that the product is so affordable that it is difficult to undercut. The Consumer Mintel s research shows that, despite low-calorie versions selling less than standard carbonated soft drinks, penetration-wise this segment has now overtaken standard (52% versus 51%). This is a reflection of the increasing trend towards calorie 4

6 Figure 4: Occasions people buy carbonated soft drinks for, April 2011 Base: 1,270 internet users aged 16+ who have bought carbonated soft drinks in the last 12 months Source: Toluna/Mintel While drinkers of carbonated soft drinks seem unbothered whether the product is unhealthy, they are increasingly intolerant of high calorie content, with 45% more likely to consider drinking low/no-calorie versions of carbonated soft drinks than a year ago. This is a market where 47% of people place more trust in big and well-established rather than niche brands which suggests that brand extensions are key to maximising revenues and smaller, niche brands and new entrants have their work cut out. What we think It is vital that the market develops other revenue channels to offset its current over-reliance on multiples, where price is hard to move and brand equity is vulnerable to commoditisation. As well as continuing to invest and develop its on-trade proposition, this means growing distribution through vending machines and online/digital shopping. It is surprising that more people do not buy carbonated soft drinks to drink on the go, which seems a perfect environment for a cheap, portable and in the case of colas an energy-boosting product. Perhaps consumers need to be convinced or reminded of the benefits and fun in consuming these drinks on the go and the results also suggest a need for more touch points for the consumer to buy or be reminded to buy carbonated soft drinks when out of home. Coca-Cola has such dominance of the carbonated soft drinks market that, Pepsi aside, brands need to offer something different and target a different type of consumer to succeed. Premium soft drink brands such as Bottlegreen and Fentimans have done this really well: while they may be carbonated, they are packaged in a much more upmarket way, and their lack of artificial ingredients means they appeal to a different and more upmarket consumer/occasion. People may have limited discretionary spend at the moment but you only have to look at the current success of iphones (penetration is up from 9% in April 2009 to 28% in October 2010; see Mobile Phones and Network Providers UK, January 2011) despite a standard monthly contract starting at 35 per month to see that people are still prepared to pay more for premium items that offer them something above and beyond what they have. The market needs to innovate more to keep its young consumer base engaged. For example, the spirits and cider sectors are constantly having to evolve, particularly around flavour but also packaging to keep young (18-34-year-old) drinkers coming back for more. Yet, examples of limited edition bottles and flavours of carbonated soft drinks are the exception rather than the norm. 5

7 Jonny Forsyth Senior Drinks Analyst Telephone +44 (0) Jonny is responsible for writing all of Mintel s UK drinks reports. He has a BA in Psychology and an MSc in Occupational Psychology. Before joining Mintel in 2007, Jonny worked as a market analyst at the Daily Mirror, a media planner at Starcom and completed a five-month secondment to Inbev (now AB-Inbev) as Assistant Brand Manager of Stella Artois. 6