By: Chuck Ulie | March 20, 2023
Remarkable price increases driven by inflation were the name of the game in beverages in 2022, helping categories that were soft in volume, such as carbonated soft drinks (CSDs), to grow in revenue. Entering the year, inflationary pressures drove price increases to levels two times that of those in the previous two years.
Here’s a look at where the major segments of the category stand today.
The Big Picture
Remarkable price increases driven by inflation were the name of the game in beverages in 2022, helping categories that were soft in volume, such as carbonated soft drinks (CSDs), to grow in revenue, said Gary Hemphill.
The managing director and chief operating office of the Beverage Marketing Corp., Wintersville, Ohio, said another reason for higher prices is there are fewer price promotions, which in CSDs particularly have been used historically as an effective way to move volume. However, as the cost of ingredients and labor have increased, companies have cut back on price promotions, “which averages out to even higher prices still,” Hemphill said.
Entering 2022, inflationary pressures drove price increases to levels two times that of those in 2020 and 2021, said Sally Lyons Wyatt, executive vice president and practice leader for Chicago-based IRI.
“In ’20 and ’21, the average was around a 6% price increase,” she said. “In ’22, pricing for packaged beverages jumped to 13% per unit on average. That level of price increase slowed down our unit volume demand and we’re seeing unit sales turn more negative for the first time in three years.”
For example, energy drinks, aseptic juices and plant-based milk were among the few nonalcohol segments that showed unit growth in 2022 in convenience stores, according to IRI. In alcohol, spirits showed unit growth while beer, table wine and sparkling wine/champagne sunk. When it comes to dollar sales; however, most segments grew.
The mass market, tried-and-true categories—like CSDs, milk and juice —are struggling in the overall beverage market, Hemphill said. Those segments have taken a backseat to segments like bottled water, energy drinks, sports drinks and RTD coffee, he said.
“We’re continuing to see overall market improvement coming out of COVID,” Hemphill said. “It’s more limited with c-stores.”
Bill Nolan, a partner with the Phoenix-based Business Accelerator Team, said unit growth in certain cold vault subcategories is very good news considering a declining c-store customer count versus pre-COVID conditions. Customers are down, he said, due to the pandemic’s stay-at-home effect and inflation belt-tightening.
“For the last two years, if you’re holding flat on your customer count, you’re doing better than most,” said Nolan, who worked for 30 years at Irving, Texas-based 7-Eleven in management and for eight years as vice president of marketing at Family Express, Valparaiso, Indiana . “The fact that the cold box is still generating sales and unit increases in a few of the key subcategories amongst this customer count decline is a very good thing. It shows the cold box continues to be one of the industry’s core strengths.”
Keeping the cold vault organized with today’s proliferation of flavors has been a challenge of late for Jeff Taylor, director of stores, Last Minit Mart, New Castle, Pennsylvania, which has six locations. Taylor said with manufacturers trying to cater to everybody, displaying the array of flavors becomes tricky.
More flavors to display means fewer facings in the cold vault for each flavor, which requires restocking more often. And while he wants to offer customers variety, innovation and new flavors, when a flavor is less than 1% of sales, he might let it fade away.
Typically, he said, a retailer wants to turn inventory at least monthly. “If you have $100,000 in sales, you don’t want inventory of retail value more than $100,000 in your store,” he said. However, the wide flavor variety means Taylor must carry a higher value of inventory compared to sales, meaning he isn’t getting the turns he would like.
Carbonated Soft Drinks Lag
Fewer people going out during the pandemic affected c-stores, Hemphill said, leading to a big drop in CSD sales in 2020, the 16th straight year of declines. In 2021, “People started going back into convenience stores, so the overall performance improved, but it’s a little bit artificial” because it had plummeted so badly in 2020, Hemphill said.
In 2022, CSDs grew 7.6% in dollar sales but fell 2.7% in unit sales, according to IRI. The increase in 2021, the first in 17 years, was helped by restaurants reopening, he adds.
The unit-sales decline in CSD sales is for two reasons, he said: consumers seeking a healthier refreshment and variety. “Because some of these smaller niche categories are growing, people are sometimes choosing those over carbonated soft drinks,” he said.
Lyons Wyatt said consumers are shifting from traditional pack types—12-ounce (still the largest share), 12-packs and 2-liter—to the 7.5-ounce mini cans and 16.9 half-liter 6-pack configurations, which have sustained the highest compounded annual growth rate. “Trends show that the club-pack offerings are providing better value to consumers, and they’re really doing better than the old-fashioned ones,” she said.
Bottled Water Healthy
Bottled water is a remarkable category, Hemphill said, that segments a variety of ways. Of most interest to c-stores is the single-serve clear plastic bottle of still water, which is about 70% of the total bottled water category on volume and is the biggest growth driver.
“It started to slow because it’s so big, and pricing is going up there, too, which could be impacting the growth of the category,” he adds. “But we continue to see healthy performance there because it’s a very well-positioned product.”
Sparkling water, which showed double-digit growth for several years, has hit a wall, Hemphill said. “That (slowdown) is maybe the biggest surprise in bottled water,” he said.
Energy Drinks Vibrant
Energy drinks are the best-performing category for two reasons, Lyons Wyatt said. First, prices haven’t risen as much compared with other categories, and second, it’s popular with the “home-centric life we have, and people going back to work are looking for a little boost.”
Regarding prices, Lyons Wyatt said she has seen not only energy but any category holding prices steady “getting a lot of bang for their buck” from consumers seeking savings.
Lyons Wyatt adds that she’s seeing more category blurring. “There’s this move toward physical and mental health supplement with C4, which is energy and hydration, and the Starbucks Baya, which is coffee fruit-based energy,” she said. “There’s Bang, which has creatine. And they’ve all launched successful innovations that still have energy and stimulation but with performance-based attributes.”
Hemphill adds that about half of energy drink volume is via c-store sales, a “vital channel” for this category. “As goes the performance of c-stores, so goes the performance a lot of times of energy drinks,” he said.
Recently, however, Hemphill said more competitors have entered the market, some championing healthier, premium products.
“While there is innovation, the tried-and-true brands have introduced line extensions that have also helped,” Hemphill said.
Monster and Red Bull dominate, with Rockstar a distant third but also a significant player, he said.
Sports Drinks Sustain
This category is experiencing a similar dynamic to energy: fairly concentrated with leaders—Gatorade, Powerade—at the top but new players like Body Armor entering the market, Hemphill said. “Because of innovation and newcomers, and strong demand just for sports drinks, you’re seeing fairly healthy performance there,” he said.
Milk and Juice Challenged
Milk and juice have underperformed in recent years.
“Milk is a challenging category because you have a lot of competition with the dairy alternatives like almond milk and oat milk and others,” Hemphill said. “On the juice side, the difficulty has been the high sugar and caloric content of the products…. Also, juice was an expensive product that’s gotten only more expensive.”
Nolan said grocery stores are taking over the milk industry because of the cost of goods. “But (c-stores) still have to stay in stock and be ready for it,” he said.
CBD Drinks Vary
CBD drinks are a “challenging environment,” Hemphill said. “It’s a bit of a patchwork situation because most of the regulatory rules and laws are taking place at the state level.”
“I think the marketplace is waiting for more clarity federally before we see it developed in a bigger way,” he added. “There’s an opportunity there, but it tends to be niche, and it tends to vary widely depending on the state you’re in.”
CSP sister research firm Technomic shows CBD beverage market penetration tripling from the 2018’s fourth quarter to 2022’s third quarter, from 0.1% to 0.3%. In addition, cannabis beverages are projected to grow in the U.S. from $1.2 billion in 2023 to $5.9 billion by 2033, according to Future Market Insights Inc., Newark, Delaware.
Hard seltzers and ready-to-drink alcohol cocktails are what’s growing in alcohol, Hemphill said.
Hard seltzers, however, have slowed in 2022 and have taken “a bit of backseat to other alcohol alternatives like spirit cocktails.”
Jon Berg, vice president of beverage alcohol thought leadership at NielsenIQ, Chicago, said there’s been a “seismic shift” in the ready-to-drink segment. “And whether it’s a new flavor or a functional beverage difference, all of those things really hit a fever pitch during 2022,” he said, adding the intense shortening of product life cycles has been the biggest issue.
A shortened life cycle can be due to distribution issues or lack of shelf space, he adds. Another reason is many suppliers test a new product in a select location, then roll it out wider or pull it back to “retool and come up with a different idea,” he said.
On the heels of RTD growth is the non-alcohol trend, Berg adds: “That has been really interesting to watch and see who has gravitated to those products.”
In recent years, spirits have done a “premiumization escalation,” Berg adds, and tequila is the most important growth area in RTD alcohol. Tequila, he said, “lends itself to (premiumization) because it has blanco, anejo, reposado variants, which come through aging, and consumers are gravitating toward that.
However, a retailer must be licensed to sell tequila, a significant restriction, Berg said.
Wine under $10, meanwhile, has encountered the biggest headwinds, Berg adds. “A lot of those shoppers who were buying inexpensive wine are now either buying ready-to-drink products or going back to craft beer as part of their repertoire,” he said.
To stay competitive in beverages, c-stores should determine if they have the right product mix for immediate consumption and bigger sizes for the take-home consumer, Lyons Wyatt said. Consider promotions and deals to boost sales—and ensure consumers are informed. “Use digital signage, some of the apps, things like that,” she said.
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