Carbonates hold untapped opportunities for global growth
While carbonates volume is increasing, the issue is that the category is not keeping pace with total soft drinks growth. Globally, from 2004 to 2009 carbonates had a CAGR of 1.5% vs. 4.0% for fruit/vegetable juice and 6.9% for bottled water. For the forecast period of 2009-2014, carbonates is projected to have a 1.1% CAGR vs. 5.2% for fruit/vegetable juice and 3.9% for bottled water.
A key question for the carbonates is: Is it destined to lose share to other soft drinks categories or are there untapped opportunities for growth?
This article will examine potential untapped opportunities.
Setting the global stage
We start by looking broadly at global consumer drinking habits of packaged drinks.
By taking 2.2 litres a day as a conservative estimate of the per capita recommended liquid intake, we build up a picture of how the world drinks, past, present and future. We track the contribution of branded packaged beverages as a share of total liquid consumption. We assume the balance consists of tap water.
Packaged drinks appear saturated in the developed markets of North America, Western Europe and Australasia. Their share of total beverage consumption has levelled off and is projected to decline to 2014.
Consumption of soft drinks in the developing markets of Latin America and Eastern Europe is about 70% of developed market per capita consumption but hot drinks is only 50%. However, soft drinks, in particular, are projected to have significant volume growth from 2009 to 2014 (growing by 15% over this period).
The untapped markets of Asia-Pacific and Mid East-Africa have vast potential for growth since packaged beverage volume consists of only 10% of total beverage needs in 2009.
One of the biggest limiting factors to packaged beverage consumption in the untapped markets is low income levels. In 2009, per capital disposable income levels in the untapped of Asia-Pacific and Mid East/Africa markets is only 8% of the developed markets. The fastest growing untapped markets, with projected CAGR’s of 6.5% or greater from 2009 to 2014 are China, India, Vietnam, Egypt and Morocco.
The teen market is a key consumer base for soft drinks and any beverage product with a fun profile. In the untapped and developing markets, more important than increasing population size is increasing purchasing power. In these markets, although the teen population is not growing, the key issue is that these are unsaturated markets with increasing disposable income.
The overarching macro trends of market saturation, disposable income growth and target population size and trend must have a significant impact on any successful carbonates global growth strategy.
For the forecast period of 2009-2014, carbonates is projected to have a 1.1% CAGR vs. 5.2% for fruit/vegetable juice and 3.9% for bottled water.
Potential opportunity in the untapped regions of Asia-Pacific and Mid East/Africa
Not surprisingly due to the underlying macro economic trends, the categories experiencing the fastest growth, both historically and forecasted through 2014 are in the untapped markets followed by the developing markets. However, carbonates is losing share of throat in these regions since both bottled water and fruit/vegetable juice are growing at a faster rate. In fact, the only carbonates category in these two areas outpacing soft drinks growth is the smallest category in the developing markets, low calorie colas.
Given the relatively low per capita consumption, particularly in the untapped markets, the challenge for carbonates is to capture a greater percentage of new soft drinks purchases than has happened.
In untapped markets, carbonates is not keeping pace with category growth. From 2004 to 2009 carbonates compound annual growth rate (CAGR) is 4.3% vs. 9.5% for bottled water and 9.9% for fruit/vegetable juice.
Both Coca-Cola and PepsiCo have a higher volume share of carbonates in the untapped markets than their global shares. Although both beverage giants have taken the lead in carbonates in the untapped markets, the carbonates category is not keeping pace with soft drinks growth. If carbonates growth had kept pace with overall soft drinks growth over this time period, this would have generated an incremental 21 billion litres between 2004 and 2009.
Given the large teen population and increasing disposable incomes, there seems to be significant volume growth opportunity for carbonates in the untapped markets. While it might be more expensive for second tier companies to develop the infrastructure that Coca-Cola and PepsiCo have, the volume opportunity could justify that expense. The question becomes what carbonates category to focus on and where to focus.
Lemon-Lime is a key focus category
Although lemon-lime is smaller than regular cola, it is growing at a faster pace; having a 6.5% CAGR from 2004 to 2009 vs. 3.4% for regular cola. Lemon-Lime seems to be a good focus area to try to increase the rate of carbonates growth since it is the fastest growing carbonates segment. Based on per capita consumption patterns, many key markets in Asia-Pacific and Mid East/Africa have a taste preference for lemon-lime. The countries driving this taste preference are China, India, Indonesia, Philippines, Vietnam, Algeria, Egypt, Morocco, Saudi Arabia and UAE.
Although lemon-lime is the fastest growing carbonates from 2004 to 2009, it still did not grow as fast as total soft drinks. China is the only major untapped market where lemon-lime kept pace with soft drinks growth from 2004 (with a 13.1% CAGR vs. 12.3% for total soft drinks).
In the untapped regions, Sprite is by far the brand leader with a 49.1% share in 2009 based on volume, having more than double the share of the next closest brand 7UP from PepsiCo with 20.2% share. Since 2004, Sprite has gained 7.2pp in share. The majority of Sprite’s success is due to gains in China. In China Sprite has a 72.7% volume share which is +10.4pp vs. 2004 but only +0.4pp vs. 2008. Since 2004 China has accounted for over 80% of Sprite’s volume growth in the untapped markets.
On a region level Mitsuya (from Asahi Breweries Ltd.) is the #3 brand (with a 4.3% volume share) and Chilsung Cider (from Lotte Group) is the #4 brand (with a 2.5% volume share). They each have low shares in the market group because of limited distribution. Mitsuya is distributed only in Japan where it is the #1 brand, with a 40.8% volume share +10pp vs. 2004 Chilsung Cider is distributed only in South Korea where it also is the #1 brand, with a commanding and stable 77.2% volume share.
Potential implications for carbonates
There may be significant volume opportunity in the future by carbonates capturing its fair share of incremental packaged drinks consumption as increasingly affluent consumers drink less tap water in the untapped regions. In this region, carbonates growing at the same rate as total soft drinks from 2004 to 2009, would have generated an incremental 21 billion litres to carbonates over that period.
Second tier beverage companies may have an opportunity to capture volume for carbonates by stimulating carbonates category growth at the same pace as soft drinks growth. Since private label is not a factor in Asia-Pacific, there may be an opportunity for a low priced alternative to the beverage giants offerings. Second tier companies could consider a larger package size at a favourable price per litre (similar to Big Cola in Latin America). With the focus on lemon-lime, second tier companies should move quickly to realize the volume opportunity before Sprite gains an insurmountable share lead.