Global Boom in Value-Added Drinks Aligns with Better Terms of Trade for Australasia
It’s been a tough few years for food and beverage manufacturers in Australasia. Australia has one the most consolidated grocery retail environments in the world and New Zealand is not far behind. Price wars between major supermarket players have made it tough for smaller manufacturers to negotiate in the local market. Exporting has not been any easier with both NZD and AUD at all-time highs over the last few years. Financial difficulties regarding import taxes and exchange rates have made international expansion even harder. But we could just be on the verge of golden window of opportunity, as Australian and New Zealand soft drink manufacturers are well positioned to benefit from the combination of recent free trade agreement (FTA) developments, more favourable exchange rates and a growing demand for premium, value-added beverages globally.
Asia Pacific & Latin America
It’s no secret that carbonates are on the decline in Western markets and while they may still being growing in emerging regions such as Asia Pacific, Middle East and Africa, exporters from Australia would find it difficult to compete within carbonates in these regions. The average unit price in Australia for carbonates is US$1.70 per litre. In Asia Pacific it’s almost half that at US$1.00 per litre.
Australian carbonates manufacturers would struggle to compete in many Asian countries with so many economy-priced products on the shelf. Health and wellness positioned beverages in the region, however, are selling at much more viable price points. In many cases they’re more premium than in Australasia. For example In Australasia, the health and wellness positioned juice category is selling through retail at an average of US$1.80 per litre. However, drinks in the same category in Singapore are selling at US$2.00 per litre, and in Hong Kong and Japan it’s US$3.20 per litre.
On average, health and wellness beverages in Asia are at much more favourable price points. These categories are also growing, as consumers seek more value from their choice in drinks. In Japan we are seeing a surge in super hydration waters, while healthy, natural RTD teas are performing well across virtually the whole region.
Latin America is another promising market. There is currently a boom in naturally positioned soft drinks including juices, bottled water across the regions as consumers seek to reduce their sugar consumption and avoid artificial additives. But apart from Brazil, price points in many Latin American markets are slightly lower than Asia Pacific. When freight costs are taken into consideration it could make it difficult for Australasian manufacturers to compete. The Trans Pacific Partnership (TPP) may well open new opportunities for beverage exporters across its member nations which include Australia, New Zealand, USA, Japan, Brunei, Canada, Chile, Malaysia, Mexico, Peru, Singapore and Vietnam, however, the deal still needs to be ratified in all countries and the full details are yet to be released so it’s not clear just yet how much the beverage industry will stand to benefit, but there’s no doubt that many of its member nations look like viable markets
On the other hand, the China Australia Free Trade Agreement (ChAFTA) is all set to go ahead with a multitude of industries set to see tariffs taper down to zero over the coming years. The soft drinks industry is one of those set to benefit.
Soft drinks in China, particularly “naturally healthy” positioned beverages with functional positioning along the lines of general wellbeing, immune system support and energy boosting present a strong export opportunity for Australia and New Zealand. Urbanisation and rising middle class in China are driving the sales in this category as consumers are looking for value-added beverages to fit in with their increasingly busy lifestyles. The recent ChAFTA will see tariffs on soft drinks (and processed food categories) drop from around 14-20% to zero of the next 4 years, allowing Australian manufacturers to be more competitive. New Zealand is ahead of the curve with its own FTA with China already in place. Euromonitor forecasts that the health and wellness soft drinks category in China will achieve substantial growth over 2015-2020, from US$41 billion to US$62 billion.
Both the Australian and New Zealand dollar have experienced significant falls against the Chinese yuan over the last year with Australian dollar going from 5.80 to 4.60 yuan and the New Zealand dollar going from 5.40 to 4.60 yuan.
When looking at any market entry opportunity it’s important to understand the competitive landscape. For example, sports drinks is the mostly highly consolidated drinks category globally, with the top 3 players (PepsiCo, TCCC and Otsuka Holdings) combining to take over 75% market share. This category is a tough one for smaller manufacturers to enter into and requires more value add to offer differentiation. On the flip side, health and wellness iced teas have much less consolidation – many multinationals have only a small share in this space. Smaller companies have actually been gaining share in soft drinks in China as they benefit from premiumisation within the bottled water, juice and RTD tea categories. While at present the health and wellness soft drinks market is dominated by local players, there has been increasing interest in international brands with Fontana and San Benedetto both performing well in juice and bottled water.
There has also been a spate of health scares in the local beverage industry in China and this may work in Australasia’s favour. Chinese functional beverage manufacturers Beijing Huiyuan Beverage & Food Group Corp and Binzhou Andre Beverage Co Ltd were both reported for using poor quality fruit ingredients. Australasia still maintains it’s clean and green branding through most of Asia Pacific, including China. Australian beverage manufacturers looking to enter this market will need to be in tune with local tastes. Understanding local flavour preferences is important for success in China’s beverage market where a trend towards lighter, fresher flavour profiles is on the rise. Lemon flavours are leading the way here in market that is looking for innovative concepts that give a unique healthy offering.
First published in Food & Drink Business