The beverage category continues to draw an increasing amount of interest from tobacco retailers as a way to build incremental sales and profits. In particular, the energy drink and enhanced water segments of the category are attracting fresh attention, thanks to booming sales that, per market research firm Packaged Facts, should exceed $9 billion nationwide by 2011.
Boulder, Colorado-based Smoker Friendly International is among the tobacco retailers placing new emphasis on the business. According to sales and marketing manager Jeremy Weiner, the company sat down with its partners at Pepsi at the start of the year and for the first time actually planogrammed the beverage cases in its stores. “Before, store managers basically just ordered what they liked,” he says. The cornerstone of the new sets, he adds, are energy drinks and enhanced waters. “We are definitely seeing growth in that category,” he says.
Weiner isn’t the only one. According to Information Resources Inc. (Chicago), sales of energy drinks in the mainstream food, drug and mass merchandiser channels (excluding Wal-Mart) were nearly $829 million for the year ended February 24, 2008, and were growing at a blistering 22 percent pace. And that’s just a tithe of the category’s strength. In its recently released report Energy Drinks in the U.S., Packaged Facts projects total sales across all channels will surpass $9 billion by 2011. That’s up from just $1.2 billion in total retail sales in 2002.
Meanwhile, sales of bottled water in convenience packaging (in other words, PET bottles) topped $4 billion across food drug and mass for the year ended February 24, representing an 11 percent improvement in sales, according to IRI. IRI doesn’t routinely break out enhanced waters as a separate category, but did conduct that analysis in its annual review for calender year 2007, and found that for the year, dollar sales of enhanced waters grew at a rate of 42 percent. That performance made the bottled water category overall the top dollar sales growth category (in food, drug, mass and in Wal-Mart) for 2007.
It seems that nearly every beverage supplier has now entered one or both segments, says Gary Hemphill, managing director at Beverage Marketing Corporation, a New York City-based consulting firm. “Both categories have had strong [past] years and had another one in 2007,” he says. “They have been two of the more successful beverage categories recently.”
Hemphill chalks energy drinks’ success up to a couple factors. First, he points to “a great job of marketing and positioning” by one of the early, and now among the strongest, brands, Red Bull. “They really tapped into this fundamental consumer need for energy, and a lot of other companies—Pepsi, Coke, Hansen—just followed that, he says.
The second factor was profitability. “Energy drinks cost more, so everybody makes more money,” he notes. “When a category combines growth and high margins, you see a lot of focus on it.” In demographic terms, energy drinks have traditionally skewed towards young men; the category also has a strong on-premise business as a mixer in bars and clubs, and there are multiple packaged varieties of energy drinks with alcohol available as well.
Enhanced waters have followed a different trajectory, essentially as an outgrowth of the bottled water category, and appeal to consumers looking for “healthy refreshment,” Hemphill says. The segment has gathered extra focus since last May, when Coca-Cola spent $4.2 billion to buy Glaceau, maker of Vitaminwater. “With its Vitaminwater, Smartwater, Fruitwater, and Vitaminenergy brands, Glaceau is uniquely positioned in key market categories...[which] are expected to make up a large portion of the beverage industry’s volume and gross profit growth in North America through 2010,” Coca-Cola said in a release announcing the deal
Unlike energy drinks, Hemphill says that enhanced waters formerly skewed towards women, and while that remains true to an extent, the growth of the category has broadened its demographic base. “It’s become fairly ubiquitous, more of an ‘active lifestyle’ type of consumer,” he says.
“There is a market for the [enhanced] waters” in tobacco outlets, says Gary Tapley, general manager of Smoke Shop Inc. (Hobart, Indiana). “Vitaminwater is doing well” in his stores, he says, as is Coca-Cola’s Powerade.
Tapley says energy drinks and enhanced waters have been a mainstay in Smoke Shops for a couple of years. “In most of the stores, sales are cold out of a cooler,” he says, noting that the typical store boasts three doors of beverages. In larger stores, the products are also sold warm by the case. “You have to have room for it, and some shops don’t,” he explains.
In Smoke Shops that skirt closer to convenience stores, “it’s a great market, but in tobacco stores it’s more of a convenience item,” he says. That, he adds, is generally true of beverages in the tobacco channel. “I even tried milk once, at a low-ball price to draw customers,” he relates. “But the people who bought milk, that was all they bought, and I was losing money.” One exception is tobacco stores near the Michigan state line, where shoppers can avoid paying Michigan’s deposit on bottles and cans. “Closer to Illinois I have a few people who come in for [beverages] but most come in for tobacco,” he says.
He cautions that beverages aren’t a panacea for declining tobacco margins. “It’s hard to take something you make $3.50 on and replace it with something you make 40 cents on,” he says, “but it does help.” Agrees Jeremy Weiner, “when you can make a 35 percent margin, it definitely helps.”
Since resetting the shelves to focus on energy drinks at the start of the year, Weiner says that Smoker Friendly stores have seen increased sales. “Store managers are seeing more of the products moving than they used to,” he says. He attributes that to carrying a full line, which gives the segment more emphasis at the point of sale, as well as to simply sitting down and planogramming the cases to maximize sales.
“I would say we carry about 15 to 16 SKUs,” of energy drinks and enhanced waters in the new set, he says, “so we’ve changed a lot. The Pepsi cooler [layout] now starts out with energy drinks, and then moves to soda.” The space for more energy drinks and waters was gained by trimming down pop—for example, cutting Pepsi down to two rows from three or four.
Like Smoke Shop, Smoker Friendly also merchandises the products warm in floor displays in stores where they have room. That chain doesn’t advertise the products, but it does employ window clings and POS materials to tout their availability, and participates in manufacturer promotional programs, such as a current five for $5 promotion on Red Bull, and an upcoming 99-cent promotion for Pepsi’s Sobe Life Water. The chain also encourages associates to suggest an incremental purchase. “It’s an easy thing to suggest at the register,” Weiner notes. “‘Would you like an energy drink to start off your day?’” •
