beverage REPORT part 2

Retailers seek merchandising strategies for hopped-up energy category By Jerry Soverinsky

t’s just past midnight on an unsea- young clerk, noticing the three energy takes a swig and heads back out into sonably warm December Chicago drinks that the man has placed on his the night. night. The hip Lakeview neighbor- counter. It’s a repeated theme, but not just hood, just blocks from Wrigley “Busy night,”the driver replies as he with taxi drivers. With bar patrons. IField,is alive with activity.I wander finishes his purchase, opens a drink, Couples returning from dates. Stu- into a convenience store, pay for a dents. They’re buying energy large coffee and grab a stool by the drinks. Maybe not as much as window to watch a kaleidoscope of THE they’re buying soda, beef jerky and activity unfold before my eyes. To BOTTOM LINE M&M’s, but enough so that I self- appreciate Chicago’sdiversity,there’s Energy-drink sales have spiked over the past consciously look at my black, no better perch. five years, prompting a recent Packaged Facts decaffeinated coffee and suddenly Several taxis are in line outside to report to predict the beverage segment will feel old and out of touch (kind of access the gasoline pumps. Business continue to grow annually at 12% with total like when my niece mentions Face- isheavy tonight,andthebanterinside sales, topping $9 billion by 2011—a whopping book or Mischa Barton). the store remains loud and constant. 650% increase from the category’s $1.2 billion “On a busy night, a Saturday A 30-something man files out of in sales in 2002. night for sure, we’re selling tons of his muddied yellow taxicab and Many experts suggest allotting one cooler Red Bull,”says the c-store’s night entersthestore.He’sbeenherebefore, door for energy drinks and to place it next to clerk, who prefers not to be identi- it seems; he heads directly to a refrig- sports drinks. Others recommend grouping fied. “The bars, they bring a lot of erator in the rear,retrieves a few specific energy SKUs by target audience: the business. But [nonweekend] drinks and hands them to the cashier. supercaffeine, health/wellness, sports. nights, still, we’re always selling “Busy night, huh?” remarks the [energy drinks]. Teenagers, drivers.

M a r c h 2 0 0 8 CSP 55 beverage REPORT part 2

Very popular.” that will top $9 billion by 2011, a phe- Hemphill, managing director of Bev- It’s a buying pattern that affects nomenal 650% increase from the cat- erage Marketing Corp., New York.“As more than just this eclectic North Side egory’s $1.2 billion in sales in 2002. such, it’s vitally important that opera- store.Energy-drink purchases are grow- These impressive numbers and con- tors give this category its due with ing exponentially across the country, sumer preferences will play a signifi- ample shelf space and high visibility at and retailers are scrambling to sort out cant role in buying and retailing multiple locations. ... Finding the the best strategies for leveraging the cat- decisions. For with this exponential proper store location and space allot- egory’s popularity. growth has come an onslaught of ment is therefore key.” energy-drink suppliers,all eager to ride How many energy drinks should Positioning + Location the consumption craze. retailers stock and where should they A recent Packaged Facts report pre- “C-stores are the single biggest put it? While the specifics are unique dicted that energy drinks will distribution channel for to property and location,there are uni- grow annually at 12% with sales energy drinks,”says Gary versal strategies to consider.

PERSONAL IMMERSION ’ve never been one to follow popular fads, and so this sudden Iobsession with “energy drinks”—drinking to fuel the body, maintaining efficient metabolic something or other ... well, blah, blah, blah. It all seems just a bit too commercial for me. And their ingredients? I mean: Caffeine? Taurine? Guarana? Don’t try to sell me. I’m a busy adult, I can barely make time to watch four hours of television each night. How do you expect me to sift through the reams of scientific data differentiating between ginkgo biloba and L-carnitine? Whatever happened to just good ol’ high fructose corn syrup? But now I’m dating myself, huh? And so, in an effort to jump full-throttle into the energy-drink phenomenon and finally understand all of the hoopla, I embarked recently on an ambitious consumption experiment: I would attempt to sit comfortably (and passively) on a couch, watching C-SPAN2 in my climate-controlled Chicago apartment while drinking only energy drinks. Would they elevate my alertness? My stamina? My sanity? Here’s what I discovered.

There’s a presentation of a 2008 budget issue by an Iowa congressman, so I begin by downing two Red Bulls and a Monster. I smile as I lick the ginseng from my lips; both drinks taste surprisingly good. I check the nutrition information, and I feel reassured when I see B12. (I remember seeing that listed on my Frosted Flakes box, too.) I hear the phrase “fiscally prudent middle class” and reach for a second Monster.

56 CSP M a r c h 2 0 0 8 First, by “store location,”Hemphill that, breaking the category down by caffeine, for women, health/wellness, is referring to where retailers position major-brand attributes seems to be the sports/activity related, ethnically tar- energy drinks within their stores,a mat- suggested strategy. geted: Placing like brands together may “Positioning energy drinks make it easier for customer purchases.” “Energy drinks may become the near carbonated beverages and sports drinks may make the most Space Allotment daily vitamin of choice.” sense,” says Cara Morrison, Bevology president Tom Hicks, whose CARA MORRISON founder of Cogitamus Consult- San Francisco-based company pro- Cogitamus Consulting ing and author of the Packaged duces SuperFly and Zenergize energy- Facts report“Energy Drinks in the drink tabs, agrees with the brand ter of determining appropriate adja- U.S.”“What may be most important is attribute-grouping strategy; he recom- cencies, a retailing decision that directly the positioning of brands within the mends placing energy drinks near affects consumer engagement.And for energy-drink cooler spaceitself....Super- sports drinks. However,he stresses that

Despite the early hour, I’m surprisingly alert. I hear a bird chirping from What is with my searing abdominal pain? I reach for another Red Bull— outside. I count 37 chirps over a two-minute period while a promo runs my 11th for the day—downing half the can before executing a double for Book TV. backflip and half-Tsukahara on a makeshift vault that I spontaneously build out of dirty socks.

Holy cow, it’s difficult sitting still. Not sure how much the segment “Improving Electronic Government” is contributing to my restlessness. I reach for a Full Throttle, and it immediately hits the spot. I begin whistling “Question Time” at the British House of Commons—finally. And it’s all an obscure country-music tune, sobbing uncontrollably. commercial-free! There’sa clip of Gordon Brown. I laugh uncontrollably when I see that they’ve fonted his title as “Labour Prime Minister.” “There’sno ‘u’ in ‘labor’!!!” I scream at my television, without response. I’m digging my newfound heart arrhythmia and flip the channel to Frustrated and without any feeling in my forehead, I race outside and C-SPAN2 Espanol. I understand everything, despite never having studied run a respectable 10K while pulling a 2004 Fiat. Spanish. I take a swig of Amp and then mute the TV’s sound entirely, supplying my own voice track to a piece that features presenters from the Woodrow Wilson International Center for Scholars. I’m definitely plugged in! With some assistance from my girlfriend, who handcuffs me to my bedpost (noideawhereshegotthose—wink-wink),I’mreadyforbed.Myexperiment complete, I drink a glass of water,though I don’t feel tired. I break free from My restlessness is overwhelming, and even a speech by the Department the nickel-plated cuffs and rush out onto to the wintry Chicago streets, of Homeland Security’s Michael Chertoff can’t motivate me to focus. I though what happened immediately after that is still a bit hazy. pause when my third-grade teacher enters the room, holding a sign that I awake four days later and discover I’m in a southeastern Dominican reads, “Did you return your hall pass?” I always had a crush on Ms. Republic resort, wearing SPF 50 clothing and mumbling something about Mattheson, so I’m pleased when she seems attentive as I offer her a sip needing to make a la carte restaurant reservations. I head to the bathroom, of XS (I’m on my third). She giggles before whispering, “You were always rubbing the sleep from my eyes, and admire the healthy tan that I’ve good at phonics.” As I lean forward to kiss her, I realize that I’m French- somehow acquired. I nod my head, approvingly. Yes, people really are on kissing my high-def Vizio. My heart is pounding. I must really be tosomething,Ithink.I’mfinallyunderstandingthewholeenergy-drinkcraze. embarrassed. Next up: Rock Star. I head to the resort’s copious buffet in search of a Red Bull.

M a r c h 2 0 0 8 CSP 57 beverage REPORT part 2 store positioning alone is not enough. about seven shelves per door, we ded- says Hemphill of Beverage Market- How much space to allot the category icate four shelves to energy drinks— ing. “Energy drinks satisfy a very spe- is another concern, a unique consider- which equals about 8% to 10% [of the cific consumer need: energy. This ation that will vary by store and demo- beverage stock],” says retailer Paul makes them unique in the overall graphic—though patterns are definitely Grammer,president of 11-store Circle realm of refreshment beverages, which emerging. A Food Mart in Jasper, Ind.“We nor- are generally purchased for [entirely “I think right now,you’re starting to mally place energy drinks by isotonic separate reasons]: their thirst-quench- give it a full door.That’s what 7-Eleven drinks—Gatorades and Powerades— ing benefits.” is doing,”Hicks says.“You see others and water sections that include flavored While distinct consumption pref- who are giving it half a door; that’s waters and vitamin-enhanced waters.” erences might indeed suggest a mostly based on knowing their cus- broader beverage-category spike, it’s tomers. But with the growth of the cat- Slipping Sodas hard to ignore the bottom-line num- egory—it’s approaching $5 billion While sales numbers for energy drinks bers (see sidebar, p. 65). And recog- [annually]—it deserves a door.” pale in comparison to other nonalco- nizing that, the cannibalization effect Allotting at least a door is the holic beverages—the Packaged Facts seems obvious. approach that 35-store c-store chain report revealed that energy drinks “Any time a new product or cate- Honey Farms, based in Worcester, totaled just 2% of all 2006 nonalcoholic gory comes out,” Hicks says,“you Mass., took in 2007—though it con- drinks sold (up from less than 1% just would hope that it increases con- tinues to carefully re-examine that fig- two years prior) —the trends for both sumption of the overall category. But ure in an effort to capitalize on its are notable.“In the past five years,” look at the numbers; it’s clearly cut- consumers’ preferences. according to the report,“energy-drink ting into other beverages, especially “Each year,”says company market- sales ... grew at 56% CAGR, while car- soft drinks.” ing director Karen Campbell,“we have bonated sodas declined 1%.” Others insist that energy drinks are increased space in [the energy-drink The bottom line for retailers: While both increasing the consumption base category], and it continues to increase energy-drink sales seem poised for con- and eroding soda sales. in volume.” tinued growth,there’sa debate whether “The segment they are going after Other retailers offer more detailed the popularity will expand the overall is the younger 18- to 25-year-old male guidance in their approach to the cat- consumption base or further erode crowd,”says Grammer.“[But] we also egory, with a strategy that’s specific to soda sales. see young women buying these both adjacencies and allotment. “We believe that energy drinks are drinks. Energy drinks seem to be sell- “In a seven-door cooler set that has broadening consumption occasions,” ing in all day-parts. ... The segment of drinks that has been shrinking is the carbonated drinks, so naturally 2008 BEST BETS some have migrated over to the ump Williams, general manager of Chicago-based Information Resources Inc.’s beer, energy-drink section. Bwine and spirits practice, cites the following drinks and trends to watch in 2008. “People who are looking for the Soda: “Low-cal or no-cal drinks will continue to grow in this category. Health and wellness burst of energy or to stay awake who are growing concerns.” do not like coffee seem to be experi- Energy Drinks: “Both Red Bull and Monster will see double-digit growth in 2008. Monster menting with this category,”he con- especially, because of its [Anheuser-Busch] relationship.” tinues.“The 20- to 30-something Sports Drinks: “The jury is out. G2—the new Gatorade drink for nonathletes—is one to generation seems to always be looking look for. And Gatorade is also coming out with a low-cal version.” Waters: “This is a tough one,” he says, before hedging his guess. “I think we’ll see a for that different kind of drink that high-end—something Fiji-like—and a low-end emerge.” does more for them. They do not want Teas: “Flavored teas will rise, and high-ends will also emerge.” to drink what Mom and Dad drink. They want their own drinks.”

M a r c h 2 0 0 8 CSP 59 beverage REPORT COMMON ROOTS part 2 espite the retail distinction today between carbonated soft drinks and Denergy drinks, both share common promotional histories. Many energy drinks are positioning themselves much as carbonated drinks did during Still others concede that while soda the category’s launch in the late 19th century: Not just beverages, but sales are slipping, it’s not solely related functional beverages—drinks that promote good health. According to to competition.“The flight from Packaged Facts, energy-drink manufacturers are “incorporating nutrition, sodas is heavily influenced by a gen- pain-killing and anti-aging ingredients into their products,” elixir-like qualities eral trend toward health and well- not unlike those that the carbonated-beverage industry promoted during ness,” Morrison says,“and not its nascency. When it was developed in the late 19th century, Coca-Cola was necessarily as a direct result from touted as a health drink, able to cure ailments such as impotence and the rise in energy drinks.” headaches. Print ads from the early 20th century used terms such as “revives” and “sustains” when promoting its benefits. Selecting Inventory Ironically, Coke’scurator,John Pemperton—the product’sstaunchest With a rush of suppliers trying promoter of its healthful benefits—provided conflicting testimonial support to squeeze into an already busy to this claim: He died less than two years after creating the drink. marketplace, making sense out of But while energy drinks market a range of benefits, industry insiders a crowded field can be difficult for still point to “added energy” as the category’s most popular draw. retailers. “Americans work hard and they’re tired. We’re always looking for an “I walked into a buyer’s office extra boost, something to give us an edge,” says Bevology president Tom in Idaho the other day,”says Hicks, whose San Francisco-based company produces SuperFly and Hicks,“and he had 360 different Zenergize energy-drink tabs. “It’s the nature of America. We’re the energy drinks. His whole office hardest-working people on earth.” Shock Coffee president Jeff Rosen agrees. “We’ve was lined with different brands. become a 24/7 society [requiring] more hours per day, Like any category, it gets crowded and the easy way out is to perk yourself up with a quickly and that’s what’s happening quick fix from an energy drink,” he says. The point now.”His advice?“Retailers need to “First off, use the eyes,”she receives personal significance for him: “Here I am make sure that they bring in brands says.“Most c-store proprietors at 11:30 p.m. on a Friday night working when I with proper marketing support.” and managers should have enough should be in bed watching Jay Leno.” While selling name brands is a awareness about their local com- Paul Grammer, president of Circle A Food sound strategy,it’scrucial to know what munity to make this type of call. If Mart, an 11-store chain based in Jasper, Ind., each store’s customers want. part of a larger franchise,proprietors agrees, though he cites taste as an additional “When making shelf decisions, be should make use of any resources the factor. “People [who] didn’t like coffee but sensitive to the makeup of your com- mother ship has to offer in terms of wanted the caffeine boost turned to munity,”Morrison advises.“Is the pop- quantitative and qualitative research.” energy drinks,” he says. ulation largely young families? [If so], And if none of the above apply? consider stocking health-focused “Check local census data,”Morrison energy drinks for women such as Go says.“Or if the business wants to lay out and energy. Hybrid drinks seem to be Girl or Tab Energy. Perhaps there is a some money and time, they could do the hot items.There are now also large Hispanic community. If so, per- some consumer‘profiling’or track the energy-shot drinks that are becoming haps stock Caballo Negro or Blue number of consumers entering the popular. … These drinks do not even Demon.” store over a given period.” have to be in the cooler but can be on For retailers experienced selling More generally,though,many retail- the front counter as an impulse item.” energy drinks,the advice seems logical. ers are already identifying general pur- This differentiation of the energy- But for those treading head-first into chasing trends, irrespective of drink category is not surprising, espe- the category for the first time, the demographics. cially when the consumer pool is so approach can seem daunting. Morri- “Monster Java has been … flying off large—and growing. son insists the challenge need not be the shelves,”says Grammer of Circle A “The market for energy drinks is in overwhelming. Food Mart.“This is a hybrid of coffee a state of flux with new-product inno-

60 CSP M a r c h 2 0 0 8 60 beverage REPORT part 2 vation and introduction,”says Morri- ing business,”Rosen says.“Branding son. “New companies are constantly your own energy drink takes a good trying to [break] into the market, hop- deal of funding,which definitely makes ing to come up with the next big thing it a risky business. ... The start-up costs in energy.” can easily exceed $100,000,not to men- tion the advertising and time it takes to 100% Risk-Free Guarantee? be successful. In the end a brand with With industrywide data supporting national recognition will far outsell a predictions that the energy-drink cat- local or regionalized brand.” egory will continue to rise,most see the retailing risks for retailers as minimal. The Future They point to the category’s young his- Most see the opportunities and imme- tory and urge experimentation to best diate future for the energy-drink cate- discover new retailing opportunities. gory as bright.“I think it’s going to see “This segment is still growing, so if tremendous growth for 2008 and you want to be in this segment,you beyond,”says Hicks. However,whether have to try the new flavors that come it will remain positive long-term is out, the new sizes, and see what sells,” another issue. says Grammer. However, he concedes Some consumer watchdog groups such a strategy carries risks. have voiced concerns that energy drinks “[Energy] drinks also carry a higher should have an age requirement akin price tag, which can also tie up inven- to that of alcohol and tobacco. They tory dollars quick[ly] if they do not advocate limits on the amount of caf- turn. But along with that, they also sell feine and other additives in the drinks. at a higher price point, which helps Their basic concern is that energy your average ticket transaction.” drinks will create physiological highs However, overinvestment is still and lows and, thus, should contain fraught with uncertainty, especially warnings for drinkers who may not be when retailers drift from their core well-suited to consume them. strengths, cautions Shock Coffee pres- “The category is so new—less than ident Jeff Rosen. Thinking of produc- 10 years old—that we don’t understand ing your own energy drink—maybe the impact of heavy consumption,”he Orange Bull? Think again. Start-up says.“If negative health risks start sur- costs make such a proposition finan- facing, who knows? I have a friend with cially tenuous at best. an 18-year-old who had a heart attack. “We’re seeing a greater trend in Wedon’t know why,but he drinks a lot c-stores crossing over into the brand- of energy drinks.” “The 20- to 30-something generation seems to always be looking for that different kind of drink that does more for them.They do not want to drink what Mom and Dad drink. They want their own drinks.” PAUL GRAMMER Circle A Food Mart Circle XXX on page XX for product information M a r c h 2 0 0 8 CSP 63 LEADING THE PACK While Red Bull sits comfortably atop the energy-drink category, competitors are gaining ground.

Top U.S. Energy-Drink Brands ($ millions) 2002 2003 2004 2005 2006 CAGR % Share Red Bull 57.4 91.3 156.1 225.8 271.9 47.5% 43% Monster Energy 0.7 5.0 16.4 45.0 91.2 236.7% 14% Rockstar 4.3 10.2 23.1 43.5 72.3 103.1% 11% Full Throttle NA NA 0.2 23.0 44.1 NA 7% SoBe No Fear NA 3.5 10.1 20.1 34.4 NA 5% Amp 11.5 12.4 14.2 19.9 23.1 19.1% 4% SoBe Adrenaline Rush 12.0 13.2 15.2 21.2 18.4 11.3% 3% Tab Energy NA NA NA NA 14.3 NA 2%

Source: Information Resources Inc., compiled by Packaged Facts. Includes mass merchandisers (excluding Wal-Mart), U.S. supermarkets and drug stores.

So what’s next?“Energy drinks with “Nanotechnology and microencapsu- The end result for consumers: added nutrition—vitamin C,for exam- lation may grow the user base of “Energy drinks may become the daily ple—will be the next step,”Hicks pre- energy-drink innovation. ... Its ability vitamin of choice,”Morrison predicts. dicts.“Toclaim that your drinks boost to mask additive flavors means that “Don’t be surprised to see crossover energy while providing nutrition,that’s supplements such as omega-3 can be from the vitamin, mineral and supple- already catching on.” included without altering the flavor of ment [worlds]. It’s no surprise, Morrison says. a beverage.” “Centrum Energy Drink,anyone?”I

Circle XXX on page XX for product information M a r c h 2 0 0 8 CSP 65