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A plethora of new products is bring- ing energy to the beverage category

INSIDE Off and Running The runaway popularity of new energy drinks has retailers scrambling to pick the winners A Veritable Stream of Profits Sales growth for bottled water may be slowing in some retail channels, but not in c-stores Reshuffling the Deck Diets, flavors are stealing share from full-calorie carbon- ated beverages

PAGE 1 of 12 CSPDigital editions are published by CSP Information Group, Inc. Contents To download previous CSPDigitals, visit: http://www.cspdigitals.com

4 Off and Running ADVERTISERS For information on CSP Information Of one thing in the beverage business Group, call 630-574-5075 To view an advertiser’s page, there can be no doubt about, it’s that the click any of the company names below: alternative/energy segment is in full bull- For technical support with market mode. And the convenience chan- CSPDigital editions, call: nel has been the primary driver. Cadbury Schweppes Americas Beverages 212-647-0396 ext. 5 Page 3 8 A Veritable Stream of Profits To advertise in CSPDigital editions, Nestle Waters North America contact Jim Bursch at: Although no longer posting the growth Page 7 630-574-5075 ext. 224 figures that catapulted it to the position Email: [email protected] of No. 2 consumed beverage in the U.S., CSP Information Group, Inc. bottled water remains a strong conve- Page 11 nience product with considerable upside. For more information about our 10 Reshuffling the Deck advertisers, visit our Advertisers Index - Page 11 If you’ve received this edition of Despite a steady change in consump- CSPDigital during your busy workday, tion patterns, carbonated soft drinks as use the link below to place a reminder in a category continue to perform well in your calendar to read it at a more conve- the convenience channel versus other nient time (works with Outlook, Eudora classes of trade. and most other PC and Macintosh desk- top calendars).

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PAGE 2 of 12 PAGE 3 of 12 strenuous workouts, alternative/energy drinks are all about quick bursts of energy. While all alternative/energy drinks contain caffeine, most today also include a variety of exotic ingre- dients including glucose (i.e. sugar), taurine, inositol, , ginseng and vitamins B6 and B12.

Retailers are pleased with the cat- egory because of its profit potential: Most leading brands retail for $1.99 per 8.8-ounce slimcan, and specially designed suction-cup racks that attach right to cold doors free up cold shelf f one thing there can be no According to ACNielsen data, retail  The adoption of energy drinks by space for other products. Several new doubt: Alternative/energy dollars are up 56.5 percent in the c- “Generation Y” – the skateboard, dirt- products have been introduced in Odrinks represent a bull market. store channel over last year, while unit bike, snowboard, X-Games set – as a larger SKUs – primarily 16-ounce cans That the leader of the charge is the volume is up 49.3 percent. drink they can call their own; – but at the same profitable $1.99 longtime No. 1 brand , which  The popular use of energy/alterna- price point. launched the category The increase has been driven by tive beverages as mixers for alcoholic in the United States, is fitting. And several factors, including: drinks, both in nightclubs and at home “Energy drinks have had the high- while Red Bull’s position as the market parties. est average retail price (1.5 times the leader remains unchallenged, many  An “on-the-go” American consumer average for all packaged beverages), other brands are enjoying healthy looking for quick bursts of energy Unlike sports drinks and isotonics, penny profit (1.8 times the average) sales in this age of prosperity for the throughout the day; which are all about recovery from and gross margin (40-plus percent),” alternative drink category. says David Bishop, director of Bar- ALTERNATIVE/ENERGY DRINK SALES rington, Ill.-based Willard Bishop Con- According to ACNielsen data, the TOTAL U.S. - FOOD, DRUG, CONVENIENCE, MASS (EXCLUDING WAL-MART) sulting. alternative/energy drinks market increased from $1.15 billion in the 52 Weeks 52 Weeks By far, most energy/alternative combined off-premise channels (food, Ending 04/17/04 Ending 04/16/05 drinks are lightly carbonated, though drug, convenience, mass, excluding some are non-carbonated. According Wal-Mart data) for the 52-week period Carbonated $1,096,569,371 $1,733,737,842 to ACNielsen data, the carbonated ending 4/17/04 to $1.79 billion for the segment accounted for 96.6 percent Non-Carbonated 52 weeks ending 4/16/05. That repre- $59,918,814 $60,656,873 of all-channel category sales (food, sents an overall gain of 56 percent. TOTAL drug, convenience, mass, excluding ALTERNATIVE/ENERGY DRINKS $1,156,488,185 $1,794,394,715 Wal-Mart data) for the 52-week period The convenience channel has been Source: ACNielsen ending 4/23/05. the primary driver of that growth.

PAGE 4 of 12 Last One In’s a Rotten Egg “Everybody has an energy drink to The fact that most major beverage companies – as well as a host of sell, so we look very hard at every- minor companies – have offerings in the category are a testament to the thing presented to us.” continuing potential that energy drinks have for future growth. As witnessed — Jon Bratta by the most recent NACS Show in am/pm Las Vegas, quite literally everybody and their brother is trying to jockey for some coveted position in cold vaults. gy category), how does one decide location on the shelf, but the door which brands make the planogram? holders are still used to highlight either While market leader Red Bull may be certain price-promoted products and/ a “smaller” company in terms of overall “Everybody has an energy drink to or to build awareness and trial for new revenue, Pepsi has three brands in the sell, so we look very hard at every- products in the door.” category (Amp from , thing presented to us,” explains Jon SoBe Adrenaline Rush and SoBe No Bratta, national beverage lead for BP But not everyone is sold on the Fear), while Snapple (i.e., Cadbury Plc.’s am/pm chain. “What is the mar- merchandising effectiveness of door Schweppes Beverages Americas) has keting plan? How is it different? Is it a racks. its Elements line. Hansen’s, the New line extension of an existing successful Age company from California best brand? The successful companies are known for its natural sodas and fruit doing certain things that help insure beverages, is heavily vested in the their initial and continued success. We category with several brands, includ- probably turn down 85 percent of what ing Hansen’s Energy, Monster and we see because many of these brands Lost. Other New Age players include just have no plan.” AriZona, Fuze and Jones Soda. Even brewing giant Anheuser-Busch has One way that Red Bull was able to ventured into the category with 180. break through the clutter was with the Not to be neglected, the hip-hop innovative door rack that allowed its scene is well represented in the cat- then-unique 8.8-ounce slimcan SKUs egory with rappers Nelly (Pimp Juice) to be merchandised in the cold and Fat Joe (Stinger) fronting energy without encroaching on anyone else’s brands, and hip-hop impresario Rus- existing territory. sell Simmons (DefCon Records) behind the DefCon 3 brand. “The tactic served its purpose, which The first: Red Bull essentially in- was to create merchandising space vented the current alternative energy With so many brands and so little where none had previously existed,” drink segment with its unique prod- space (even though many c-stores are explains Bishop. “Since then, energy uct and distinctive packaging. now devoting entire doors to the ener- drinks have found a more permanent

PAGE 5 of 12 ENERGIZING GROWTH ENERGY DRINK UNIT VOLUME AND DOLLAR VOLUME ARE by looking at Red Bull, which lost Generation Next GROWING SUBSTANTIALLY IN CONVENIENCE STORES market share last year (from just over Perhaps the future of the category can 50 percent to just below 50 percent), be seen in a new product introduction all the while increasing its own sales from Pepsi’s Mountain Dew franchise. Dollar Volume Percent Change vs. Year Ago by over 40 percent. Perhaps with this MDX, which Pepsi first advertised DOLLAR VOLUME in mind, Coca-Cola, which had very during the World Series but launched limited success in its initial foray into nationally in November as an “energy 52 Weeks 52 Weeks 52 Weeks 52 Weeks the category with KMX, has launched soda,” contains a veritable power pack Ending Ending Ending Ending a new brand in 2005 – aptly named of energy-inducing ingredients, includ- 04/24/04 04/23/05 04/24/04 04/23/05 – in hopes of grabbing a ing ginseng, guarana, taurine and Carbonated $473,266,348 $748,127,203 n/a 58.1% larger slice of what should soon be a D-Ribose (a five-carbon sugar). $2 billion pie. “Mountain Dew helped create the Non-Carbonated $20,435,053 $24,521,601 n/a 20.0% An Immediate Success energy category, and MDX is the next Total According to ACNielsen figures pro- logical step in our evolution,” explains 56.5% Alternative Beverage $493,701,401 $772,648,804 n/a vided by Coca-Cola North America, Katie Lacey, vice president marketing, Full Throttle had achieved a 78 per- carbonated soft drinks for Pepsi-Cola cent penetration rate among all con- North America. Citing the explosive Unit Volume Percent Change vs. Year Ago venience stores in the U.S. by June. growth of the energy drink category, UNIT VOLUME Late this summer, the brand extended Lacey defines the MDX target con- into the diet segment with Sugar Free sumer as someone “who is looking for 52 Weeks 52 Weeks 52 Weeks 52 Weeks Full Throttle, packaged in single-serve a boost of energy, but refuses to sacri- Ending Ending Ending Ending 16-ounce cans and four-packs, and fice taste and refreshment.”  04/24/04 04/23/05 04/24/04 04/23/05 launched primarily in the convenience channel. Carbonated 228,919,261 346,155,157 n/a 51.2% “The Full Throttle brand has consis- Mountain Non-Carbonated 12,513,793 14,364,087 n/a 14.8% tently driven growth in the energy drink Total category since its introduction, and Dew helped Alternative Beverage 241,433,054 360,519,244 n/a 49.3% Sugar Free Full Throttle will keep our momentum going,” says Mary Her- create the rera, director of marketing for sports Source: ACNielsen & energy drinks for Coca-Cola North energy cat- America. “Based on our results in “We don’t use cooler door racks,” “We allocate the proper space that test markets, we expect Sugar Free egory.” explains Bratta. “They block product, the beverages deserve out of the Full Throttle to increase consumption they tend not to get executed very existing space,” says Bratta. occasions among current energy drink —Katie Lacey well, and they breed competitive door users, and appeal to new consumers racks.” That, in turn, creates cold vault Perhaps the energy surrounding seeking the raw energy Full Throttle Pepsi-Cola, N.A. clutter. the category can best be illustrated provides.”

PAGE 6 of 12 PAGE 7 of 12 “We’re expecting bottled water to enhanced waters. That makes single- grow between 15 percent and 20 serve and sampling opportunities so percent this year,” notes Ron Gillion, vital to the continuing health of the category manager at Texarkana, Tex.- bottled water category, and the con- based E-Z Mart Stores. “It will prob- venience channel as the category’s ably slow a little next year, but we’re primary growth driver. still projecting 10 to 15 percent growth in 2006.” “C-stores represent a vital part of our business, because they Others in the industry concur with offer trial to consumers,” Gillion’s projections. notes NWNA’s Seager. “Furthermore, bottled -By Bob Phillips “Our short-term forecast for 2006 is water consumers are that water will continue to grow, but at important to c-store decade after exploding onto nia, Massachusetts and Texas already a slower rate than in the recent past retailers because of the retail scene, bottled water exceed the European average. – most likely in the low double digits, the wide demo- Aremains not only strong, but a 10 to 15 percent,” notes David Bishop, graphic and vital component in the ultimate profit- NWNA, the leading company in the director of Barrington, Ill.-based Wil- the growing ability of convenience-store retailers. U.S. in terms of cumulative dollar and lard Bishop Consulting. consumption Although no longer in ‘skyrocket unit volume, markets many of the per capita mode,’ bottled water sales remain nation’s strongest regional brands, Just as important as dollars for per year.” quite strong for a maturing category. including Poland Spring (Northeast), c-store retailers is the type of consum- Arrowhead (West Coast), Zephyrhills ers bottled water attracts. While adult “From our perspec- According to Steve Seager, senior (Southeast) and Deer Park (Mid-Atlan- males continue to be the channel’s tive, much of the growth in bottled retail marketing manager for Green- tic). Indeed, according to Infor- target consumer, bottled water tends water will be driven by the extension wich, Conn.-based Nestle Waters mation Resources, Inc., to bring in more diverse shoppers, of sports drinks and isotonics into North America (NWNA), bottled water four of the top 10 brands resulting in greater overall sales. the bottled water category, such as is the No. 2 consumed beverage in the sold at c-stores are NWNA Gatorade has done with Propel,” U.S. (behind carbonated soft drinks.) properties – even though “Bottled water is so important adds Bishop. In addition, Dasani and What’s more, even with such long- each is sold regionally. because it attracts younger con- Aquafina have extended their lines to term growth, the category’s upside sumers and women – both of include flavors in an effort to further remains enormous. According to ACNielsen whom we’ve worked very hard attract an ever-growing c-store con- Convenience Track data, at getting into our stores,” notes sumer base. “Currently Americans are drinking bottled water accounted for Gillion. just over 23 gallons of bottled water nearly $2 billion in sales for Private Labels Deliver per year,” explains Seager. “Those per the 52-week period ending These consumers look for Not surprisingly, chains of sufficient caps are expected to reach the devel- October 8, 2005. Further- traditional bottled water, cer- size have jumped on the private label oped European average of 32 gallons more, 32 percent of all bottled tainly, but also are interested bandwagon to offer consumers, in of bottled water per year by 2008,” he water purchased was done so in various extensions, such general, a lower-cost item while main- says, adding that per caps in Califor- at convenience outlets. as flavored and nutrient- taining healthy margins on their end.

PAGE 8 of 12 1 2 3 4 5 6 7 8 9 10 Aquafina Private Label Dasani Poland Spring Propel Dannon Arrowhead Deer Park Crystal Geyser Ozarka $411,510,500 $377,878,500 $339,454,300 $194,610,700 $177,940,100 $155,517,000 $140,480,700 $105,627,900 $84,441,140 $77,629,140 Total U.S. Dollar Sales – food, mass, drug, excluding Wal-Mart) 52 weeks ending 10/30/2005 Source: Information Resources Inc.

In terms of relative risk, getting into age segment. And water will continue The term ‘bulk’ often refers to gallon the consumer can pop in, make their the private label segment of the bot- to show the largest amount of growth jugs, most relevant to the supermar- purchase – either for immediate con- tled water category is a no-brainer, as on an absolute basis. Combined, ket channel. It can also refer to the sumption or to take home – and be on consumers don’t see a great degree of these factors create a strong oppor- 5-gallon cooler jugs relevant to home their merry way. difference between high- and low-end tunity that retailers have leveraged and office delivery. But to the c-store brands. to accelerate profit growth while also channel, bulk water refers to a new, “The multi-pack segment in c-store producing differentiation in an other- increasingly important SKU: 24-pack bottled water sales now represents 15 Indeed, according to a recent wise commodity-driven segment.” cases, which drive volume, provide percent of the bottled water PET seg- research report by analysts at Morgan healthy margins and increase dol- ment and has grown 28 percent year Stanley, just 20 percent of bottled- Multiple Growth lar rings without taking up cold vault to date according to ACNielsen,” says water consumers say they are loyal While the growth of single-serve con- space. Seager.  to a particular brand while 40 percent venience-still bottled water (packaged say they purchase whatever brand is in units 1-liter and less) is not surpris- According to NWNA’s Seager, while cheapest [CSP Daily News, Dec. 16, ing given the immediate consumption single-serve units will always be 2005]. profile of the category, the growth of important to the c-store retailer’s bot- HOLDING THE LINE? tom line, promoting multi-pack sales wherever possible, from the cold door fter predicting bottled water would “Just 20 percent of bottled- to the gas pump, represents an out- Alikely see a price increase led by standing opportunity for incremental Nestle Waters in early 2006, beverage water consumers say they are revenue. analyst Bill Pecoriello of Morgan Stan- ley, says he now sees mixed signals loyal to a particular brand.” “Display, display, display multi-packs on the pricing front. of bottled water,” he advises. “Make — Morgan Stanley room for multi-packs in both cold and “We thought there was a chance the warm shelf as well as outside the store industry would take prices up in [the area.” first quarter of] 2006 due to higher “Much of this [growth in private label] multi-packs in the c-store channel is cost resin and other cost pressures,” is driven by a retailer perspective that somewhat unexpected. One might According to Seager, it’s important to Pecoriello wrote in a recently released doesn’t perceive a lot of brand equity assume that multi-packs might be a display your high-margin brands and report. “[But] Nestle indicated [on in many national branded waters,” better fit in the supermarket, club or packs prominently and to price them December 12] it hasn’t received any says Bishop. “Equally important, water, mass channels. Then again, you know competitively with other channels. You indication that either Pepsi or Coke after energy drinks, delivers the high- what happens when you assume have the decided advantage of being plans to follow its water price increase est retail gross margins of any bever- something. a bottled water destination, where in early 2006.” -- Steve Holtz

PAGE 9 of 12 Furthermore, convenience stores Flavors Also Strong are a soft drink destination stop, as 41 While Coca-Cola hasn’t gone quite as percent of all off-premise CSD sales far – Coke Classic remains the com- occur in convenience and gas outlets, pany’s flagship brand – it has shown according to ACNielsen. a recent change of course. Take, for instance, the most recent news out “The C&G channel is a very impor- of Atlanta – the launch of Diet Black tant part of our business,” explains Cherry Vanilla Coke and Black Cherry Marty Eskenazi, vice president of the Vanilla Coke in January 2006. C&G channel for Cadbury Schweppes Americas Beverages (CSAB). “It’s a The simultaneous launch of a diet great channel for consumers to try our and full-calorie brand is a North Ameri- products, with the single-serve format can first for Coca-Cola. acting as a sampling vehicle for us.” “Cherry-flavored beverages are Diets Lead the Way experiencing significant growth, as arbonated soft drinks, the younger generation as well as His- In looking forward to long-term trends are no-calorie soft drinks,” explains mothership of every conve- panic consumers, are growing. in the soft-drink category, the future Katie Bayne, senior vice president, Cnience retailer’s non-alcoholic is now for the diet segment. Over the Coca-Cola Trademark, Coca-Cola beverage operation, have been un- “While they continue to lose share to past few years, both Coca-Cola and North America. “Our fusion of cola, dergoing a radical transformation in bottled water and energy drinks, CSDs Pepsi have seen their diet brands black cherry, and vanilla flavors cre- recent years. With more than half the still represent the largest share of the grow at the expense of their flagship ates a taste that is complex and deli- adults in the U.S. overweight, and non-alcoholic beverage business, offerings. Indeed, Pepsi has reposi- cious.” nearly 25 percent qualifying as obese, whether it’s based on unit volume, dol- tioned Diet Pepsi as the flagship brand consumers have been turning away lar sales or gross profit dollars,” says of the portfolio. And this new focus on The new flavors will replace Vanilla from high-calorie products. One of the David Bishop, director of Barrington, diet products affected the company’s Coke and Diet Vanilla Coke which, major casualties in this mass exodus Ill.-based Willard Bishop Consulting. flavored brands as well. according to the company, will go on has been full-calorie CSDs, which “hiatus” at the end of 2005.  have also come under siege from Overall, the performance of CSDs “Relaunching Diet Mountain Dew is advocacy groups accusing soft drinks in the convenience channel remains a great opportunity for us to grow one While they continue to lose of creating a generation of overweight strong – certainly when compared of our strongest performing brands of share to bottled water and children. to grocery. According to ACNielsen the past few years,” said Indra Nooyi, Convenience Track data, carbonated PepsiCo’s president and Chief Fnan- energy drinks, CSDs still The news isn’t completely bleak, soft drinks accounted for $9.8 billion cial Officer at Morgan Stanley’s Global represent the largest share however. Just as full-calorie soft drinks in retail rings in the c-store channel for Consumer & Retail Conference in of the non-alcoholic bever- have fallen out of favor, diet soft drinks the 52 weeks ending October 8, 2005. New York in early November. “Though age business have taken off. And while colas, the That was up 7.7 percent over the previ- Diet Dew has achieved nearly double- darlings of the baby boom generation ous 52-week period. Meanwhile, CSDs digit growth year to date, significant —David Bishop in its formative years, have fallen off, grew in supermarkets by only 1.3 untapped growth opportunities Willard Bishop Consulting flavored soft drinks, favored by today’s percent during the most recent period. remain.”

PAGE 10 of 12 Advertisers Index

Cadbury Schweppes Americas Beverages PO Box 869077 Plano, Texas 75086-9077 5301 Legacy Drive Plano, Texas 75024 Phone: 972-673-7000 Fax: 972-673-7835

Cadbury Schweppes Americas Beverages (CSAB) is a subsidiary division of Cadbury Schweppes plc. CSAB’s brand portfolio includes Dr Pepper, 7UP, Snapple, Mott’s Apple Juice, RC Cola, A&W Root Beer, Sunkist Soda, Canada Dry, Hawaiian Punch, Schweppes, Diet Rite, Slush Puppie frozen drinks, Clamato, Mr & Mrs T Mixers, Holland House Mixers, Rose’s, Mistic, Yoo-hoo, Orangina, IBC, Stewart’s, Nantucket Nectars and other well-known consumer brands.

Nestle Waters North America 777 West Putnam Avenue Greenwich, CT 06830 Phone: 203-531-4100 Fax: 203-863-0298

Nestle Waters North America Inc. has been the undisputed leader in the North American bottled water industry for nearly two decades. Formed in 1976 with just one brand, Perrier Sparkling Water; today we sell 15 of Europe and North America’s preeminent bottled water brands to our loyal con- sumers. The company follows its credo: “Respect for each other, respect for the environment and respect for community.”

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