Three More Canadian Beverage Trends For 2014

Many experts had created their own lists for food & beverage trends for 2014, how do you make sense of all of these?  Some are more macro-level and includes a generic view toward food & beverage (like this Innova report) while another taps into consumer needs that drive changing beverage preferences (like this CSP publication).  Euromonitor International’s white paper has also listed five beverage trends pertinent to the Canadian landscape (link here, must process credentials before report can be accessed).  These five trends are fairly on point, but may have missed out on some other additional activity that will change the beverage landscape this year.  Here’s some additional points BevWire has noticed and would like you to consider:

Improved Natural Sweeteners To Grow Zero/Low/Mid-Calorie Sodas

Pepsi Next - courtesy of rft3.wordpress.comDr Pepper & Pepsi had both launched mid-calorie sodas with combination sweeteners in the past two years, while Coca-Cola finally took the plunge last year with Coca-Cola Life.  Although Coca-Cola Life has yet to make its entry into the North America, this is a strong sign that everyone believes calorie segmentation for sodas is a step in the right direction.  Coca-Cola also has received FDA approval for Reb-X – their stevia sweetener developed in conjunction with Pure Circle.  In addition, Zevia & Steaz are also among a host of naturally-sweetened soda manufacturers that are gaining broader exposure and shelf space within grocery retailers.

These factors indicate that natural sweeteners are receiving just as much as attention as their regular calorie counterparts – if not more.  Optimizing a soda formula that removes the bitter aftertaste will go a long way toward restoring sales to this segment.

Aspartame Fears Continue to Depress Diet Sodas

The fear over safety of consuming aspartame came to a climax in mid-2013 as Coca-Cola ran an advertisement to dispel fears over this ingredient (link here).  With a greater focus toward ingredient consumption, consumers are leaving diet sodas for other beverage products.  The soda segment as a whole is facing scrutiny for contributing to obesity, but having extra attention on ingredients within diet soda has led to more consumers choosing alternative beverages such as juice, tea, and water.

With a continued rise in competition from adjacent segments and beverage categories, diet sodas will continue their rapid decline relative to the other soda segments.

Small Home Appliances Crowd the Consumer’s Kitchen Counter Space

Courtesy of sodastream.ca

SodaStream’s controversial in the 2013 Super Bowl ad really put them on the map, as well as put other carbonated soft drink manufacturers on notice.  Consumers also noticed this and SodaStream was rewarded with sales as well as increased availability across Canadian retailers.  SodaStream has also benefited with licensing agreements and partnerships to carry branded syrups like Kraft’s Kool-Aid and Country Time.  Starbucks is making inroads to get on your kitchen counter as well, trademarking “Fizzio” in 2013.  From trademark documents, Fizzio is their at-home carbonation unit that will carbonate water into soda flavors.

Outside of at-home carbonation units, coffee & espresso makers are also seeing a bump in sales.  Keurig, Nespresso, Tassimo and other coffee pod makers offering deep discounts on the coffee machine, attracting your initial purchase in order to have you buy exclusive coffee or tea pods from them in the future.

While BevWire doesn’t have an official list where these trends are being ranked, the rise of natural sweeteners certainly seems to be the most likely to take place in early 2014.  That said, we are only 13 days into 2014 and many things can still happen to change up the trends.  Let’s see how this plays out over the next 352 days.

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Coffee War: Kraft & McDonald’s vs Starbucks

McDonald's McCafe coffee, now sold in grocery retailers by Kraft.  Courtesy of mcdonalds.ca

Ever since the 2011 break-up with Starbucks, Kraft had been looking for a beverage partner to package and distribute premium coffee.  Enter McDonald’s McCafe.  The quick service restaurant has been looking for growth opportunities outside of burgers & fries, recently turning their attention to premium coffee.  They have even started selling bagged ground coffee within the restaurant.  However, most coffee drinkers still enjoy their first cup of coffee at home, and gaining distribution to the traditional grocery channel is critical to McDonald’s expansion efforts.  While this partnership benefits to McDonald’s, how will it benefit Kraft?  How will it affect their current coffee brands: Gevalia, Maxwell, and Tassimo?  And what about Starbucks – how will this impact their grocery coffee business?

Kraft Benefits Greatly With a Strong, Already-Built Beverage Brand

It is much easier to leverage a well-known brand rather than build your own.  This is what Kraft is doing.  Even without specifically knowing about McCafe premium coffee, McDonald’s itself is a well-known household name.  McDonald’s has also worked hard to change its image as a destination with unhealthy food options.  This has culminated into their successful, award-winning “Our Food.  Your Questions” campaign (read about it here).  As such, consumers are more open and knowledgeable about McDonald’s healthier options like snack wraps or fruit smoothies.  Kraft is able to leverage on McDonald’s name to help them gain some shelf space in grocery retailers.

Gevalia coffee - courtesy of commonsensewithmoney.com

Before ending their partnership, Kraft had helped transform Starbucks’ grocery business from an initial $50 million to nearly $500 million in annual sales.  With Starbucks wresting full control of their coffee business from Kraft, they were forced to refocus on Maxwell House, Gevalia, and Tassimo.  Maxwell House was a value offering, and competed against store-brand coffee.  Growing this brand would only serve to devalue the category.  Tassimo single-serve at-home units were expensive (and still is), not to mention ahead of market trends and did not have a strong market presence.  Growing this would take a considerable amount of investment and still not fill the void left by Starbucks’ premium coffee.  Gevalia was Kraft’s best bet, and still they had to build this premium coffee brand.  You can see from the clip below that they fully intend on competing against Starbucks head-to-head.  And if you haven’t heard about Gevalia, then you’re not alone. It still has work to do before achieving high enough awareness levels to penetrate the shopper’s consideration set when it comes to buying ground coffee in the grocery aisle.

With McDonald’s McCafe coffee part of their portfolio, Kraft now brings another strong and well-known coffee brand to retailers.  However, it only partially fills the void created by Starbucks.  Tony Vernon – Kraft’s Chief Executive – says McCafe is considered a step above Maxwell House, but still below their premium coffee Gevalia (story link here).  That said, Kraft expects McDonald’s McCafe to fill a mid-tier coffee segment and regain lost shelf space, but they still expect Gevalia to be their premium brand to compete against Starbucks.

How Will This Affect Starbucks?

At this point, this partnership is something to monitor but not react.  Within the coffee segment, Starbucks consumers are highly loyal and may not interact much with McCafe coffee.  Considering where McDonald’s McCafe coffee are priced, Starbucks’ similar offerings figures to be priced at a 20% premium – at least.  Consumers also buy Starbucks because it is considered an “affordable luxury” item while McCafe is considered a broader appeal item.  Unless coffee drinkers suddenly change their taste preferences, McCafe will not steal away many Starbucks coffee drinkers.  Within Kraft’s portfolio, Gevalia still remains Starbucks’ top threat yet the brand itself has some work to do.  Gevalia still has to gain awareness and cultivate a rich premium coffee history.

The evolution of Starbucks.  Coffee has not been their core focus since 2011.  Courtesy of  brandautopsy.com

And while coffee still remains the core component of Starbucks’ business, they have been moving to expand their own portfolio.  They have smoothies.  They have tea.  They even have yogurt and baked goods.  They plan on having their own soda line at some point in the future.  What was a company that  only attracted coffee drinkers has morphed into one that attracts any thirsty (or hungry) consumer.

So as Kraft finds a partner to fill a gap in their coffee business, Starbucks has branched out to other beverage segments.  Coffee is a large part of the beverage market and one where a few manufacturers compete in.  It’s a good thing that despite the size of this segment, all three companies – Kraft, McDonald’s, and Starbucks – are diversified and have other focal points to turn their attention to.

 

Nestea Enters Crowded Liquid Enhancers Space

Nestea's Liquid Water Enhancer - image courtesy of bevnet.com
Nestea’s Liquid Water Enhancer – image courtesy of bevnet.com

It seems that Nestea is primed to enter the liquid enhancers space soon (link here).  In a segment that grows increasingly crowded with strong brand names like Kraft MiO, Crystal Light Liquid, Dasani Drops, Powerade Zero Drops, is this the right decision by Nestea to enter with their own liquid enhancer?  Aside from the well-known branded players, a host of grocery retailers already have their own store brand (per this BevReview article, Walmart, Supervalu and Winn-Dixie all have their own versions).  Can this beverage segment sustain another branded player?  With various offerings available and finite space in the grocery aisle, will this launch actually be beneficial?  It depends on who you talk to.

First, let’s take a look at what Nestea is introducing to the marketplace.  Nestea Liquid Water Enhancer will arrive exclusively to Target in three flavors:  Iced Tea with Lemon, Iced Tea with Peach and Half & Half Iced Tea.  Another flavor will hit the rest of the market afterwards: Green Tea Citrus.  The Nestea Liquid Water Enhancers will be available in 26-serving bottles.  Because there is no other tea-based liquid enhancer in the marketplace, the Nestea product is unique and certainly adds value to the grocery aisle.  The consumer will now be able to find their Nestea drink mixes in both powder and liquid formats.  So Nestea benefits from this product launch, giving themselves a broader consumer reach.  Now that Nestea has a unique product, they just need to go and “sell” it to the grocery retailer that their product is beneficial for them too.

Retailers, however, may interpret this as more of a headache than anything.  With liquid enhancers expanding so rapidly, it looks like manufacturers just want to launch a product and get in on the gold rush.  With another product added to the overall consideration set, the retailers must decide which ones to carry and help them grow their business.  Do they maintain the same space in the grocery aisle for these products?  Or should they rationalize some other products?  The retailer may simply pass the problem on to manufacturers, and have them create the most compelling sell story to gain retailer distribution.  What may ensue should certainly benefit consumers and retailers: manufacturers will undoubtedly be offering some form of pricing and promotional support to get them to take their product in-store.

Coca-Cola's Powerade Zero Drops - image courtesy of coca-colacompany.com
Coca-Cola’s Powerade Zero Drops – image courtesy of coca-colacompany.com

For liquid enhancers and the consumer, Nestea’s entry is a positive addition.  Nestea’s entry carves out a niche for tea-based liquid enhancers, similar to how Powerade Zero Drops and MiO Fit created the sports niche.  Despite further fragmenting liquid enhancers into more beverage segments, this launch will be beneficial to the category.  As more marketing dollars get behind liquid enhancers, this may spell opportunity for even more product launches.  If consumers are willing to mix water with enhancers for caffeine, electrolytes, and tea, what else may they be interested in?  How about juices?  Or carbonated soda?  In due time, consumers may be able to find liquid enhancers for any beverage that is currently available in can or bottle format.

While the Nestea launch further crowds the liquid enhancer market, it still benefits everyone.  Consumers get another liquid enhancer choice.  Nestea improve their consumer reach.  And retailers linking these two groups together will be rewarded with more profits.

Newest Japanese Soft Drink: Hot Ginger Ale

Canada Dry Japan's Hot Gingerale - via huffpost.com
Canada Dry Japan’s Hot Gingerale – via huffpost.com

Japan has always had some interesting innovations with their beverages, ranging from soda flavors such as cucumber, green tea, and Cheetos.  At the root of it all, these quirky flavors (to Westerners) are an indication of how different a Japanese consumer’s taste preferences are.  The latest innovation in Japan’s carbonated soft drink category?  Hot Ginger Ale from Coca-Cola’s Canada Dry.  As this new product is gearing up for introduction in late October, many questions are left unanswered.  How is this can heated up?  Will soda manufacturers in Japan develop other heated soda beverages?  Will it make its way over to America?

While hot drinks are normally found in Japan, hot carbonated drinks are quite different.  Carbonation is typically lost when a soda is heated up, but Coca-Cola has managed to maintain the beverage’s carbonation despite it being heated up.  After four years of research & testing, their technology allows for the beverage to maintain carbonated when heated up without burning the hand.  The Gizmag has a feature piece on Hot Can, one of the companies that has developed self-heating can technology (article link here).  The can is multi-layered becomes heat-activated with the press of a button, some shaking, and about 20-30 seconds of wait time.  The can’s layers separate the beverage from the heat activation layer, and will add a predetermined amount of heat upon activation.  Therefore storage at room temperature is best – fridge-storage means the heating the beverage up won’t really make it that hot, while storing it in a already hot place will burn the hand.  The can has a heat indicator to safeguard against burning the hand.

Given that Japanese drinks have explored many new frontiers on taste, packaging, and now temperature, it likely won’t be the last area where they try launching new products in.  Apparently, Coca-Cola has already introduced self-heating coffees in Japan.  This goes to show that other heated drinks may not be entirely uncommon.  Should this Hot Ginger Ale product become successful, there is no limit to what other soft drinks will be introduced targeted for heated consumption.  Kirin Japan is already slated to launch their own heated soft drink a couple of weeks after Hot Ginger Ale hits the market – titled Kirin No Awa: Hot Hojun Apple & Hop.  Could Pepsi also be in the works to launch their own heated beverage soon as well?

So far, these heated soft drinks are primed for release in Japan and no other country.  However, the technology is more important than the soft drink itself.  While Westerners may find warm soft drinks hard to stomach, there may be other uses for this technology.  Heated coffee and tea sounds very plausible to penetrate the North American beverage landscape, and heated sport drinks and energy drinks may not be all that weird either.  And despite our perception of beverages being best served hot or cold, it’s innovations like these that really make you think about whether there is a different way to consume the beverage.

what happened to vitaminwater?

vw+vw0 canada line-up courtesy of @vitaminwater_bc

Since the explosion of vitaminwater on to the beverage scene years ago, momentum appears to have subsided for the brand and enhanced waters.  It seems that a variety of market conditions has reduced excitement for vitaminwater to just another product on the shelf.  There are certainly more reasons behind the brand’s continued decline, but BevWire will detail three major contributing market conditions.  

Market Condition #1 – vitaminwater has benefited and been obstructed by being a part of Coca-Cola’s beverage family.  As highlighted briefly in an earlier post about Zevia, vitaminwater saw immense benefits from the Coca-Cola acquisition.  The enhanced water brand entered a broader distribution network that vastly improved the brand’s availability.  At the same time, their initial marketing strategy was to be driven by “consumer demand”, relying on key influencers to spread word for the product.  This type of demand ensured that consumers and retailers were willing to pay a premium, and made discounting less unnecessary.  However, as Pepsi’s Aquafina Plus (in Canada) and SoBe Lifewater (in the U.S.) kept on promoting at enormous discounts, vitaminwater was compelled to react.  Without their premium positioning, vitaminwater became just another brand in Coca-Cola’s portfolio that had to fight for promotional dollars.  And with Coca-Cola focused on growing its sparkling business of Red (Coca-Cola),  Silver (Diet Coke), and Black (Coke Zero), a host of beverage brands lost promotional funding.  After initial success in the Canadian market from 2007 to roughly 2010, the vitaminwater has slowly lost market visibility as advertising support shifted more to other Coca-Cola properties.

Evolution Fresh - courtesy of drinks-business-review.comMarket Condition #2 – shifting consumer trends and preferences, highlighted by more juice, tea and energy drink entrants.  Since 2010, we have seen more product releases coming out from the juice, energy drink and ready-to-drink tea segments.  Starbucks was a strong force that expedited this trend.  Their acquisitions of Evolution Fresh and Teavana, along with their Starbucks Refreshers product launch gave them greater market coverage and allowed them to capitalize on the consumer trends.  In energy, the big three of Red Bull, Rockstar, and Monster all had product innovations enter the marketplace.  And also some negative media attention that led to consumers increasingly purchase these products to find out what whether all the extra attention was merited.  With consumers increasingly empahsizing health benefits – and vitaminwater also paying attention to this with their vitaminwater zero production introduction – the natural benefits of juice and tea became top of mind.  Because vitaminwater was relatively less healthy than these other products in the emerging segments, consumers shifted their purchase dollars from enhanced waters to juices, teas, and energy drinks.

 

via forum.smartcanucks.ca – just one of many Aquafina Plus coupons. This one is a fairly reasonable 33% discount.

Market Condition #3 – retailers react to new reality of people’s purchase habits.  Following the economic recession (that some still think we’re in), many Canadians buying behavior has focused more intensively on price.  That is not to say that they are not willing to pay more, but the value-benefit equation is more influential of their purchase decision.  Retailers have long pressured manufacturers for price concessions and finally Coca-Cola gave in to price promotions on vitaminwater in 2010 – around the time its descent began.  What happened next was more price cutting by its competitors to maintain their own sales – Aquafina Plus discounts became much deeper than before.  Ultimately this leads to the current situation, which is reduced segment value.  Since vitaminwater is no longer the premium brand that it once was, retail support started to transfer to other segments.  Shelf space for vitaminwater was compromised, and sku rationalization also start to slowly creep in.

While these three conditions do not represent the entirety of why vitaminwater is losing steam, it summarizes what is happening.  There are both internal and external contributors.  However, all hope shouldn’t be lost on the segment itself.  More competitors will look to redefine the value equation because the market leader is down.  Bottled water sales itself is on the incline.  And other vitamin beverages like Karma, Activate, and even Rockstar Energy Waters look to carve out their own niche in the marketplace.  Liquid enhancers such as Dasani Drops, Kraft MiO, Crystal Light Liquid are also seeing sales gains too.

Just wait to see how vitaminwater will react to the competitive pressure and what they might do to revive the one-time darling of the beverage industry.

Starbucks Buys Teavana, Diversifies Beyond Coffee

Starbucks Logo Evolution

It appears that Starbucks’ recent purchase of Teavana has some analysts and coffee drinkers scratching their heads.  Considering that the coffee giant already owns a tea brand in Tazo, why would they want to purchase another tea brand?

The simple answer is that Starbucks is readying their continued evolution to a diversified beverage company.  Having changed their logo to remove the words of “Starbucks Coffee” shows their seriousness of extending their brand beyond just coffee, and beyond the Starbucks name. Their past acquisitions of Tazo (1999), Ethos Water (2005), and Evolution Fresh (2011) have been instrumental for expanding their beverage footprint in the consumer’s mind and physical purchase locations.  And while most of these offerings have been incorporated within the Starbucks coffee shops, other products have expanded their reach into grocery supermarkets and other consumer outlets.  Products like the bottled Frappucinos, Starbucks VIA Ready Brew, Verisimo system, Starbucks Refreshers, Tazo Tea, and Evolution Fresh juices and smoothies have all permeated other channels and have seen some form of success beyond the Starbucks coffee shops.

So what can we expect the Teavana purchase to do for Starbucks?  How is this product differentiated from Tazo Tea?  Will there be some form of cannibalization between the two tea offerings under the Starbucks portfolio?

Teavana Logo

The Teavana purchase will undoubtedly expand Starbucks’ reach outside their branded coffee shops.  Teavana owns and operates their own stores, which may soon incorporate select Starbucks products that fits into the Teavana theme and strategy.  For example, selling Starbucks coffee within Teavana shops may not be appropriate, but selling Evolution Fresh juices and smoothies and Ethos Water may be a possibility.  This cross-selling effort will certainly increase the reach of non-coffee beverages under their portfolio.  Also, considering that Starbucks has started to open standalone Evolution Fresh locations in the U.S., those locations may also incorporate some Teavana offerings as well.  Aside from the bricks and mortar stores that Teavana operates, Starbucks also acquires their online infrastructure where the loose leaf tea products are sold as well.  This also significantly buffs up Starbucks online presence and can provide an entirely new set of learnings and opportunities.  Starbucks has mainly existed as a bricks and mortar presence insofar to create that “third location” away between the home and office, but expanding their online presence gives them a chance to offer additional products to the consumer.  How about purchasing some VIA Ready Brew with that Teavana tea tin?

With regard to product differentiation, it’s commonly understood that the Tazo-branded products are bottled or tea bags.  The main opportunity does not exist in offering a different form of tea packaging, but the expanded consumption occasion.  Tea bags or bottled tea are typically consumed on-the-go or at the office, because the consumer is in a rush and does not have the time to sit and enjoy the beverage.  Teavana’s loose leaf tea allows Starbucks to reach the consumer in their relaxed state – at home or at the office – when they have more time to enjoy their beverage.  In that aspect, these two tea brands should be complimentary to the overall “tea consumer” rather than cannibalistic.  It would also make sense that Starbucks only minimally incorporates the Teavana products into their existing Starbucks establish (similar to Evolution Fresh) while maintaining the operations separately and at arm’s length.

At the end of it all, this acquisition bolsters Starbucks’ presence and further entrenches their beverage offerings into the consumers’ hands – be it at the office, on the streets, or at home.

This also signals a warning shot to the traditional beverage manufacturers (ie Coke, Pepsi, Dr Pepper Snapple Group) that the total beverage landscape is changing dramatically.  Consumers are increasingly turning away from the the sodas, to coffees, bottled water, and teas.   And Starbucks is leading the charge in this area.  If you don’t believe me, check out their video below.

Honest Tea Modifies Packaging To Benefit Consumers

Honest Tea's new bottom - courtesy of mnn.com

Honest Tea typically produces their beverages in plastic bottles that have a dome-shape at the bottom of it, but this dome-shaped bottom has caused some consumers that Honest Tea is tricking them in relation to the actual amount of liquid inside each bottle.  While the bottom says 16.9oz (473ml) liquid is inside each bottom, some are wondering if there’s actually less.  As a result, they’ve issued a statement on their website to clarify this:

We recently switched to a thinner bottle, one which is 22% lighter. This saves us money and saves the world resources. The only problem is that the thinner bottle had the risk of getting dented. In fact, this was a real problem that forced us to redesign the bottle. To help keep its shape, the inside must be under pressure. When the bottle is filled with hot tea, the liquid expands and the plug on the bottom pops out. (If you squeeze real hard, you can make this happen.) Then as the tea cools, the plug pops back in and creates the pressure on the inside that prevents the bottles from being damaged. The thinner plastic means we needed more pressure and hence the bigger plug. There really is 16.9 oz. inside and we aren’t trying to pull a fast one. But we can see how you could get confused or could think that we are trying to be deceptive. We clearly need to do a better job explaining why the bottle has this design. In the next label run we plan to say something to explain this to our customers. We hope that makes you feel that you can still trust us and will stick with us.

Honest Tea has since switched to new, flatter bottom bottles to make it less confusing for their consumers.  This packaging adjustment is great timing as their parent company, Coca-Cola Refreshments, is exploring growth opportunities to increase Honest Tea’s visibility and awareness. Nestea will be distributed by Nestle Waters (Nestea’s original parent) starting sometime in 2013.  This means that the tea category is poised to be shaken up slightly with more competition as Nestle Waters will undoubtedly be promoting Nestea vigorously to gain sales (bevwire article link here).

Honest Tea flat bottom

For Honest Tea, paying attention to what their users are saying is just the entrance fee into the growing tea category.  The packaging change-up shows their current users that the company has heard what they are saying, but it does not bring in any new users.  What Honest Tea does in addition to this adjustment is what may help them gain more space in the category.  As they look for growth opportunities and try to gain more space at the retailers, their conversations and results with the retailer’s buyer are paramount.  They must show the retailer that they have a better product, a more profitable product, or both (which would be the best scenario).  In which case, showing them consumer demand is up for tea products and how Honest Tea best satisfies the most is what determines whether they will win or lose.

 For Honest Tea to have success, switching to flatter bottoms is just the first of many steps.  Most retailers may already have their 2012 summer shelf and cooler spacing planned, but if a product not in the planning set shows potential, it can merit a replacement of a slow selling product.  If Honest Tea can convince that they deserve more shelf space at retailers this summer, that would go a long way to helping them out gain space when Nestea comes of a competitor’s delivery truck.

Snapple’s Diet Half & Half Criticized, Message Lost In Stereotypes

Snapple’s recent marketing efforts for their half tea, half lemonade diet beverage is criticized for being racist, rather than lauded for its comedic relief.  The commercial’s aim was to stir up interest on which half of the beverage is the better: tea or lemonade.  Instead, its portayal of the office workers supporting tea (East Indian) or lemonade (Asian) has stirred up controversy for being stereotypical.  The lemonade supporter wears a yellow outfit and plays ping pong to support lemonade, while the tea supporter wears a jockey outfit and also plays ping pong to debate his point.  The two sides end up wearing sumo outfits and battle on a wrestling mat to see who wins.  See the commercial below.

This makes the overall commercial very confusing as it spends too much time debating which half is better, and only uses the remaining 5-10 seconds to tell the audience that neither half matters.  At the same time, hashtags for #tea and #lemonade are shown to extend the debate through Twitter at hashout.snapple.com.

All this initial attention on tea or lemonade has muted the commercial’s overarching message.  Neither half is more important than the other; it is the half lemonade PLUS half tea that gives the beverage the great taste consumers want.   Extending the conversation to Twitter also appears to be a bad idea as users are encouraged to vote on which half is better.  The debate may generate more buzz for the product, but it does not translate to sales.  It also reinforces the message that one half is better than the other.  In the end, this may lead users to believe that the Diet Half ‘n’ Half is really a Diet Two-Third ‘n’ One-Third, or a product that is not evenly mixed to provide a refreshing taste.

Based on the commercial alone, would you go on-line to join in on debate?  Do you even care which half is better?  Or do you ultimately prefer AriZona’s Arnold Palmer and would not bother trying this product?

The Fate of Nestea and FUZE in the Tea Category

Nestea

Most readers that also follow the beverage industry or the BevWire twitter feed know that Coca-Cola and Nestle Waters have altered their distribution agreement, with Nestea to be distributed by Nestle Waters after the end of 2012 (source article here).  The article goes on to state that Coca-Cola will focus on increasing the visibility for their own line of teas, such as FUZE, Honest Tea, Gold Peak, and Peace Tea.  How will this play out for the two beverage giants, Coca-Cola and Nestle?

Nestle Waters – a spinoff from the Nestle S.A. – originally bottled and distributed water exclusively, but has recently began to extend their offerings with a tea acquisition.  Bringing Nestea back into the fold for them now gives them a much stronger and balance tea portfolio.  Nestea will serve the value and price-conscious end of the tea spectrum, while Sweet Leaf Tea and Tradewinds cater to consumers at the organic and premium end of the spectrum.  Nestea itself is also popular and likely ranks as one of the larger tea brands in North America (other major players in a oligopolis category being Lipton, AriZona, Snapple).  Nestea may very perform better under new ownership, since its exclusive business operations are waters and teas. It may likely benefit with higher marketing budgets as they now become a key brand among some lesser known brands, and competes with fewer brands for funding.  Business customers like Wal-Mart, CVS, and other supermarkets are not likely to be too affected since they already stock Nestle Waters products, so Nestea will now be brought to them by the same trucks that the Nestle Waters products come off of.  Consumers may not even notice any difference, because the product is essentially the same as taste and packaging stay the same.

How about for Coca-Cola, how does this distribution partnership affect them?  With Nestea no longer coming off their delivery trucks, the company’s focus is to grow FUZE first and foremost.  Honest Tea, Gold Peak, and Peace Tea will also benefit from increased attention.  However, although FUZE stands to have the most opportunity to make a name for itself in the tea category, the brand is somewhat struggling currently.  FUZE is currently known for its juice offerings (except for Subway where it is already available as a fountain tea beverage) but struggling to fully differentiate itself among other competitors.  With the exception of FUZE’s Slenderize juice line (low-calorie benefit), FUZE’s other offerings are not easily connecting with consumers as a vitamin-enhanced juice.  Consumers currently see the FUZE line as just another emerging juice product that blends together unique fruits (peaches with mangos, bananas with coconuts, etc).

Fuze lineup - courtesy of foodbizdaily.com

Coca-Cola’s first order of business is to ensure that consumers understand the value proposition and benefits of the FUZE.  And because the company now understands that FUZE will represent both juices and teas, their positioning and c0mmunication will be markedly different from what it was before – simply raising the profile will not be enough.  The key message can no longer be about vitamin-enhanced juices, but either vitamin-enhanced juices and teas  or simply vitamin-enhanced products.  In that vein, it will be interesting to see what type of advertising message FUZE will come up with.

Another key area of concern may be the pricing strategy for FUZE.  Nestea exists as a value player in tea, while FUZE is a premium-priced juice offering.  If FUZE were to replace Nestea as Coca-Cola’s value tea offering, FUZE will have to adjust its pricing strategy to enter as a value competitor.  Is that in itself a good strategy?  As a company, do you want to trade down from a premium offering (higher margin product) to sell incremental bottles but make significantly lower margins?

Although Nestea will not be officially transitioned to Nestle Waters until 2013, there is a lot of preparation for both companies to do.  Coca-Cola will have to maintain its efforts on Nestea in North America, but be mindful that by 2013 Nestea will be a product that competes against their own tea offerings.  They also cannot legitimately stop their efforts on promoting Nestea since Coca-Cola still holds distribution rights for Nestea elsewhere in the world (Europe, Asia, etc).  At the same time, Coca-Cola must be working hard to raise FUZE’s profile as well as their other offerings to cover for the loss of Nestea.  On Nestle’s part, they must prepare for taking on a large tea brand and look for opportunities to increase Nestea’s market position.

There’s no word on whether how much of this will affect Canada, but since Canada’s market is closely affiliated to the American market, there is likely to be some impact.  Keep an eye out for these changes when Nestea changes hands.

RTD Tea Category Growing – Driven By Convenience and Natural Food Stores

Arizona and Tazo tea

Packaged Facts published a research paper in early October stating that Ready-To-Drink (abbreviated RTD,  sometimes referred to refrigerated tea or bottled tea) is showing growth and resilience despite an economic downtown in the United States (link to the abstract here, but unless you want to buy the report you won’t know the full details of the research).  I’ve also wrote about the tea category’s growth in convenience stores earlier in the year (link here).

While the focus is entirely on the United States, there are some similarities between the two markets of U.S. and Canada, so the category’s growth is relevant to consumers here.  Packaged Fact’s research abstract points to the growth being driven by convenience stores and natural  food stores, although grocery stores remain the top channel that shoppers choose to purchase tea from.  In Canada, I would suggest that specific tea shops and also coffee shops (think Starbucks, Tim Horton’s, Second Cup, and Blenz, etc) also contributed to the tea’s growth.

Consumers already have a belief that tea is a healthier option relative to coffee, and many are sacrificing coffee beverages for tea or other caffeinated beverages.  Therefore the coffee shop’s survival depends on their ability to expand their beverage offerings beyond what they are experts at.  Walk into a Starbucks and you will see Tazo tea, Naked Juice, and Ethos water,  while Tim Horton’s will have a refrigerated section that includes Lipton bottled tea.  While these coffee shops’ main purpose is to serve coffee, having tea and other category options allows them to keep the customer happy and retain them, rather than losing them to a competitor.  After all, would you still go into a coffee shop with a friend if neither of you wanted coffee and they only served coffee, why not go into a tea shop?

Honest and Lipton tea

Focusing back on the growth of RTD tea, the report mentions that natural food stores drove double digit growth.  This point is intriguing because natural food stores are seen as niche and somewhat unconventional in their grocery offerings.  However, the growth of tea products in this channel may indicate that consumers are receptive to healthier alternatives, and bottled tea products that are stocked in these natural food stores may soon see wider distribution because of this healthy trend.  Another insight may be beverage manufacturers anticipating this trend and have looked to get their tea products listed and distributed in natural food stores to reach a wider audience.

In any case, it looks as if the tea category’s growth has very strong potential in the upcoming years.  As a healthy alternative to carbonated beverages and coffee, tea may be growing at these beverage category’s expense.  And it may provide competition in more than the traditional setting of your grocery store’s beverage aisle, as coffee shops and natural food stores are increasingly stocking tea options.

Taking this one step further, how can beverage manufacturers like Coca-Cola and Pepsi protect their carbonated offerings?  Since the beverage conglomerates also have tea offerings in their beverage portfolios (Coca-Cola with Nestea and Honest Tea, Pepsi with Lipton and SoBe), a solution may be a two step process.  First, gain distribution within these natural food stores (and other alternative channels like tea shops and pharmacies) for their respective tea beverages.  Next, understanding that there may be space and refrigeration limitations within the store, provide a health-branded cooler (of course, also include the manufacturer’s logo somewhere) to resolve these limitations, and bring in quick-moving and higher margin carbonated soft drinks.  These carbonated products can offset the cooler’s cost and provide these alternative channel retailers with a wider beverage selection to grow their customer base.

So the next time you step into a natural food store, keep a look out for the tea offerings they have available.  Are the tea offerings all-natural and names that you have rarely heard of?  If so, look out for these beverages in your traditional grocery store aisle in the near future, as they may be gaining wider acceptance in the market.  Or are they the Honest Teas and Liptons that you are familiar with?  If so, then the beverage manufacturer has successfully entered the alternative channel to expand their tea’s growth.