2009 has challenged beverage companies, and business in general, like few previous years have. Beverage Industry took a mid-year poll of some of the beverage industry’s top leaders in diverse product categories to find out how the industry is faring. None of our executives downplayed the effects of the recession, but to a person, their responses were optimistic and reflected a spirit of innovation.

 

Q: 2009 HAS BEEN QUITE A UNIQUE YEAR. WHAT ARE SOME OF YOUR THOUGHTS ON HOW THE ECONOMY IS AFFECTING THE BEVERAGE INDUSTRY?

 

Randy Papadellis: The economy has impacted the industry much as you might expect. Value brands seem to be doing a little bit better, although I’ve got to tell you that Ocean Spray is flying in the face of those trends. But I think as an industry, the value brands seem to be doing better than perhaps they were prior to the economic downturn, and that would be expected.

 

But Ocean Spray, particularly within our juice category, is growing at almost record levels and continues to do that. And we’re certainly not a price brand, per se. But I think what we’re doing is riding the coattails of significant innovation and investment in things like advertising that we’ve been making over the last several years. Couple that with the health benefits of eating and drinking cranberries, I think, has made for a good consumer story, even during tough economic times.

 

Jim Koch: My first thought is, boy, we’re lucky to be in alcoholic beverages and not in cars or real estate or just about anything else. I think alcoholic beverages have held up well in general. Beer even more so, and craft beer even more than that. Craft beer is growing with healthy pricing and very healthy consumer attitudes.

 

Howard Schultz: Consumers are being more and more thoughtful about every dollar they spend. We need to offer them compelling reasons to spend their hard-earned money with us.

 

Mike Weinstein: The impact the recessionary economy has had on consumers is well documented. Obviously people without jobs or worried about their finances are cutting down on consumption in all categories. There are numerous other behavioral changes that are also being seen that impact beverages — for example, trade-downs from branded products to private label, movement from bottled beverage products to free tap water, and shifts from higher unit priced products to lower priced ones.

 

For the smaller beverage companies, especially those in emerging segments, there is other collateral damage from the new economy. As consumers become more frugal, they become less prone to experimentation or paying up for “image gratification” products when all they really need is their thirst quenched. And while “better for you” products had been all the rage in good times, fewer people are willing to spend a premium for benefits like nutraceutical additives or organic ingredients. The new attitude is “better unhealthy than broke.”

 

The credit crunch has also dried up a lot of investment funding, which has been tough on those getting started on new ventures or those going into expansion mode. And the small up-and-down-the-street retailer, where many of these products get their start, are being disproportionately affected. Store owners have fewer dollars to spend on new brands or building store inventory.

 

On the positive side, for those who can weather the storm, the lessons learned and the reduced number of competitors can spell future opportunity.

 

Peter Burns: We’ve found that consumers are increasingly looking for products that offer a combination of consistent quality, unique variety, great taste and value. As a premium specialty tea company, Celestial Seasonings provides a very strong experiential taste benefit at a terrific value — about 15 cents a cup. On the other hand, super-premium tea and beverage brands are struggling because their price points have become less approachable to mainstream consumers. Consumers also are making more purchasing decisions at shelf, so it’s really important for us to differentiate our brand through innovation and packaging.

 

 

Papadellis: I think they’re the same challenges that every company would face, which is how do we continue to keep our foot on the investment accelerator, if you will. Innovation and advertising are so important to our industry and the temptation is to let up on the accelerator a little bit during tough times when the real answer is to be doing the exact opposite — to be doing even more during tough times. But access to capital and the ability to invest, I think, are the biggest challenges that most companies, including beverage companies, are facing right now.

 

Weinstein: Obviously the biggest challenge facing the industry right now is the economy. Of course, every year that I’ve been in this business the beverage industry has had a list of challenges that we always seem to find a way to overcome. As government at every level struggles for ways to raise revenues, they seem to quickly turn to beverages as an item that they can put tax on that can raise large sums of money. And despite all the work that the industry has done in trying to improve the imagery of beverages from a nutritional standpoint, the sparkling category continues to be under pressure from critics around key ingredients including high fructose corn syrup and even non-caloric sweeteners.

 

Commodity costs continue to loom large as increases in any of the key raw materials can play a significant impact on pricing going forward. And as more consumers become environmentally conscious, packaged beverages, particularly water, will be under great pressure and scrutiny to ensure neutral carbon footprints and recyclability.

 

Again on the positive side, high unemployment rates have made it easier to find qualified employees in every capacity from drivers to warehouse workers to salespeople.

 

Schultz: I think the weak global economy is still the biggest challenge facing the beverage industry — and to be honest — just about all sectors of the economy.

 

Koch: There’s always the looming threat of taxes and regulation. We’re seeing excise tax increases in a handful of states. We had an increase in the sales tax on alcohol here in Massachusetts and there’s always the threat of federal excise taxes increasing. So that’s one issue.

 

I think, in beer, adapting to the new reality of the industry here in the United States being dominated by two large foreign conglomerates — it’s like an earthquake, at first it hits and then you see what happens. It will take the next few years to see the real consequences of having an American beer industry dominated by foreign conglomerates.

 

Burns: Customer consolidation — both retailer and distributor — is a big challenge right now. Margin pressures caused by a number of factors, including fluctuating ingredient costs, are always present as well. Of course, it’s always a challenge to stay close to the consumer, but it’s paramount to do so. Having an understanding of what drives consumer purchasing decisions and then being able to translate that knowledge into effective and relevant news is key for every brand.

 

 

Schultz: We have taken a close look at every expense and every aspect of our operations. And as a result, we have become much more disciplined in the way we run our business, without sacrificing the customer experience. These changes aren’t temporary. They will remain part of our organization and culture, and will pay off even more as the economy improves.

 

Koch: Some are obvious and others will take five or 10 years, and we’ll look back and say, ‘We could have seen that coming in 2009 if we looked more closely.’ There’s obviously a continued opportunity as craft beer drinkers continue to experiment with new styles of beer and new occasions for beer. The slogan that I use to kind of summarize what has started to happen and will continue over the next five to 10 years is that beer is the new wine. The same ignition of consumer interest that happened in wine in the 1980s, I believe, has now come to beer. The consumer is trading up. The mass marketed brands are stable but the growth is all in the high end. Consumers are pairing food with beer. Consumers are using specially designed glassware for different beers. Consumers are getting educated about the history and tradition and variety of beer. And consumers are putting beer in what traditionally would be thought of as wine occasions, like fine dining.

 

It’s not out of the question that the generation that is in their 20s now will ultimately adopt beer in the same way that their parents adopted wine. That could be quite transformational, and the independent craft brewers are making beers so they’re worthy of the same respect that fine wine enjoys.

 

Papadellis: Certainly for Ocean Spray, we believe there has always been an opportunity to merge the cranberry with other healthy fruits and into new products. For example, this year we launched a line of new Cranberry Pomegranate items that have done incredibly well for us, surpassing our expectations. The pomegranate, being yet another healthy red fruit when combined with the cranberry, really delivers some terrific consumer innovation.

 

We also have looked at blueberries as an opportunity. We’re currently in test market in several markets testing a blueberry juice product. You might think, ‘What’s the big deal about that?’ but there really isn’t a major national brand of blueberry juice out there, and we think Ocean Spray can fit that bill quite nicely.

 

Our recently introduced Cranergy product, which is essentially an all-natural energy product, continues to do very, very well for us. So I would say those are the biggest areas of opportunity that have emerged for Ocean Spray this year.

 

I think the key for the industry has been to continue to look at products that are new, that are innovative and continue to deliver on the health equation.

 

Weinstein: The great thing about the beverage industry is that there are always numerous opportunities for volume and growth. New ideas and new positionings are always close at hand. The approval of stevia this year added new opportunities for natural low-calorie entries. The energy shot category, which is a few years old, really took off in 2009 with probably 100 guys looking for the 20 percent of the market that 5 Hour Energy doesn’t own.

 

There are also other emerging niche segments that have captured some distributor and consumer attention of late — coconut waters, protein drinks, anything with antioxidants like acai or pomegranate. And, of course, the value play this year is big. Low-priced, large-size bottles and cans seem to be thriving in the new economy.

 

Burns: We have a number of new opportunities that we’re really excited about, especially in a category where consumers are motivated by the treasure hunt of discovering new flavors and emerging varieties that deliver healthful benefits. We think the smoother flavor of our reformulated Green Teas will introduce us to a whole new group of consumers who have been turned off by green tea’s reputation for bitterness, and we see real opportunity taking strong power sub-brands and expanding them in ways that strongly appeal to consumers — like expanding our Sleepytime franchise with Sleepytime Vanilla.

 

There’s also a great opportunity in broadening the distribution and improving the product mix of our Wellness Tea line.

 

From a marketing standpoint, we’ve taken the opportunity to greatly expand our online consumer communication. We’re proud of our longstanding commitment to environmental and social responsibility, so we’ve increased the CSR content of our Web site with a new section called “Healthy Teas, Healthy Planet.” We’ve also welcomed nearly 1,000 brand fans to our Facebook page in just a few months’ time. Consumers can expect to hear even more from us in this increasingly important space in the coming months.

 

Finally, our partnership with Green Mountain Coffee Roasters is expanding to include additional hot and iced K-Cup product offerings. This is an important means of pushing beyond our core hot tea business into a rapidly expanding new category.

 

 

Schultz: We’re working hard to enhance the experience our customers have in our stores while continuing to innovate. In February, we launched Starbucks Via Ready Brew — a truly great cup of coffee that replicates the body and flavor of Starbucks coffee in an instant form. And this summer we have been rolling out a new food program with a focus on real, wholesome ingredients. We’ve also opened new concept stores in Seattle and Paris that incorporate green store design elements and reflect the character of their surrounding communities.

 

Koch: We’re always developing new beers and trying to push the envelope of beer into new flavors and new occasions. Earlier this year, we introduced the Samuel Adams Imperial series, which is three different beers at about 10 percent alcohol that sell for about $10 for a four-pack. It’s a sipping beer that you would drink the way you would drink a wine. You’re going to savor it.

 

Papadellis: Certainly the pomegranate items have been very successful for us. Our preliminary launch into blueberry products, and we also continue to look at other fruits and vegetables as opportunities to blend with cranberry.

 

I keep knocking on wood all the time. We’ve really continued to do quite well, despite the global economy.

 

Weinstein: Well it took us a few tries but we finally got the Hydrive enhanced water energy drink proposition exactly where it should be — great taste and hydration with multi-hour energy delivery and just 30 calories. Our core consumer is one who doesn’t like the taste or imagery of typical energy drinks but wants the energy lift. We’re rolling out the Hydrive across the country now via DSD and getting a great response.

 

But we haven’t stopped there. We continued to look for other ways to expand our “better energy” positioning and concluded over a year ago that the shot market was interesting but would quickly get oversaturated. So we took a different direction by utilizing a non-traditional product form. We launched Hydrive Energy Chews in May of this year, and we’re really energized about this idea.

 

Using proprietary encapsulation technology, we were able to create an edible energy product that delivers great taste and time-release energy, something the shots can’t offer. Now this isn’t a beverage — we call it an energy drink without the drink — but it appeals to beverage users for energy occasions that have historically been addressed with liquids. I have to say, I’ve never seen a product with such outstanding consumer and retailer interest. And that’s primarily because people view it as new and innovative (even though we weren’t first to do chews) and because of our bold package design and great taste.

 

We have a few other pretty cool energy ideas cooking, but you’ll just have to wait until next year’s issue to find out what they are.

 

Burns: We’ve just reinvigorated our Green Tea product line by infusing our formulas with Bai Mu Dan white tea to address a key consumer concern — the perception of bitterness in green tea. These new, smoother-tasting Green Teas and new Sleepytime Vanilla are gaining significant momentum heading into the fall.

 

We’re also very excited to have completed a significant packaging overhaul to create a shelf presence that really resonates with consumers. Lastly, as part of our ongoing efforts to implement the most eco-friendly business practices possible, we’re introducing new 100 percent recycled retail displays that contain 90 percent post-consumer material.

 

The 2009-2010 hot tea season is our 40th year in the specialty tea business. Celestial Seasonings was founded on innovation, and after four decades as the leaders in the category we’re still bringing innovation to specialty tea today. We’re planning a big celebration in September with some of the employees from our past who have helped us get to where we are today. It’s going to be a great year for us!