CATEGORY CLOSE UP: FUELING THE FOUNTAIN

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1 CATEGORY CLOSE UP: FUELING THE FOUNTAIN Operators fend off competition and keep up with trends to ensure their cold dispensed beverage sales continue to grow. By Jamie Hartford On paper, cold dispensed beverages might not seem like a huge win for convenience stores. They account for just over 12% of sales in the foodservice category and less than 2.5% of overall in-store sales, according to 2012 NACS State of the Industry data. Two years ago, average cold dispensed beverage sales per store were less than $50,000. By comparison, average packaged beverages sales per store were nearly five times that amount. Cold dispensed beverages can be used strategically to bring customers inside and drive add-on purchases. With sales growth above 11%, the category also played a big part in pushing the industry s in-store sales to positive growth (2.2%) and record sales ($199.3 billion) in This is a category, over the last five years, that has been growing significantly faster than the overall store, said David Bishop, managing partner of Balvor, a Barrington, Illinois-based sales and marketing firm. That growth is expected to continue. Based on a January 2013 survey of 119 retailers, covering 19,000 stores, Balvor predicted cold dispensed beverage dollar sales growth could reach 4.8% this year. But despite what seems to be a rosy outlook for the category, convenience stores can t sit back and expect cold dispensed beverages to sell themselves. The category s success is attracting competition from within and beyond the convenience retail industry, and a changing sales mix means operators must stay on their toes to keep up with cold dispensed beverage trends. Go Big or Go Home Summer months mean thirsty customers, but they also bring out the competition. In recent years, that hasn t just meant a price war with other convenience stores; QSRs are also rolling out drink deals. They re tired of seeing their customers pick up a Big Gulp before they go through the drive-thru because they don t see the value in a $2 soda, said Darren Tristano, executive vice president at market research firm Technomic Information Services. McDonald s has made waves with its $1 for any size of soft drink or sweet tea promotion, and drink prices are likely to fall as temperatures rise again this summer, Tristano predicted. But convenience stores still have an edge when it comes to value.

2 Convenience stores have done a nice job of offering a relatively low price on a very large quantity, Tristano said. Many offer 44 ounces or more, whereas McDonald s largest fountain drink tops out at 20 ounces. Large sizes typically appeal more to men, whereas women tend to prefer smaller sizes at lower price points, Tristano said. Convenience stores can also win points with regulars and increase loyalty by offering deals on refills and even selling reusable cups. With a refill price point, they can be extremely competitive, Tristano said. Kent Couch, a single operator who owns Stop and Go Mini Mart, a 4,000-square-foot store in Bend, Oregon, takes a unique approach to pricing fountain drinks at his store. Stop and Go offers three sizes: 20, 32 and 44 ounces. Contrary to what you might think, the middle size is the most expensive, at $1.19. Both the 20- and 40-ounce sizes are priced at 99 cents. The strategy came about when a competitor in Couch s market started promoting fountain drinks at 99 cents for any size. Forty-four ounces is not our highest-volume size, but we can show a good price image at 99 cents, he said. 20 ounces is our most popular size, and at 99 cents, we re making a margin on that. Refills at Stop and Go are priced 89 cents. We do a pretty good job with loyalty by offering refillable plastic mugs, which tends to keep customers coming back, Couch said. Options, More Options Another way convenience stores can compete with QSRs to quench customers thirst is by offering variety. Equipment advances make it easier for convenience stores to offer more cold dispensed beverage choices in a relatively small space. Stores such as Rockland, Massachusetts-based Tedeschi Food Shops Inc. and Cape Girardeau, Missouri-based Rhodes 101 Convenience Stores, have already rolled out the Coca-Cola Freestyle, a machine that can dispense more than 100 varieties of sparkling and still beverages from a single unit. The Freestyle takes up about the same amount of floor space as an eight-head soda fountain.

3 Customers who have adopted the Coca-Cola Freestyle have reported positive results, said Brian Nixon, director of retail foodservice strategy and planning for Coca-Cola Refreshments. (Coca-Cola introduced Freestyle to the c-store industry at the 2010 NACS Show in Atlanta.) Coca-Cola also recently debuted the Gold Peak Variety Tea Tower, which can dispense four flavors of its Gold Peak ready-to-drink teas from a single unit. Retailers like its operational ease, which doesn t require them to brew fresh tea every day, Nixon said. Plus, it offers multiple great-tasting choices from a small footprint. Today s customers demand customization, Tristano said. They re become more demanding and interested in having options wherever they go, he said. Six [fountain] heads may not be enough. Not every convenience store can install a Freestyle machine, but there are other ways for operators to expand their cold dispensed beverage options, such as offering different varieties of ice (e.g., crushed, chewy and cubed) and flavor shots. But in some markets, that might not even be enough to set a store apart. Our fountain grew with the advent of crushed ice and flavor shots, said Couch, who added those options to his store around nine years ago. Now, crushed ice and flavor shots are the norm. We don t have a competitive advantage.

4 Soda Falling Out of Favor As if it wasn t hard enough to worry about keeping up with the competition, convenience stores also have to follow the evolving tastes of customers when it comes to cold dispensed beverages. Carbonated drinks have traditionally been the category s big seller, but soda pop just isn t as popular as it used to be. The volume of carbonated soft drinks sold in the United States has declined for the past eight years, and sales of the beverages have fallen at an accelerating rate over the past three years, according to the trade publication Beverage Digest. Nixon insisted Coca-Cola s core brand continues to perform well in the entire cold dispensed beverage category and has seen sustained growth in convenience stores. Fanta, another of the company s carbonated offerings can attract multicultural shoppers, he said. But Nixon also called attention to the strong performance of Coca- Cola s noncarbonated brands, citing impressive growth of Powerade and rising sales of Gold Peak tea. Another trend is energy drinks coming out of the cold vault and into the fountain especially in the form of infusions that can be added to other beverages. It s kind of like espresso: Do you want one shot, two shots or three shots? Tristano said. But dispensed energy drinks can be a tough sell. It s pretty hard to put energy drinks on the fountain because the price has never been close enough [to the other fountain offerings], said Couch, who has tried selling dispensed energy drinks in his store twice. If customers put the costlier energy drinks in a cup meant for cheaper fountain offerings, it can result in lost profits for operators. Over the years, Couch has reduced Stop and Go s carbonated dispensed drink offerings from 24 heads to 16. In total, he has 34 dispensed beverage taps, including two teas, one specialty root beer from a regional supplier and six varieties of kombucha, a fermented tea that sellers claim can stimulate the immune system and help with digestion. Customers can buy the kombucha to take home in 64-ounce growlers, and Couch estimated it accounts for around half of Stop and Go s cold dispensed beverage business.

5 Kombucha is just huge in our store right now, he said, adding that it s likely growing in popularity for the same reason customers seem to be moving away from sugary sodas. People are becoming more health conscious, so they re gravitating to other beverages, he said. Changing tastes and stiff competition are sure to remain constants in the cold dispensed beverages category, but if operators understand their customers and stay on top of the trends, sales will continue to flow from the fountain. Jamie Hartford is a freelance writer based in Los Angeles. Read more of her work at jlhartford.com.