Faced with declining profits, declining trip frequencies, flat transaction sizes and a massive migration of heavy user households to alternate channels for just about everything but perishables, supermarkets have their suppliers struggling to excavate core insights that will help turn this picture around.
 Our contribution in this article is to focus on how suppliers currently encourage supermarkets to merchandise and promote Carbonated Soft Drinks (CSDs) -- the number-one merchandisable category in the store and one of the few categories that offer supermarkets the opportunity to compete head-to-head on price with super centers and clubs and win every time.
With only two exceptions (bread and milk), CSDs is the most powerful category supermarkets can use to rebuild trip frequencies and recapture heavy users. In addition, we believe there may be an opportunity for supermarkets to increase CSD category profits by as much as 53 percent and simultaneously bring this category into much better alignment with current CSD heavy user shopping preferences.
Despite the flurry of competitive activity that supermarkets have encountered from alternate channels, supermarkets remain solidly entrenched as the industry’s leading destination channel for CSDs with a 73 percent share of F/D/M retail dollar sales through 2003 -- up 17 percent since 1997. In fact, CSDs are one of the very few dry grocery categories in which supermarkets have been able to grow share since 1997 -- not an insignificant achievement given the current competitive environment.
The issue with this growth is that it has come at a huge cost in profitability to supermarkets. Between 2001 and 2003, CSD profits in supermarkets declined by approximately $110MM, or 12.1 percent. Not surprisingly, most of this loss was driven by seemingly never-ending promotions on 12 and 24-pack cans -- 45 percent of this loss contributed by 12-packs and 19 percent by 24-packs.
Unfortunately, supermarkets’ CSD profit performance between 2001 and 2003 is not an anomaly but a continuation of a trend, which, according to UBS Warburg, shows that CSD profit margins have declined every year between 1994 and 2003. In addition, it is obvious that supermarkets’ continued use of 12 and 24-packs as loss leader items has done little to increase trip frequencies or slow the migration of heavy users to alternate channels.
The first step in changing this picture is to develop a better understanding of just who buys the CSD category and how they buy it. Specifically:
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- CSD consumers come from relatively large affluent households. In 2002, for example, the "typical" CSD heavy user household comprised 4+ people and had a combined income of $50K+.
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- CSD shoppers now buy CSDs in as many as four different channels with 76 percent purchasing most or all of their CSD requirements in two of these channels.
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- The heavy CSD shopper spends an average of $1,112 or 61 percent more per year in supermarkets than the average supermarket shopper.
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- The heavy CSD shopper buys an average of 12 unique CSD brands per year compared to 6.6 brands for light category shoppers -- ideal for supermarkets, which are perceived as the channel of choice for offering incomparable variety in core categories.
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- It is as a result of this need to satisfy so many different tastes within the same household that CSD brand loyalty (share of requirements) has dropped to remarkably low levels. According to A.C. Nielsen, household loyalty to Coke Classic is now only 22.5 percent; to Pepsi -- 21.6 percent and to Diet Coke -- 17.9 percent. Keep in mind when reading these numbers that these data refer to "taste" brands that can only be considered national icons.
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- The last thing we would note about supermarket shoppers is that although they are spending about two-percent more per trip on CSDs than they did in 2000, they are making eight-percent fewer trips and spending five-percent less on CSDs annually than they did in 2000.
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This latter fact appears to be due to supermarkets’ success in driving CSD shoppers up to promotionally driven larger sizes with the inadvertent result that the category has gradually begun to lose its usefulness as a traffic puller. In 2003, for example, 81.5 percent of total 12-pack cans sold through supermarkets were sold on promotion -- 83.9 percent of 24-pack cans and 88 percent of 2-liter bottles. Meanwhile, only 12.5 percent of 20-oz bottles were sold on promotion; 57 percent of 6-pack cans and 62 percent of the category overall.
While the need for supermarkets to trade shoppers up to larger sizes is obvious, the indications are that suppliers may wish to moderate this strategy with respect to CSDs in Supermarkets because:
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- The category is unique with respect to its utility as a traffic-builder for supermarkets. In this context, over-promotion of larger sizes appears to be dampening this advantage.
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- Satisfying the purchase preferences of the heavy-user CSD household is paramount. Given the relatively large number of different CSD brands these households buy in a year, enabling these shoppers to buy these brands on promotion but in trial-friendly, smaller pack sizes would seem to be an obvious and simple solution.
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- As we will explain below, slight shifts in promotion emphasis to smaller pack sizes are one way for supermarkets to improve CSD category profitability dramatically.
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Between 2001 and 2003, suppliers and bottlers did try to improve category profitability in Supermarkets via aggressive promotion of the 20-oz single-serve bottle. During these two years, the percentage of 20-oz unit sales sold on promotion jumped by 84 percent while 20-oz bottles’ contribution to total Supermarket CSD category profits increased 44 percent -- from 16.5 percent in 2001 to 23.8 percent in 2003. This is all the more remarkable because 20-oz singles account for only 1.7 percent of total Supermarket CSD case sales and 5.9 percent of category dollar sales.
Unfortunately, these 20-oz initiatives were diluted by corresponding continued increases in promotion of both 12- and 24-packs as loss leaders, culminating in a net profit loss vs. 2001 for the CSD category of 12.1 percent. Nevertheless, it is instructive to look at what happened to 20-oz bottle performance as a result of these efforts, which clearly shows that relatively small changes in promotion mix emphasis can yield disproportionately large rewards, especially on low base volume pack sizes.
The success that supermarkets achieved with 20-oz bottles over the past several years suggests that this “shift the mix” is do-able without the need for radical changes in overall CSD category merchandising strategies. The objective, obviously, is to shift the promotion mix away from 12s and 24s as much as possible without infringing upon the power of these pack sizes as image and transaction builders.
To where does one shift this mix? Multi-Pack PET and 6-pack cans are both under-promoted relative to the category overall and represent a viable substitute for 12 and 24 pack cans in terms of consumer usage. Additionally, smaller pack sizes can be promoted as “mix & match” multiples (e.g., any four flavors of six-packs for $5) and generate a hot promotional value without the level of pantry loading that diminishes trip frequency for supermarkets. An added benefit is that some of these smaller pack sizes are not broadly distributed in supercenters and clubs, thereby giving supermarkets a (much needed) edge.
A key win that we anticipate for suppliers is increased sustainability of new flavors. We suspect that the precipitous drop-off (e.g., Vanilla Coke four-week IRI reported volume was off 63 percent in the 8/10/03 period and Pepsi Twist was off 49.2 percent) would be abated by more frequent promotional offerings in smaller pack sizes for those consumers who like the flavors for variety but don’t want to switch to them as a mainstay CSD.
So where does one begin? If you are a CSD supplier or captain and think this situation may apply to your top supermarkets, then we suggest laying out a promotion plan specifically designed to improve CSD category profitability with these key areas of focus:
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- Shift the promotion emphasis away from 12s and 24s to under-promoted pack sizes.
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- Define the consumer rationale for these promotions.
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- Balance profit goals with image and traffic-building objectives.
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Make sure that CSD pricing is aligned with these objectives. Bringing pricing into alignment not only appears to be the key to the successful execution of this strategy but also to happier consumers, broader and deeper household penetration and increased trip and purchase frequencies -- in addition, of course, to potentially significantly improved Supermarket CSD category profits.
Christopher W. Hoyt is President of Hoyt & Company LLC, a packaged goods training and consulting organization based in Scottsdale, AZ. This article is a summary of a 2004 Hoyt & Company study on CSD package size merchandising, which Hoyt & Company will present to interested parties. For details, please contact Nancy Swift at 480 513 0547 or email at nancyswift@hoytnet.com
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