European soft drinks: market outlook with Canadean consultant Kate Wratten

The impact of the unfolding eurozone crisis will not only affect politicians and bankers, but to a perhaps much greater extent it will also affect industries, companies and consumers, including the soft drinks market. Faced with increasing taxes, rising manufacturing costs and low consumer confidence, sector growth has been slowing down remarkably in recent years.

But despite all the bad news, Europe is still one of the biggest markets for non-alcoholic drinks. Canadean senior strategy and business consultant Kate Wratten forecasts that the Western European market will reach about 103 billion litres in 2012, while Eastern Europe will account for 46 billion litres. However, compared to other big markets such as Asia and Latin America, growth has been much slower, particularly in countries such as Greece, Portugal, Ireland and Spain.

In this exclusive interview, Wratten, strategic consultant for Canadean’s beverage business in Europe, gives an outlook on what European soft drinks manufacturers can expect as we enter into the last six months of 2012.

Elisabeth Fischer: How big is the European soft drinks market compared to other regions?

Kate Wratten: In terms of the biggest region, Asia is now the biggest soft drinks producer at about 150 billion litres, followed by North America and Latin America and then Western Europe and Eastern Europe.

The biggest difference between the regions is that in Europe we’re seeing pretty flat growth in soft drinks. For 2012, we forecast a growth of about 0.6% on last year’s figures in Western Europe, for Eastern Europe about 0.5%.

It is Asia and Latin America where the strong growth is coming from. The population there is still growing, their economies are still developing and they have bigger increases in disposable income, whereas Western Europe and Eastern Europe are already much more developed markets.

EF: Apart from the economic crisis, what are the challenges drinks manufacturers have to face in Europe in 2012?

KW: In the first quarter of 2012, wide areas of Eastern Europe had very cold weather conditions, colder than normal, which had an impact on the market’s performance. One of the interesting things that we’ve seen within Western Europe is how the introduction of soft drinks taxes is impacting growth of the industry.

At the beginning of this year, France introduced a tax on carbonated drinks. It’s essentially a soft drinks tax, causing the French reasonably well-doing carbonate market to move into decline. Denmark is in a similar situation.

There, the government increased the tax on sweet and soft drinks by 50%. Again, we’ve seen an impact on the market as a result of that. I believe taxes on carbonated drinks will develop to a trend within Western Europe because sugar, obesity and health concerns are very much on government agendas.

EF: What countries are particularly doing well within the European soft drinks market?

KW: In Eastern Europe, Turkey is one of the markets that are doing really well. It has had fantastic GDP growth during the last few years, even though we saw a ban on carbonated drinks in school canteens due to health and wellness concerns. That has caused the growth to slow in the first quarter of 2012 compared to 2011.

Of the other two big key markets in Eastern Europe, we would expect Poland to show some growth but we are expecting that volumes decline in Russia.

Poland had better weather at the beginning of this year, which has helped them.

In addition, the recent Euro 2012 [football championships] will have strongly helped the Ukraine and Poland, whereas Russia has to face concerns about possibly the worsening economic conditions with a second wave of the global financial crisis.

In Western Europe, we’re counting France, Germany, UK, Benelux, Austria and Norway [as] the growing markets. We expect a particularly poor result from Greece, Portugal, Ireland, Spain and Denmark and it’s really the economic conditions that are causing that slow recovery.

EF: What soft drinks category will most likely emerge as the big winner of 2012?

KW: A category that we’re still continuing to see doing very well across Europe is energy drinks. In terms of percentage it’s probably the biggest winner even though it’s a relatively small category. In Western Europe, energy drinks were up almost 19% in the first quarter of 2012 from 2011 and they were up 16.5% in Eastern Europe. In Russia in particular we saw really strong growth coming out of energy drinks.

Reasons for this growth are partly because energy drinks are a relatively smaller, newer and exciting category that is still developing. We’re also seeing a lot of activities from key players such as Red Bull and Coca Cola. A market such as Russia, the biggest Eastern European market, is also interesting.

Originally, it was all about the premium brands but more recently we’ve seen the launch of a lot of more lower-priced brands, which has made this category more affordable for a larger audience of people.

EF: How have private label drinks influenced the performance of premium brands in Europe?

KW: Retailers such as Tesco and Carrefour are continuing the development of private labels and retailer-owned brands, driven in large parts by economic conditions but also by the increasingly sophisticated offering that retailers are bringing.

Private label products are no longer just about your cheap alternative to brands. Yes, they are still value-for-money alternatives but they’re of much higher quality now and are competing with premium brands across different kinds of soft drinks segments.

Retailers have [become] better at doing private labels as they have developed. A few years ago, it was much more about low-priced products as a lower-priced alternative to brands. More recently, they are genuinely competing with premium-branded products. Tesco’s Finest is a really good example of a retailer having introduced a private label very effectively.

The trend is in part also consumer-driven as the economic conditions and recession have pushed consumers into buying private label products. There is a bit of a change in perception. A few years ago, it may have been considered that buying a private label product or going to discounters, such as Aldi or Lidl, is an inferior choice. Today, consumers are much more accepting and there is no negative stigma attached to it.

EF: What drinks category has made the biggest losses in 2012?

KW: The category that has been very heavily impacted across Eastern and Western Europe is juice. Juice concentrate prices are very high, and this has an impact on producers in terms of their cost going up.

As a result, prices for consumers are being pushed up who are often trading into lower-priced categories, whether that would be nectar in some markets or fruit drinks in others.

We’ve seen a particular impact on Germany, which is the biggest Western European market and accounts for more than a quarter of juice sales. If it has an impact in Germany it tends to affect the whole of the Western European numbers. We also saw an impact in Eastern Europe with the costs of juice and nectar going up and still drinks relatively benefitting as a result.

EF: What can we expect to see in the European soft drinks market in next few months?

KW: The biggest impact on the market will probably be the weather conditions. It will be also interesting to see what happens to carbonates in markets such as France and Denmark as a result of the soft drinks taxes being implemented there. If we continue to see high prices for fruit juice concentrate, we will continue to see the juice and the nectars category struggle.

A lot of carbonates have been pushed by strong promotional campaigns by big players. If we continue to see a lot of activity carbonates could be performing at reasonable levels.

Iced tea will continue to grow pretty strongly. At the moment Nestea and Lipton are the two major brands and pretty active within the market place.

We will see good growth coming out of that category as it works well with the whole health and wellness trend. Energy drinks will also continue to grow.

EF: What advise would you give European drinks manufacturers on the basis of these numbers?

KW: That depends hugely on the country and on the category they are playing in. But given the slow growth that we are seeing in volume terms, manufacturers should be thinking about where the value is coming from. They’re going to need that balance between the need for volume and maintaining value, which is a real challenge when we’re seeing private label offerings coming in.

It’s almost deciding where can you compete with a private label or a low-priced brand and where actually do you need to say ‘we let them play at the low-priced end of the market and actually we need to focus more on the premium segments where we can actually deliver value as well’. That’s an interesting dynamic that we’re seeing globally and value is one of the key things.