Even a household name like Coca-Cola (NYSE:KO - News) can't rest on the laurels of its brand. So the Atlanta-based icon unveiled plans on Aug. 19 to pour $4 billion in new spending into China between 2012 to 2014.
Worldwide, Coca-Cola plans to spend $25 billion in the next five years. Its target: hundreds of millions of consumers projected to enter the middle class, move to cities and drink out of cans and bottles.
"As the world becomes more urbanized and as more consumers begin to lead on-the-go, mobile lifestyles, we see a great runway ahead," said Coca-Cola chairman and chief executive Muhtar Kent on a conference call in July.
Smaller beverage makers like Hansen Natural (NASDAQ:HANS - News) that rely on less traditional beverages also have plans to expand in Asia. But the picture of international growth contrasts with the more mature markets seen in developed countries. Americans, for example, have been drinking steadily less soda for years.
Not only is sales growth slowing, but the cost to produce, bottle and ship beverages has gone up too. That's prompting companies to cut their costs wherever they can. Those efforts are driving leaps in the industry's technology.
"There's a lot of innovation that's going on," said Larry Hobbs, executive director of the International Society of Beverage Technologists. "It's a very, very tough market.
1. Business Coke's $35 billion in 2010 revenue and $160 billion market capitalization make it, by far, the largest company in IBD'S 19-stock nonalcoholic beverages industry group. The company's primary product is concentrate, which it sells to bottlers worldwide.
Last year, Coca-Cola acquired the North American bottling operations of Coca-Cola Enterprises (NYSE:CCE - News), the region's largest bottler, which now primarily bottles for the European market. Charlotte, N.C.-based Coca-Cola Bottling Consolidated (NASDAQ:COKE - News) is the No. 2 Coca-Cola bottler in the U.S.
In addition to sodas and energy drinks, nonalcoholic beverage firms also produce juices, sports drinks, teas and bottled water. They sell packaged drinks as well as concentrates like powder mixes.
Product niches like energy drinks have helped Hansen Natural to post quarterly double-digit revenue gains for more than a year and double its stock price. It's also entered the market for single dose, "energy shots" and has a sports drink, joining a market crowded with PepsiCo's Gatorade and Coca-Cola's Powerade.
Privately held companies have sprouted up selling a variety of energy drinks, with one launched last year by NASCAR race driver Bobby Gordon, who said he would stop racing full time so he could help run Speed Energy.
• Name of the Game: The race is on to put drinks in the hands of wealthier consumers in emerging economies. Beverage makers also must keep up with changing preferences and health concerns with new or reformulated drinks. They can also partly offset higher commodity costs with redesigned containers and new production techniques.
2. Market The soft-drink market is massive. In 2010, global sales of soda, water, juice and bottled tea rose 7.6% to $446.9 billion, according to Euromonitor. Throw hot drinks like coffee into the mix and the market weighs in at well over half a trillion dollars.
But within those weighty numbers there has been a shift to lower-margin products. Measured by volume, soda sales edged up 2% in 2010. Bottled water sales volume grew 6%.
That's due in part to consumers switching to cheaper options. In developing economies consumers also have growing concerns over the quality of tap water, said Richard Haffner, Euromonitor's head of drinks research.
Purchases of beverages tend to be impulse-driven, so companies carefully track customer traffic in stores, PepsiCo Chairman and Chief Executive Indra Nooyi said in a July conference call.
She also pointed out that consumers are price sensitive with their drinks and can easily trade down from soda and juice, to bottled water and ultimately to tap water.
When asked if there's a growing risk of more tap water consumption, Dr Pepper Snapple CEO Larry Young said no.
"As we watch the economy and the unemployment levels, there's always going to be an impact on the consumer," he told analysts in July. "In the past, they've traded down to (carbonated soft drinks), value juices and, you're right, tap water. But traffic overall is looking up.
One of the fastest-growing categories, however, is ready-to-drink teas, which jumped in volume about 50% from 2005 to 2010. That's largely due to the preference for tea in Asia.
But Haffner sees growth in the U.S. too, as Americans turn to products that at least appear healthier. To meet that demand, he expects ready-to-drink teas with nonsugar sweeteners or fewer conventional sweeteners.
"There's going to be a lot of experimentation around teas," he said.
3. Climate Americans looking to save money may be trading down to lower-priced beverages like bottled water. But preferences appear to be shifting too.
Increased awareness of obesity and diabetes has put some drinks in the crosshairs. Politics are moving in that direction as well.
First Lady Michelle Obama's anti-obesity initiative, for instance, explicitly discourages Americans from consuming sodas and sweetened drinks. State and federal regulators have also contemplated various taxes on soda sales to discourage unhealthy habits. (On Sept. 8, Coke suspended a $24 million spending program in France, to protest the country's new tax on sugary sodas.) In the face of such pressure, combined with economic weakness in the U.S., developing markets offer a broad path-of-least-resistance.
The $4 billion that Coca-Cola plans to invest in China in the next three years will pay to build new bottling plants, expand existing ones, develop new drinks and find new ways to distribute and market its products.
Hansen Natural has already reached into Europe and South America and is now poised to enter Asia as well. While the company won't say which Asian country will be its first target, it does say it is targeting northeast Asia and has named a Hong Kong-based executive to head its Asia operations.
In a conference call in August, Hansen Chairman and Chief Executive Rodney Sacks said the company is in advanced talks with distribution partners and expects to have signed agreements by the end of the third quarter.
Still, the company isn't ignoring its more mature markets. Euromonitor's Haffner said beverage makers are searching for ways to make drinks healthier with nutritional additives.
Companies are also trying out new product types that blur categories, he said, noting coconut water drinks that seek to be all-natural, healthy sports drink alternatives.
"It's going to be a dynamic market," he said.
4. Technology Making and shipping beverages has gotten more costly, forcing companies to turn to new techniques to save money.
The prices of corn, used as a sweetener, and sugar have surged more than 70% in the past year. Oil, used to make and ship plastic containers, saw prices ease over the summer, but still costs about 20% more than it did a year ago.
While beverage companies have raised prices to offset some costs, margins are still under pressure. So companies are cutting costs on production and ingredients. New container designs, for example, could trim the amount of glass and aluminum needed to make them.
The industry also has started applying a new finish on bottles that reduces the amount of plastic in them, without compromising their sturdiness, said Hobbs of the International Society of Beverage Technologists.
Another pricey input companies are looking to trim is water. While the volume used in beverages isn't changing, the volume used to clean equipment could come down with the help of new chemicals.
"Water is a very, very expensive commodity," Hobbs added, pointing out that its availability in some developing countries can be limited.
In addition to new ingredients that can make drinks healthier, beverage makers are developing "potentiators" that can enhance a sweetener's effect, he said. They can also combine existing sweeteners that would reduce ingredient costs.
Companies are limited in how much they can tweak recipes before consumers take notice. But tough conditions "force innovation to thrive," Hobbs said.
5. Outlook Annual sales volumes of soda in the U.S. have been dropping since before the start of the recession. Worldwide, Euromonitor sees compound annual volume growth in soft drinks — soda, water, juice, ready-to-drink tea and coffee, sports drinks, energy drinks — of 4% from 2010 to 2015.
But the developed countries' growth rate is expected to be only 0.9%, while developing countries will see volume growth of 5.8%, led by the Asia-Pacific region's 7% rate.
• Upside: The rising middle class in emerging markets that is reshaping the world economy is reshaping the beverage industry too. Bigger paychecks mean people will have more money to spend on a growing variety of packaged drinks. Areas of the world like Africa with large populations of young people will also be more inclined to drink sodas, which have higher margins than other drinks.
• Risks: Beverage companies face increasing health fears tied to the sweeteners used in them as well as flagging volume growth in developed countries. In emerging economies, demographics are starting to skew older, potentially making consumers there less inclined to drink sodas. Wealthier ones are expected to worry more about their health too. Companies also face the threat of government policies aimed at reducing consumption of sweetened drinks.