May 30th, 2011

Drinks Makers Woo Convenience Store Shoppers

The Wall Street Journal

Beverage companies including Coca-Cola Co., PepsiCo Inc. and Dr Pepper Snapple Group Inc. are trying to woo more shoppers at convenience stores and gas stations, hoping that these more-profitable sales can provide some relief for higher commodity costs.

Drinks sold at those shops are typically higher priced per ounce than at supermarkets, so they generate higher profits. That’s key for drinks makers now, as it blunts some of the pain from rising costs for plastic used to make bottles, fuel to ship them and other ingredients.

But high gas prices and frugal shoppers have slowed convenience store purchases. So beverage companies are trying to lure shoppers with smaller, less expensive sizes, new flavors, and package deals.

“The [immediate consumption] channel is critical for generating new profit,” said Katie Bayne, Coke’s president of sparkling beverages in North America.

The beverage industry has slowly lost some sales in the convenience channel, as consumers increasingly buy drinks in other places like dollar stores. According to trade publication Beverage Digest, 10.4% of sodas were sold in the channel in 2010, down from 10.8% in 2009.

Higher gas prices threaten to compound the problem. Gasoline is 38% higher than a year ago at $3.81 for a gallon of regular, according to AAA. Over Memorial Day weekend, U.S. auto travel is only expected to drop 0.3% from a year ago, according to a recent AAA survey. But 70% of travelers plan to cut back in other areas of their trip.

To woo price-conscious shoppers, Pepsi is “aggressively expanding” the availability of 99-cent 16-ounce bottles, to sell alongside the traditional 20-ounce bottles which sell for about $1.50, said Tom Greco, Pepsi’s chief commercial officer. The price matches the 16-ounce offering from Coke, a size the company says now makes up 20% of sales to the convenience channel.

Dr Pepper Snapple is also coming out with smaller sizes. Earlier this year, the company started selling six packs of cans, rather than 12, at many convenience stores and gas stations, hoping the price of between $1.99 and $2.49 is easier to swallow than $4.99 for the larger size. The company also replaced two-liter bottles with one-liters that cost between 99 cents and $1.19.

“There’s still that customer who has four quarters in his ash tray that he wants to scrape together and spend on a beverage,” said David McMichael, Dr Pepper Snapple’s vice president of sales to convenience stores and gasoline stations.

To balance out lower-priced sales, Coke and Pepsi both offer liter sizes priced higher than the smaller 20-ounce drinks. They may also promote a drink as a combo meal with a convenience’s food selection.

Pepsi, which is defending its leading market share in the convenience channel, has introduced flavors to target some core convenience store customers, like Gatorade’s Limon Pepino (lime cucumber) for Hispanic consumers. It also offers bundles of a drink and a snack from its Frito-Lay portfolio, so that customers who come into convenience stores, rather than just filling up at the pump, are encouraged to spend more.

“If traffic declines, you have to get the basket size up,” Pepsi’s Mr. Greco said.

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