Decoding

the New Beverage Boom

Changing consumer demographics demand smaller juice packaging from the CPG Industry White Paper

In the non-carbonated beverage market, competition can be fiercer than the grand finale of Top Chef, especially with sales rebounding gradually from the recent recession. Revenues hit $35.4 billion in this category last year after dipping to $31.8 billion in 2009, according to data from IRI. But to survive and prosper, no manufacturer can afford to ignore the trends impacting and reshaping the retail end of this industry. The new millennium brought new technologies, delivery channels, packaging options, media and consumer trends to the industry, which manufacturers must master and employ in order to stay relevant and offer retailers sales and marketing support. While this sounds as tricky as some of the recipes on Top Chef, its not if you start with the basics. Simple but stunningly swift demographic shifts are driving every aspect of this process, starting with household size. The fastest growing and largest population segments in the U.S. are now single- and two-person households. According to U.S. Census Bureau figures, they now comprise over 60% of all American households. 1

 For a hint of these shifts, just turn on the TV. Hit shows such as Modern Family and Desperate Housewives are telling for more than their entertainment value. The American households portrayed on these shows make it clear that the iconic nuclear family that has held sway in this country since the days of Leave it to Beaver is kaput. Families of four or more decreased from 37% to 24% between 1970 and 2007, while the share of households with only one or two people increased from 46% to 60% according to the U.S. Census Bureaus 2007 study on Americas Families and Living Arrangements. There were 112.3 U.S. households in the U.S. in 2008, but data from OECD study that same year notes that 60% have no children. And singles over 18 are a more significant force in the U.S. marketplace than ever before; today they number about 100 million, which amounts to 44% of the adult population, according to the U.S. Census Bureau Report Americas Families and Living Arrangements: 2010. As married couples and singles with children decline and now comprise 40% of American households, single- and two-person households have become the fastest growing population segments. But most importantly, these smaller households will continue to dominate the American demographic landscape and change every aspect of the way we live. And for beverage manufacturers, it signifies a simple reality: its time to think small. Not surprisingly, one- and two-person households have very different needs from families with children, and America is small-sizingor right-sizingin every category thanks to these demographic changes. Our shrinking homes, cars, stores, electronics and portion sizes prove the point. Of course, its important to note that the 2009 recession motivated many homeowners and renters to downsize because of lost jobs and lower wages, but the trend was on the rise before that time. In February 2009, MSN Real Estates Market Watch column noted, For many homeowners it is not so much a matter of down-sizing as right-sizing, giving up big homes with unused space and buying a home that better fits their needs. The housing bust, concern over rising home energy costs and changing lifestyles have all increased interest in smaller homes that are designed to reflect the changing lifestyles of households, notes a 2010 AIA study. In fact, the median size of new single-family homes dropped consistently from a peak of 2,268 square feet in 2006 to an even 2,100 in 2009, notes the National Association of 2

 Home Builders (NAHB). More telling were the results of a 2010 NAHB survey: 52 percent of builders expected to produce smaller homes in 2011, compared to only seven percent who expected to build larger ones. Autos are on the same road. With gas prices hovering at the $4 mark, smaller cars such as the Ford Focus, Nissan Versa and Fiat 500 flew off dealer lots in March 2012 and gave U.S. car makers their best monthly sales in almost five years, notes Industry Leaders magazine. But gas prices arent the only factor driving this market segment. In March 2010, Automobile magazine cited baby boomers and the generation between 15 and 30 as the two biggest demographic groups driving this trend, as the former trades down when they become empty nesters or retire and the latter choose small cars from the get-go. Ford product development chief Derrick Kuzak called the trend right-sizing, noting that people are buying cars that are as big as they really need. On the retail front, the major players are reformatting their facilities for a variety of reasons that relate to smaller households. Walmart Express, a compact new format for the retail giant that averages 15,000 square feet per store as opposed to the usual 185,000 square feet, debuted in 2011 and another 350 are planned for this year, in part to enter urban markets, notes Independent Retailer. This makes sense, since a 2011 NAHB study The Geography of Home Size and Occupancy confirms, larger families are more likely to live outside central cities, so this strategy puts smaller stores where single- and two-person households, and denser population figures, are dominant. Vegas Inc. tellingly calls big-box stores the elephants of the suburban retail savanna and notes that they face growing threats to their survival, while mentioning that Best Buy is also closing 50 of its U.S. big-box stores and opening 100 small-format, stand- alone Best Buy Mobile stores by 2016. For the beverage market, this means supersize and large containers are moving to the sidelines as the demographically driven trend to small-size gains momentum. The research consultancy Hartman Group identified this trend in 2006, noting, as America's households increasingly involve 3 or fewer people, the scope for multi-serve packaging itself starts to look quite bleak. They feel the single-serve package is here to stay since it fulfills the need to manage waste and to acknowledge our increasingly individualistic eating patterns in a highly fragmented, fickle culture of eaters. Fitness and healtha concern that started with the baby boomers-- also plays into this trend, as well as new economic realities that are increasing the demand for smaller size packaging. The two trends dovetail and start with the baby boomers. This huge generation has turned into beverage boomers who seek a healthy, well-balanced 3

 dietare changing nondairy beveragesand pass on their good practices to their offspring, who in turn do the same with their children, notes a May 2012 report in Dairy Foods magazine. At the same time, thanks to the economy, consumers are destocking their pantries and buying less on trips, but shopping more and making value that includes health the crux of their shopping ethos, according to Whats in Store 2012, a trends report from the International Diary-Deli-Bakery Association (IDDBA) cited in Convenience Store Decisions in May 2012. Beverage manufacturers are trying to meet all these demands with a variety of products, often in smaller packages. A recent study from Packaged Facts shows that in 2011, beverages with flavored, sweetened, unsweetened, low-fat or non-fat, health-specific and fortified varieties are becoming more prevalent in the marketplace. The report also found that the market for dairy-alternative beverages reached $1.33 billion, with almond milk posting the biggest dollar sales gains in the category and soymilk remaining the most popular primarily because of the health benefits associated with the drink. And in May 2012, Convenience Store Decisions noted, manufacturers of many consumer goods have decreased package sizes, but not prices, to offset rising input costs. The smaller packaging is often labeled as greener, portable, and healthier than larger sizes. Thanks to all these forcesfrom the rise of single- and two-person households to the increasing importance of sustainability, health, variety, value and mobility--its time for beverage manufacturers to look at their portfolios under a new lens and carefully consider what consumers want and need, especially as the 2013 planning season draws near. While family brands remain relevant, they will not offer the most new growth and greatest profits. Competition will continue to intensify, so it makes sense to look for uncontested market spaces to maintain market share and grow. And the small household, an exploding demographic that represents such a space, is ready to be mined. Those that reach, engage and design products for this new demographic will be the real winners in the marketplace. And to do so, its critical to create and introduce innovative new products that are right-sized; marry flavor with functional ingredients geared towards fitness and health; and are packaged in sustainable, environmentally friendly formats. Think of these offerings as new generation drinks for new generation households. But embracing this new order and effecting change may not be easy for manufacturers thanks to a range of issues. 4

 The first is the complexity of this demographic, which is a diverse group that runs the gamut from recent college graduates to retirees. They can be single, widowed, cohabitating or married. But most fall into two segments---Millennials, now 18 to 34, and Baby Boomers, 45 to 65. For many, the Millennials are the most inexplicable. According to a 2010 report from Pew Research Center, they are self-absorbed and self-reliant, with a strong sense of independence and autonomy. Eight key values ascribed to this group are choice, customization, scrutiny, integrity, collaboration, speed, entertainment and innovation. They were also born into a technological, electronic and wireless society where computers are the norm in the home and schools, and media has made global boundaries more transparent. And 40% are multicultural. Boomers have defined themselves by their careers, and while some have retired, many plan to expand into active retirement by re-engineering life. They are also more tech-savvy than previous generations, but want quick fixes that require little change and instant improvement; they appreciate options and flexibility; and health and wellness are major concerns for them, which translates into maintaining youthfulness and eating natural and organic foods. Both groups are also multifaceted, as evidenced by the fact that America is an astonishing and rich melting pot of races, cultures and ethnicities with a wide range of beliefs and values. Migration is playing a large role in the nations multiculturalism, and will continue to do so. According to the Census Bureau, there were 9.7 million foreign- born people in the country in 1967, and 34.3 million, or 12% of the population, but 2004. And immigration accounted for over 90% of U.S. population growth over the last decade, bringing with it a surge of Millennials in their 20s. These characteristics have strong marketing implications for manufacturers, and it is necessary to employ a wide range of marketing strategies to reach themfrom social media to traditional methods. Yet all segments of this demographic are similar in that they have different needs from families with children, strong consumption patterns and unmatched purchasing power. This past January, CNN Money reported that consumption by singles contributes $1.9 trillion annually to the economy, according to the U.S. Bureau of Labor Statistics. Doing the math (footnote below), its possible to extrapolate that two-person households spend $1.5 trillion annually. But what products manufacturers market to them may be fundamentally different than those that are currently in their oeuvres. Both the health-oriented Boomers and multi- 5

 cultural Millennials like variety and flavors. And they are more worldly thanks to the Internet. That means they want products that speak to them and fit their lifestyle. Often, these are the all-natural blends of 100% fruit and vegetable juices that incorporate bold, fresh flavors and health-oriented functional ingredients, notes Jim Carper, editor-in-chief of Dairy Foods magazine. Most popular right now are pomegranate and acai juice for their antioxidants, and vitamins, whey protein, minerals, fiber, electrolytes and prebiotics and probiotics for their health benefits, he notes. Also high on the radar are flavored waters with functional ingredients, which are milks number one competitor in sales for share-of-stomach right now, adds Carper. Coconut water, which is high in electrolytes, is a huge front-runner in the market. The insights above simply reinforce the need for real innovation. Packaging these new products will also require creative thinking and innovation. All segments of this group know what they want, have a strong sense of independence reflected in their propensity to often live alone and are immersed in mobile, busy lifestyles. These characteristics prompt them to choose more compact or handheld packaging that is also sleek and graphic to express who they are. Grab-and-go is the biggest trend for beverage manufacturers right now because these products are consumed away from home. But theres also a growing demand for smaller packs that hold several servings, rather than giant, family-sized containers, notes Carper. This kind of sizing speaks to smaller-size households and the individualization that specific products for specific members of the household require. But beyond mobility, packaging has a host of other marks to meet, especially since it must grab a consumers attention within 10 seconds to influence purchasing behavior notes the market research guidebook GreenBook. And is must communicate the right message for its cohort, since consumers look for various packaging attributes based on their age. A Mintel report titled Beverage Packaging Trends released this past January found that consumers 25 or younger show a high acceptance for stylish, unusual designs and are less likely to rate health and nutrition attributes as important, while those over 55 want simple, easy-to-read beverage labels and pay close attention to health claims. And finally, it must also keep environment in mind. Demand in the U.S. for green packaging, which consists of recyclable, renewable, reusable and biodegradable content, is expected to increase 3.4 percent annually, notes market research firm Freedonia Group. 6

 So packaging has a big burden to bear, since it must possess a range of user-friendly traits such as individualization, grab-and-go portability and easy-to-use caps; offer color, printing and shape options; showcase innovation; clearly maintain product integrity and safety; and communicate brand message, which is subject to demographics. This allows brands to differentiate themselves and stand out in a sea of sameness on retailers shelves. Innovative new offerings from Tetra Pak that fulfill these objects include the Tetra Brik Aseptic Edge in 200 ml and 1000 ml, the Tetra Gemina Aseptic and the Tetra Prisma Aseptic. Clearly, the hurdles to moving forward in this new marketplace are as challenging as mounting a new television production. Like producers who write captivating new scripts for a target audience then package and sell them, manufacturers must create captivating new products for this new demographicthe small householdthen package and sell them. It will most likely require them to overhaul existing plants, collaborate with a host of innovative suppliers and market in new ways and through new channels. But for now, one thing is clear: its time for them to fully assess their existing capabilities and those of their suppliers to understand the magnitude of this change. And its time to start educating all channels in the retail environment about the importance of small-sizing.

Footnote

Estimated value using average annual expenditure for two person households with no children ($28,017), multiplied by singles purchasing power (1.9 trillion), divided by average annual expenditure for single person household (34,471).