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The Future of BeveragesThe industry is being disrupted by significant trends with con-sumers, products, brands, and distribution. As niche players eat up more of the market share, established companies must evolve to stay competitive.
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From the traditional power-houses to new entrepreneurial start-ups, non-alcoholic beverage companies are operating in a whole new world as the industry is undergoing monumental shifts.For example, with an eye on health-conscious consumers, PepsiCo purchased the sparkling water company SodaStream in 2018, and after Coca-Cola moved into the tea market a decade ago with its organic, fair-trade Honest Tea subsidiary, the company is dipping its toe in the rapidly growing coffee segment by buying Costa Coffee in 2019. Meanwhile, new entrant Boxed Water is nudging plastic bottles off the shelves with its paper-based packaging.
With today’s consumers thirsty for healthy and eco-friendly options, massive changes are coming. In this paper, we take a close look at how consumer, product, brand, and distribution trends are changing the beverage industry and how companies can become early adapters to stay relevant in the long term.
1 “Engaging Generation Z: Marketing to a New Brand of Consumer,” Ad Week, 27 November 20172 “How Obsessed Is Gen Z with Mobile Technology?”, The Center of Generational Kinetics2 Vision Critical
Today’s Consumers Are Value-Driven IndividualistsConsumer demands have always affected what the beverage market offers, and today’s demo graphics are triggering massive change. Generation Z—born between 1998 and 2017—will come of age to become the main consumers of tomorrow’s products. By 2020, this age group is expected to account for about 40 percent of all consumers.1 And by 2026, they will be the largest generation on the planet. The result? More than $50 billion in buying power.
Catering to them with the right products will require having an in-depth understanding of exactly what they are looking for and how they are looking for it (see figure 1). They have abandoned conventional media with much less TV time than previous generations, and as the first true digital natives, they are able to quickly adapt to new technology. It’s no surprise that the smartphone is Gen Z’s most used device with about five hours per day.2
Gen Z prefers customized experiences, local brands, and personalized products, and they put more weight on value affirmation, connectedness, authenticity, and local heritage. They seek out brands that have strong values, and 41 percent of them do not trust big brands compared with 31 percent of Millennials.3 However, they do trust social media influencers such as popular bloggers, YouTubers, and Instagrammers. They want many options, with not only appealing tastes and designs but also sustainable products that are in line with their values. These value-driven individualists pay attention to their health and consume sustainable products. For example, they drink fewer alcoholic beverages and prefer products that don’t use artificial sweeteners.
Consumer goods companies must adapt to this new outlook of a generation that has a modern value system and new expectations for a brand experi-ence. Winning Gen Z as long-term customers will require two moves. First, beverage companies must develop a shopping and consumption experience that fosters emotional engagement and bonding with a community. Second, it will require capital-izing on both existing data and new sources of information to pinpoint consumer preferences and emerging trends. When big data becomes smart data, customer loyalty and sales will both improve.
2The Future of Beverages
For years now, regulators and consumers have both been leaning toward health-conscious beverages—a trend that will only become more relevant as the problem of obesity expands. Around the world, more people are suffering from obesity, which is often associated with high consumption of sugar (see figure 2 on page 4).
These circumstances are alarming regulators. For example, the World Health Organization recommends reducing the intake of free sugars to less than 5 percent of total energy intake, and Public Health England is recommending regulatory action to reduce the industry’s promotion of sugary products and raise awareness about the risks of consuming sugar. Taxation is already being used to discourage sugar consumption and could become even more strict.
New Products: Health-Consciousness Options and Premium Drinks
Norway, for example, has a long tradition of trying to deter sugar consumption, with a tax that was introduced in 1922. In 2018, the sugar tax on beverages either imported into or produced in Norway went up 42 percent to about 50 cents per liter for both naturally and artificially sweetened beverages. Other examples from around the globe are Great Britain increasing their sugar tax to £18p for >5g sugar in 1000ml and £24p for >8g in 1000ml, France with €7.5” per hectoliter, or India with a 40% tax on sugar-sweetened beverages. Countries like Canada, Malaysia, Vietnam, and the Philippines plan to implement or increase their sugar taxes in 2019.
Figure 1Gen Z consumers’ expectations differ from older shoppers
Note: Generation Z are those born between 1998 and 2017.
Source: Kearney Gen Z consumer study 2017
Value-a�irming– 70% say it is important that products
are aligned with their beliefs.– 51% will avoid a company if it violates
their moral or ethical code.
Visual– They are more visual with the cognitive
portion of their brain more developed from constant use of multimedia devices.
– The average attention span is 8 seconds—33% shorter than for Millennials.
– 60% won’t use apps or websites that load slowly or are di�icult to navigate.
Localized– 41% do not trust big brands, compared
with 31% of Millennials.– 77% prefer brick-and-mortar stores
when shopping.
Option-oriented– 75% are more likely to buy if the
experience is personalized.
Connected– 54% say influencers and vloggers
have some influence.– They are 1.3x more likely to
purchase based on the influencervs. a traditional celebrity.
– 46% research items on their mobiledevices before making purchasesin a store.
Authentic– Brands that are transparent and
have built trust can enjoy up to an 8% price premium.
– When it comes to ads, 63% preferreal people rather than celebrities.
Gen Z
3The Future of Beverages
0
5
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15
20
25
30
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201820142010200620021998199419901986198219781974
Overall trend+9.1%
Figure 2Obesity is on the rise around the world
Prevalence of obesity(% of global adult population)
Note: Obese is categorized as a body mass index of more than 30. Adults are those over the age of 18.Data is actual data until 2014 with extrapolation through 2018.
Sources: Guideline – Sugars Intake for Adults and Children, World Health Organization; A.T. Kearney analysis
World
Oceania
North Americaand Europe
Latin Americaand theCaribbean
Asia
Africa
Regulators are not the only ones with an eye on heath. Consumers are also fueling trends toward health consciousness, which creates new market opportunities and triggers innovation. An array of products are gaining popularity, including naturally flavored water, naturally brewed tea, protein-based beverages, sports drinks, and functional beverages intended to create health benefits, for example, with amino acids or vitamins and minerals.
The health trend can also be seen in a decreasing consumption of alcoholic beverages. Norway again offers an interesting example (see figure 3 on page 5). Alcohol consumption is already low compared with most European neighbors, and it is declining, leading to the introduction of low and non-alcoholic substitutes, including fermented drinks such as Gaffels Fassbrause, non-alcoholic or low-alcohol beer such as Heineken 0.0, non-alcoholic cider such as Kopparberg, and alcohol-free spirits such as Seedlip.
Premium soft drinks are also becoming more popular as consumers embrace alternatives such as the adult soft drinks from Nix & Kix and craft sodas from Square Root London. Consumers are also investing in appliances and ingredients to make their own spritzers and lemonades. Monin is just one example of a company with such offerings.
Overall, the market for traditional soft drinks and alcoholic beverages is shrinking as consumers’ pursuit of alternatives pushes the market toward healthy products, light soft drinks, and non-alcoholic substitutes.
4The Future of Beverages
105
100
110
115
120
125
201620152014201320122011
-1.4%
Figure 3Consumers in Norway are making healthier drink choices
Per capita consumption of soft drinks in Norway (liters)
Soft drink consumption by volume in Norway(million liters)
Sources: Nielsen, Statista; Kearney analysis
Pepsi Max
Coca-Cola Zero
90
3948
51
100
110
20
40
60
80
100
120
201720162015
To ride the wave of these trends and become a leader instead of a follower, beverage producers will need to become more agile in their product innovations. What’s needed is an effective system to continuously observe the market and track new trends. Knowing your customer is important, but it is only a first step in this rapidly evolving environment. Product development and rollout need to be as lean as possible to reduce time to market, and capabilities for agile testing need to be built to ensure the sharpness of a new product’s positioning as well as consumer acceptance.
Finally, processes to adjust the initial launch plans must be in place to ensure flexibility in responding to changing market needs. Forward-thinking companies that introduce effective processes for their product launches will stay ahead of the accelerated innovation cycle by quickly reacting to market trends and launching relevant products.
5The Future of Beverages
Figure 4Consumers prefer small, local brands
% of respondents who say they have little or no trust Preference for local brands by category(%)
Notes: Percentages are for beverages on a European level. N = >31,500 in 63 countries.
Sources: Nielsen; Kearney Gen Z consumer study 2017
Largecorporations
Smallbusinesses
57
56
55
55
52
25
12
India
France
United Kingdom
United States
China
Japan
Germany
17
22
14
53
17
28
31
Examples
3532
3130
2928
2524
232222
2121
201919
181616
1513
1212
1077
14
Ice creamBreakfast cereals
Biscuits, chips, snacks, cookies
Baby food and formula
Chocolates and confectioneryFrozen meat and seafood
Paper productsSauces and condiments
Tea and coffeeBeer and wine
Frozen mealsLaundry products
Instant noodlesHousehold cleaning products
Carbonated soft drinks
Dairy productsMineral and bottled water Deer Park, Dasani
Luzianne,Maxwell House,Samuel Adams, Sierra Nevada
Surge,Mountain Dew
Zipfizz
Haircare products
Canned and tinned food products
Oral care productsSkincare products
Bodycare products
Feminine care products
Vitamins and supplementPet foods
Energy and sports drinksBaby wipes and diapers
None of the above
54
In addition to product and consumer trends, the brand will also be a crucial success factor as smaller companies—the so-called
“piranha” brands—continue to take small bites out of the market share of leading consumer goods firms.4 Small players such as Tito’s in vodka, Innocent in smoothies, NOCCO in fitness drinks, and Chobani in yogurt drinks are stealing market share from big players with a yearly revenue growth of up to 20 percent while the industry powerhouses saw low or negative sales growth in 2016.
Brand Trends: Learn How to Swim with the Piranhas
4 See Swimming with the Piranhas and Reinventing the Mass Consumer Model at www.kearney.com.
So, what is fueling this trend? Consumers have developed more trust and confidence in smaller brands, and the global wave of mass premiumization is rewarding distinctive brand attributes and values (see figure 4).
6The Future of Beverages
The piranhas are winning by following six mantras:
— Establish a sharp value proposition.
— Focus on an authentic brand.
— Build an asset-light business model.
— Be fast to launch and slow to expand.
— Maintain a risk-taking mindset.
— Think before you spend.
To respond, the big fish need to learn how to swim with them. Large established beverage companies should reflect the piranhas’ brand image and imitate their strengths to protect their market shares.
Niche brands are beginning to eat up the market share of leading consumer goods firms. With the right operating models, the big fish can learn to swim with these small but powerful competitors.
Five countermoves can help companies stay competitive and relevant:
— Rethink new product development and rollout.
— Fight against the status quo internally.
— Look for organizational models that favor brand power.
— Find the best-suited brand ventures model.
— Create a more flexible asset model.
One way to swim with the piranhas is to build a sub-brand as Pepsi has done with Caleb’s Kola. The craft soda, designed to meet consumers’ preferences, has a brief list of simple ingredients, including sparkling water, Fair Trade cane sugar, and kola nut extract—matching the attributes Gen Z consumers are looking for in transparency, sustainability, authenticity, and simplicity.
In addition to the niche brands, local brands are putting pressure on mass consumer products. Cultural messages are much more authentic when they come from local players. While global players must often adhere to marketing campaigns prescribed by their global head quarters, local companies can make quick decisions that fit right into their local markets. Coming out on top requires effective innovation processes. In addition, developing local sub-brands, acquiring piranha brands, and targeted investments can keep the industry powerhouses ahead of the brand trends in the long term.
7The Future of Beverages
Keeping up with trending products, a new generation of consumers, and growing brand awareness also requires keeping up with distribution trends. Societal and mega trends in mobility are fueling distribution trends around the world. The four mega trends in mobility are demand for road safety, smart highways, urbanization, and the sharing economy.
Road fatalities have increased in several countries around the world, out of which 90 percent can be traced back to human error. This triggers a call for safety, which in turn stimulates research in autonomous driving, which could significantly lower distri-bution costs. Another development stimu-lating autonomous driving is smart highways. Most new highways and traffic signals are equipped with sensors to reduce congestion and improve existing infrastructure, for example through fiber optic connections to enable driverless communication. Also, the migration to densely populated areas fosters the demand for transportation, ride-sharing services, and new means of transportation—a development that could lead to fewer people owning cars and higher demand for deliveries.
More producers are pursuing direct-to-con-sumer value chains—a disruptive development that eliminates several steps of the classical value chain. Products could be delivered to consumers directly from production. Warehouses could become redundant as automated trucks, robots, and drones pick up and deliver goods on demand. And bulk distri-bution from central warehouses to retailers could be eliminated. In this new world, all goods would be available in online stores, and there would be no need for physical stores. For producers, this brings the benefits of access to customer data, greater influence on the customer experience, and fewer middlemen, where much revenue is lost.
Amazon Fresh is a good example with its door-to-door grocery delivery service. The grocery and beverage service offers a wide assortment online with goods stored at Amazon distribution centers and delivered to consumers’ doorstep within two to three hours.
Nestlé’s ReadyRefresh operates with a similar business model in the US beverage market. Households and businesses can order online, selecting the beverages and the delivery frequency to suit their needs. Storage is facilitated by regional distribution centers, and the beverages are delivered within a specific timeframe. Some containers, such as three- and five-gallon water jugs, can even be picked up when they are empty.
These distribution developments bring a wealth of opportunities, but also certain challenges. Producers receive firsthand insights from their direct contact with consumers, and the convenient services can lock customers into a routine (for example, a subscription model for water). However, door-to-door delivery is still only viable in urban areas.
Distribution is a crucial topic that cannot be forgotten or underestimated. Forward-thinking producers are implementing new technologies now to be the trendsetters while remaining profitable and keeping customers satisfied.
Flexible and innovative channels are becoming more relevant as ecommerce continues to grow. Innovation and direct distribution creates access to consumers and reduces dependency.
Distribution: Think Direct-to-Consumer
8The Future of Beverages
To remain relevant and competitive, beverage players must act in all four areas—customers, products, brands, and distri-bution—and learn from other industries and from smaller beverage companies.
The transformation journey begins with the customer. As individualism picks up and classical segmentation loses relevance, all business-to-consumer companies must build capabilities to not only gain access to relevant customer data but also to process it. To gain access, strengthen partnerships with distributors and retailers; to make the most out of the data, complement retro-spective analysis with predictive modelling.
As a next step, product innovation cycles can be adjusted to align with consumer trends. Lean processes (usually driven by lean and empowered teams) can reduce time-to-market, and capabilities in agile testing can ensure that new products are relevant.
To communicate strong brands to the next generation of consumers, well-established beverage companies can learn from their young, bold competitors. Brand authen-ticity is crucial for Gen Z, so the brand must have a strong value proposition. If it is hard or even impossible to establish this associ-ation for trendy new products with the core brand, consider acquiring smaller compet-itors or launching a new internal brand.
In distribution, flexible and innovative channels are becoming even more relevant as e-com-merce continues to grow. Innovation and direct distribution can create access to consumers and reduce dependency on a distribution network. However, do not rush to eliminate well-functioning standard route-to-market models, and test new models intensively since building new distribution models is an investment-intensive undertaking.
How to Win
9The Future of Beverages
Franziska NeumannConsultant, New York [email protected]
Adrian KirstePartner, Munich [email protected]
Marlene KesslerConsultant, Dusseldorf [email protected]
The authors wish to thank Indira Banerjea (research expert, Düsseldorf) for her contribution to this study.
Authors
10The Future of Beverages
For more information, permission to reprint or translate this work, and all other correspondence, please email [email protected]. A.T. Kearney Korea LLC is a separate and independent legal entity operating under the Kearney name in Korea. A.T. Kearney operates in India as A.T. Kearney Limited (Branch Office), a branch office of A.T. Kearney Limited, a company organized under the laws of England and Wales. © 2021, A.T. Kearney, Inc. All rights reserved.
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