Industry issue 2 - changing consumer tastes

“With more manufacturers entering emerging market sectors that are already quite saturated with carbonates, juice and water, they’re going after niche segments,” Bengtsson says.“We’re seeing juice/ready-to-drink (RTD) tea mixes, juice/energy drinks, juice/water, sparkling juices and premium juices, such as smoothies, that are going for niches.” And in some categories that have been downtrodden, new product heroes have enlivened the category. “In the past year or the past two years, one of the main trends has been an increase in health awareness,” Bengtsson says.“Consumers have been worrying more about the content of their drinks and making sure to eat and drink healthfully. This has led to an increase in natural products, such as 100 percent juices, smoothies and low-calorie beverages.” Summer is the time when studios roll out their potential blockbusters and a few beverage categories have experienced the beverage equivalent of a multi-million dollar opening weekend. Double-digit growth was reported for energy drinks, RTD tea, RTD coffee and bottled water, according to data from Information Resources Inc. (IRI), Chicago, for sales ending May 20, 2007. Only carbonated soft drinks and domestic beer experienced a “flop,” to borrow the movie industry term for disappointing performance. Both categories saw single-digit decreases in the past year. Top 10 http://web.ebscohost.com.ezproxy.lib.ucalgary.ca/ehost/detail?vid=1&hid=113&sid=b3da8709-b23a-4e53-a5a9-998dfe12cc54%40sessionmgr110&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=bth&AN=25931031#db=bth&AN=25931031

This year, Cott has landed deals to launch store-branded energy drinks with six retailers, Mr. Sheppard says, including Quebec-based convenience-store giant  Alimentation Couche-Tard Inc., whose brands include Circle K, and U.S. supermarket chain Albertson's Inc., Boise, Idaho. "We're in discussions with all our major customers" about launching more store-branded energy drinks, he says. Wal-Mart Stores Inc., Cott's biggest customer, accounted for more than 40% of the company's $1.75 billion in sales last year. Mr. Sheppard also has cut costs and made production more efficient by reorganizing his North American management team, closing plants in Ohio and Quebec and opening a new facility in Texas. For the six new energy-drink accounts, Cott is contracting out production to co- packers. While that means the company's margin is slimmer on those products, Cott doesn't want to build its own lines for making the drinks "until demand is established," Mr. Sheppard says. Cott on April 20 posted stronger-than-expected operating profit for its first quarter, sparking a 15% jump in its share price that day. Including restructuring and other charges, Cott had a loss of $2.1 million, or three cents a share, compared with net income of $8.3 million, or 12 cents a share, a year earlier. Revenue slipped to $394.2 million from $395.5 million. Mr. Sheppard's plan to rely on energy drinks for growth could be tough to execute, some industry watchers say. "The challenge will be to get consumers to buy private-label [energy drinks] when they're accustomed to buying brands like Red Bull and Monster," says John Sicher, editor and publisher of Beverage Digest. Cott also continues to face threats from Coke and Pepsi in the soda- pop market. In 2005, according to an annual study by Beverage Digest/Maxwell, Cott saw its share of soda sales shrink for the first time in years, albeit by only 0.1 percentage point, to 5.4% of the market. Other analysts question whether Cott can deliver on Mr. Sheppard's promise to profit from sales of bottled water. Mr. Sheppard, who acknowledges that "we don't make that much money on water right now," says a new, high-speed production line dedicated to bottling water will help to improve the product's profit margins. Cott's struggle with bottled water highlights the downside of the company's close relationship with Wal-Mart. Mr. Sheppard has said that Cott entered the water business in order to supply the Bentonville, Ark., retailer. But analysts say that has become a problem for Cott, in part because  Wal-Mart sells water mostly in lower-margin packages of 12 or 24 bottles. Peter Holden, an analyst with Veritas Investment Research Corp. of Toronto, says, " Wal-Mart needs to keep Cott alive -- but  Wal-Mart doesn't need to make them rich." Cott insists that its relationship with Wal-Mart is an asset.

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