North American retail soft drinks volumes have been characterised by modest growth over the last decade. In 2017, bottled water became the biggest category by volume, and carbonated soft drinks (CSDs) continued to decline with consumers looking for healthier alternatives. The industry saw its next big disruptor in 2020 with the COVID-19 pandemic. With consumers shifting away from so many on-trade channels and on-the-go or convenience channels, consumption patterns accelerated growth in retail volume. In the last five years, energy and sports drinks have led the charge in value growth terms as consumers look for lifestyle drinks with a clear functional need state and use case. However, in actual volume terms, bottled water remained the main contributor for industry growth.
Over the last five years, the story was clear: consumers wanted “healthier” alternatives that aligned with their desired need states and emerging consumption occasions. And, more importantly, they were willing to pay more for that. This trend allowed companies to continue to grow volume while also increasing value.
Between 2018 and 2023, off-trade industry value grew by 42% (7% annually) while it only grew by 8% (1% annually) in volume terms
Source: Euromonitor International
Some of the higher unit price categories like sports drinks and energy drinks, or even RTD coffee, sustained this growth. However, the 2022-2023 cost-of-living crisis has put some serious pressure on this established dynamic, and – for the first time in more than a decade – North American retail soft drinks volume experienced a contraction.
Inflation, price mix growth, and its recent impact on industry volume, value and outlook
2022 is the background of this phenomenon. Annual inflation reached a historic high of 8% in the US and 6% in Canada, with much of that inflationary pressure still present in 2023. In comparison, soft drinks unit prices in the region grew by 11% in 2022 and are set to grow by another 11% this year. Soft drinks continues to outpace the core CPI, but the story has nuances within specific categories.
Many premium categories like RTD coffee, RTD tea, energy drinks, and sports drinks rode the wave of inflation. These categories took relatively less pricing action in 2022, taking advantage of their already higher unit price and seeing very small increases or even declines in constant unit price. Another limitation for these categories is the reduced number of SKUs compared to CSDs where it is easier to distribute price increases across several format sizes and multipacks. Price increases in categories dependent on impulse or single formats are more visible to consumers.
Conversely, CSDs had very aggressive growth in unit prices, with historic 8% growth in 2022 and 10% in 2023 in nominal terms. This adjustment of prices tested the consumer's price elasticity with incredible results, and the category experienced only a modest decline in volume despite the strong growth in prices in 2022.
In 2023, sports drinks, which has been a focus for many players in recent years, demonstrates that consumers have a limit to their price elasticity.
Despite modest growth in constant unit prices, the category is expected to experience a significant decline in volume
Source: Euromonitor International
There are several factors at play here. First, the dependence on impulse and less flexibility makes price movements more noticeable for consumers. These categories also start from a higher unit price, so consumers are likelier to feel the price change even if they are smaller in percentage terms. Finally, the competition from innovative formats in sports drinks concentrates and oral replenishment solutions (ORS) has increased the pressure on volumes as consumers look for hydration and added-value products in alternative formats, with brands like Liquid IV taking advantage of that comparatively lower unit price per RTD volume.
Value propositions will continue to be key for industry growth
Price architecture and revenue growth management will continue to be essential tools for managing value growth in the industry. CSDs have successfully demonstrated that companies can use their SKU assortments to distribute price increases and still allow consumers to manage their expenses. Working closely with retailers and foodservice operators, both big and small, is also key to ensuring that consumers can universally find the correct product at the right pricing at the right place. While the large price/package mix gives CSD brands an advantage, all categories need to double down on their value proposition and be mindful of the need state they fulfil.
Convenience, health and wellness, and functionality are still things consumers are willing to spend more on. Brands that communicate their value in these areas are well positioned to continue to capture growth, moving forward. Some examples of this in 2023 include Liquid IV in the concentrated sports drinks space and functional CSDs that continue to grow despite their comparatively higher unit price. However, consumers' willingness to pay more should be read as an opportunity to make consumers trade up rather than pay higher prices for this type of product.
Read our article, Prioritising Affordability and Value to Thrive amid the Rising Cost of Living, for more analysis on the cost-of-living crisis. Take a look at our report, Shifting Habits: Drinking Occasions and Channel Mix, on how drinking occasions and beverage channel behaviours will be shaped by the balance of personal health, moderation, and intoxication.