Channels To Market
There are three main channels to market for suppliers in the GB soft drinks industry, the take-home, licensed on-premise and leisure and catering channels. A brief description of these channels and trends at the category and customer levels is set out below.
Take-home
Category: Soft drinks is the largest FMCG category in the GB take-home channel (with an estimated value of £6.1 billion in 2007 according to AC Nielsen), and is also one of the fastest growing, with a CAGR in terms of retail sales value of approximately 5.2% from mid 2006 to mid 2008. As at April 2008, the year on year growth in retail sales value was below the three-year average at 1.4%, mainly driven by the less than average summer in 2007. In volume terms, we estimate that approximately 70% of all GB soft drinks sales are accounted for by the take-home channel.
A breakdown of stills and carbonates sales in the GB take-home channel to April 2008 and the recent growth statistics for this channel are set out below. The chart and table show that in take-home, stills is the larger category and has grown faster than carbonates over the last three years. At a sub-category level, the growth in pure juice, water, juice drinks, smoothies and sports drinks reflects the key underlying consumer trends.
Customers: Customers in the GB take-home channel include large grocery retailers (primarily Tesco, J Sainsbury, Asda, Wm Morrison), high street stores (for example, WHSmith, Woolworths), "impulse" channel retailers (for example, convenience stores, garage forecourt sales and off-licences) and cash & carry wholesalers. The take-home channel has experienced a period of consolidation with the takeover of Safeway by Wm Morrison in 2004 and several major multiple retailers increasing their presence in the high street through the acquisition of convenience stores. This consolidation has increased the purchasing power of the major retailers and enabled them to exert increased pricing pressures on their suppliers (including those in the soft drinks industry).
Contracts between suppliers and customers in the take-home market are generally negotiated on an annual basis (with respect to product prices) but usually do not include any minimum purchase obligations.
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Licensed on-premise
Category: In 2007, soft drinks represented the third largest growing major category in the GB licensed on-premise channel, with GB retail sales of approximately £2.4 billion. Based on current growth forecasts, it is likely to overtake Spirits to become the second largest category, behind Beer, in the coming year. The growth can be explained in part by the increase in consumers eating out, as a survey conducted by TNS Alcovision in 2005 showed that there is a marked increase in soft drinks purchases in licensed on-premise outlets when people are eating-out. In volume terms, we believe that approximately 6% of GB soft drink sales are made to the licensed on-premise.
A breakdown of stills and carbonates sales through the licensed on-premise channel to March 2008 and the recent growth statistics are set out below. The chart and table show that carbonates is the larger category in the licensed on-premise but that stills has grown faster over the last three years. Again, the fastest growing sub-categories reflect the "better for you" and "added value" trends.
Customers: Customers in the GB licensed on-premise channel include licensed pubs, clubs and bars. Similarly to take-home, the licensed on-premise channel has seen recent consolidation amongst its customers, with a series of recent acquisitions and mergers resulting in the top six managed pub operators controlling approximately half of the managed pubs in Great Britain.
A key difference between the take-home and the licensed on-premise channels is the form of the contractual arrangements between suppliers and customers. In the licensed on-premise channel, supply contracts generally have a term of between three and five years to reflect the investment required by the suppliers to service the customer (for example, the installation and maintenance of dispense equipment) and may include minimum purchase obligations. Whilst volume based overriders in licensed on-premise contracts are common, promotional discounting is not a major feature in this channel.
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Leisure and Catering
The leisure and catering channel is highly fragmented. Industry reports estimate that there are over 100,000 individual outlets plus sales through vending machines. As a result, accurate data on retail sales value through this channel is unavailable. Soft drinks sales were approximately 2.5 billion litres in the leisure and catering channel in 2007, representing approximately 24% of all GB soft drinks sales by volume in 2007.
The leisure and catering channel includes restaurants, fast-food outlets, hotels, entertainment venues, contract caterers, canteens, schools and vending machines. As with the take-home and licensed on-premise channels, there has been consolidation amongst customers in this channel (for example, Terra Firma’s acquisition of UCI cinemas and Odeon cinemas in Great Britain in August 2004).
The nature of the contracts in this channel varies considerably according to the customer-type, although the arrangements with major leisure and restaurant customers are similar to those in the licensed on-premise (as a result of the level of investment made by suppliers in equipment and the costs of distribution to the customer’s outlets).
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