How is the soft drink industry responding to the challenges of inflation?

Generationally high commodity prices and soaring distribution costs are reshaping the strategies of soft drink suppliers and bottlers in 2022. In response, the global soft drink industry will continue to creatively explore price combinations /packaging, likely introducing new smaller bottles and cans, affordable multipacks and alternative formats, such as bagless, returnable and counter systems. A wide range of adaptable packaging across channels helps to pass on costs, while maintaining accessibility for both consumer and retail customers.

Price increase negotiations with retailers are somewhat aided by strong brand strength and low private label penetration in key categories, but some tension is expected in 2022-23, particularly in on discounters in Western Europe, where the presence of private label is stronger and temporary delisting is more common. Equally important will be the price/channel strategy – while off-trade price increases were the main focus in 2021, channel recovery could also lead to short-term price increases.

Raw material costs are the main driver of inflation in soft drinks

Primary packaging materials are a significant source of rising cost of goods sold for brands and bottlers, with higher prices for plastic resin over the past 12 months (peak in 2021) and low availability /high prices for recycled PET as European producers increase orders to meet new targets after the EU Plastics Directive comes into force in July 2021, despite capacity problems.

Impact on industry: increase in commodity prices from May 2020 to May 2022

Note: Shaded chart based on 2-year high prices (May 2020-May 2022)
Source: World Bank Euromonitor International, NTO Nederland and Intercontinental Exchange (ICE)

Skyrocketing global aluminum prices are impacting brewers and soft drink bottlers due to demand for metal cans, with double-digit increases also recorded for fiber/paperboard secondary packaging materials. Sugar prices soared in the summer of 2021, but have since moderated. Prices for coffee, tea, corn and orange juice concentrates reached record highs in early 2022.

Production and transportation costs are also top concerns for soft drink industry leaders.

Nearly 80% of respondents to Euromonitor International’s April 2022 survey of soft drink industry leaders indicated that inflation had had a large or moderate impact on business operations over the past 12 last months. Rising production and distribution costs and rising raw material costs were both reported to have an equally large impact on beverage operations and profitability in 2022. Transportation and logistics costs were also the top factors impacting beverage respondents, while labor shortages had relatively less of an impact within the business. the industry sample.

imagewqfgq.pngSource: Voice of the Industry: Non-Alcoholic Beverage Survey, April 2022

Industry Leaders: Raise Prices, Accept Lower Margins, Reduce Promotional Spend

In Euromonitor International’s Voice of the Industry: Non-Alcoholic Drinks Survey, April 2022, two-thirds of global respondents indicated that they had already raised the prices of some product or service in response to inflation, 45% indicating that the prices of all products and services have been affected in the past 12 months.

60% of respondents said they intended to accept lower profit margins during this period, while only 18% said they had tried to reduce the number of products or services offered in response to the price inflation.

image3m59.pngSource: Voice of the Industry: Non-Alcoholic Beverage Survey, April 2022
Case Study: Record Growth in US Sports Drink Prices

The US sports drink category represents a prime example of the pricing challenges the broader industry has faced over the past 12-24 months. Gatorade, the leading sports drink brand in the United States, has been hit particularly hard by supply chain issues in 2020/2021, with reported shortages of PET packaging materials and production issues leading to stockouts national stockpiles for some popular flavors. According to Euromonitor International’s Median Price Index, US sports drink prices rose to a high of 70.6% above 2020 indexed prices for a short period in February 2022 on online channels.

imagedq6qn.pngSource: Via median price index

A wide range of SKU options for popular brands provides PepsiCo and its competitors with pricing flexibility at appropriate seasonal times and across different channels/occasions. In the United States, standard 32oz/946ml one-size-fits-all bottles of leading sports drink brand Gatorade saw a price increase at the start of the high-volume summer season, while SKU prices fell (likely through discounts) in future consumer/multipack options – a segment where volumes have remained high. Gatorade also experimented with a new 28oz curved PET bottle. While multiple SKUs are used simultaneously in the US market depending on the channel, the 28oz unit replaced the 32oz options at some retailers in 2021/2022.

Looking for a post-pandemic recovery in the catering sector to increase margins

A period of high inflation is unlikely to impact the pace of new product innovation, with major producers planning new launches. New brand extensions and new products can be expected to focus on profitable immediate consumption and small format packaging, with multipacks and larger format SKUs facing the largest unit price increases short term.

As pandemic restrictions are eased in many regions, higher rates of consumer mobility in 2022 will also bolster out-of-home consumption, a highly profitable business segment for suppliers, which will support profitability even if inflation does. mount the COGS.

For more information on inflation in the soft drinks industry, see the Global Beverages Market report.

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