Soft Drinks 2.0: Evolving Into a Total Beverage Company

Sugar taxes are creating a temporary demand disruption for the soft drink industry. However, it’s the paradigm shifts in the socioeconomic and consumption ecosystems that are creating enduring changes in the product mix and competitive landscape. While the road ahead remains uncertain, corporate strategies have responded by blurring category lines and building ‘competitive moats’ around emerging consumption occasions. Platform as a service (PaaS) is emerging as a business theme, and it will drive realignment in the soft drink industry value chain.

Sugar Detox

Soft drink volumes across many markets in South and Southeast Asia have struggled in the past eight to twelve quarters. This was driven mainly by a series of excise and sales tax changes targeted at reducing excessive sugar consumption. Four countries – the Philippines, Malaysia, Singapore, and Thailand – introduced sugar-specific regulation for the beverage industry. An immediate decline in sugar-sweetened beverages (SSB) volume was reported subsequently in each of the affected markets. Regular soft drink consumption declined by 24ml on a per capita per day basis, while the no-calorie and low-calorie alternatives increased by 6.5ml during this period (see Figure 1).

Figure 1: Daily per capita soft drink consumption in the Philippines, 2017 vs. 2019

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Source: GlobalData, UN Population Division, Rabobank 2020

While the efficacy of such measures in the long-term reduction of sugar consumption will require an epidemiological study, their immediate impact on demand is unquestionable. Going forward, the near-term growth rates of soft drinks in South and Southeast Asia will improve, owing to base effects and sustained growth in India. However, growth in the core SSB categories are likely to remain below historical averages.

The Soft Drink Industry Has Bigger Worries Ahead

Changes in the consumption ecosystem, such as an aging society and health & wellness trends, are polarizing the soft drink industry into two distinct consumption themes – refreshment and functional. With consumer resistance to calories without purpose, the core SSB categories in the middle are being squeezed by competing segments. In our view, these changes will have an enduring impact on the soft drink industry, as an aging population continues to drive change in the portfolio mix towards healthier (i.e. low-calorie or added-functionality) beverages.

Corporate Strategies Reflect This Market Evolution

To mitigate the immediate impact of sugar taxes, companies have innovated around single-serve beverages, which supported product margins and lowered overall calorie intake for the consumer. For soft drink companies over-indexed on the core SSB categories, reformulation toward a lower-calorie portfolio has to become a critical element of the long-term strategy. Product mix and flavors must reflect the reality of the rising median age in Asia.

Category-blurring products are an emerging area of interest and can act as both a defensive and an offensive strategy. Therefore, more and more soft drink companies will likely include these as part of their portfolio mix. For a fuller discussion of these topics, read the Rabobank report “Blurring Category Lines: The Next Generation of Beverage Companies.

Soft Drinks 2.0: The Total Beverage Company

In addition to changing their portfolio mix, soft drink companies can leverage changes in the route to market to strengthen their corporate strategies. For instance, platform as a service (PaaS) is an emerging theme for companies in the food & beverage sector. It fundamentally transforms business models from pure brand ownership to having a platform with substantial retail and on-trade infrastructure. A few beverage companies are moving toward becoming a regional or global platform by building and acquiring infrastructure in the away-from-home segment. As these players invest in new infrastructure, supply chain partners have the opportunity to move up the value chain by partnering with the emerging beverage platforms.

For a fuller discussion, please see the recent publication “The Sour Side of Sweet: Strategic Moves in Beverages and the Road Ahead.” This report is part of a series on blurring category lines that tracks realignment in the beverage sector.

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