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    GROCERY: Carbonated Soft Drinks: Soft drinks, hard profits

    At two distinctive grocers, upstart brands help to enliven the CSD business.

    By Bob Phillips

    Consumers, especially adults, have steadily been moving away from carbonated soft drinks that they perceive as loaded with high-fructose sugars and other artificial ingredients -- and that spells an opportunity for grocers willing to indulge their shoppers' search for alternatives.

    One such operator, Grapevine Natural Foods, an independent natural food grocer in Newtown, Pa. (a northern suburb of Philadelphia), is already predisposed to meeting demand for healthier foods. The store, which does in excess of $1 million in annual sales at a single location with a footprint of about 2,000 square feet, sells high-quality organic fruits and vegetables as well as all-natural food and condiments.

    But Chuck Alwine, the owner and a former Food Lion veteran, realized his beverage business was sorely lacking. Alwine hadn't been able to capitalize on the move toward healthy beverage consumption, even with his store's excellent positioning, because he was undermerchandising the category.

    "We had maybe one shelf," recalls Alwine. Since Grapevine's mission was to provide its shoppers with the finest in healthy all-natural and organic products, the store didn't stock Coca-Cola and Pepsi. "We carried a few brands, like Reese Ginger Brew, Hansen's, and RJ Corr, but beverages weren't a real big part of our business," he says. "And that didn't make sense, because there was so much business to be had out there. What could we do to capture a portion of that market?"

    Enter Steaz, an up-and-coming brand. Eric Schnell, president of Healthy Beverage Co., also based in Newtown, was at the time launching a new line of all-natural, organic tea-based sparkling sodas. Recalls Schnell of the start of his partnership with Grapevine: "I guess they had heard about us, since we were both in the Philadelphia market. Their goal was to get behind the Steaz brand, since it was local, but also to build up their own portfolio of natural soft drinks [beyond] this one shelf they'd been stocking for 15 years."

    As fate would have it, Alwine had an empty end cap in prime position at the front of the store. He was contemplating what he should do to optimize that valuable piece of store real estate when he met with Schnell to talk beverages.

    Eyes front

    Popular marketing logic would place high-margin, lower-demand items in the front of the store, with lower-margin beverages placed somewhere less conspicuously in the center -- the idea being to encourage shoppers to pass by high-ticket items and displays before they can get to their beverage destination.

    But Alwine's challenge was somewhat different. Not only wasn't Grapevine a beverage destination stop for his shoppers, many of them weren't even aware that Grapevine stocked any beverages at all.

    "It probably would have made more sense, using traditional supermarket merchandising practice, to put your high-ticket items -- in our case, perhaps vitamins, since vitamins yield huge margins -- in the front of the store and to display them prominently," explains Alwine. "But I've found that doesn't always work. I'd much rather get more quick turns through lower-cost items like a four-pack of soda than have 10 bottles of vitamins sitting there for two months and maybe sell three."

    Thus, he offered Steaz the valuable end cap. "My attitude was, 'Hey, let's give it a shot,'" recalls Alwine. "It was placed in the front of the store, right as the customer walks through the door."

    For his part, Schnell brought in colorful signage -- shelf talkers and posters hanging from the ceiling, which are refreshed periodically -- and he also introduced a cold door to the store.

    Furthermore, the partners took the unusual step of devoting the bottom two shelves of the end cap to full 24-count cases, and Alwine threw additional square footage around the unit into the bargain.

    "I don't know many retailers that do that," says Alwine. "They're mostly selling single bottles out of a refrigerated case, or four-packs."

    The marketing of cases, on the other hand, is primarily reserved for the club/wholesale channel -- a channel Steaz broke into last year, with much success. The brand is also growing at a healthy rate in the traditional grocery marketplace, thanks to interest from adult consumers.

    "We're seeing that traditional, mostly sugared CSDs remain popular with kids, whereas adults are moving away from them and replacing them with more healthy beverage options," notes Schnell. "That has helped our brand grow beyond the natural trade, where we started. Our core business for three years was Whole Foods, Wild Oats, and 2,000 health food stores. Now we're finding our products have been very successful in crossing over into club stores like Costco -- we've done phenomenally well since we launched in Costco in April '06."

    Alwine and Schnell thought of the move as an experiment, but it turned out to be a match made in heaven: Four years later Steaz still owns the end cap that greets Grapevine shoppers as they enter the store.

    Fairway drives drinks

    The same trend can be seen at Fairway Markets, an independent chain of four high-volume food stores serving New York City and the surrounding metropolitan area. While Fairway specializes in products for the gourmet, natural, and organic segment, it also does a large business in more traditional products, including mainstream carbonated soft drinks sweetened with high-fructose corn syrup, such as Coke and Pepsi. But Fairway is seeing that business shift.

    "I've seen an evolution," says Paul Weiner, natural foods manager for Fairway Markets. "Soft drink consumption is moving toward less and less sugar, which is where a product such as Honest Tea is driving the business. VitaminWater and Tazo also hold their own quite well in the natural segment."

    Weiner points to a relatively new line, Itoen unsweetened Japanese green and white teas, as a hot brand in the all-natural segment.

    "We have case stacks of Itoen, because it's been selling enormously well," explains Weiner. "Honest Tea tends to sell much better in season -- spring, summer, and early fall. In those seasons I'm case-stacking it and I'm buying lots of it. We feature Honest Tea anywhere from $1.50 to $2. My high watermark would be $1.25/four for $5, and I'll go as low as 99 cents if I get deals. With Itoen I'm at $1.50 every day. Next to enhanced water, green tea is probably my best-selling beverage item throughout the year.

    "To make a long story short, I display my beverages prominently in spring, summer, and fall," adds Weiner.

    This makes the Steaz phenomenon at Grapevine even more impressive: Since its implementation four years ago, Steaz -- and, by default, the rest of the beverage assortment at Grapevine -- has seen no noticeable drop-off in winter sales.

    "Of course, you're going to sell more soda in June and July, but, to be honest, we sell a lot, all year long," says Alwine. "It doesn't seem to affect it all that much. I've never once thought, 'Well, here it is, the middle of February, and it's 20 degrees out, so we're going to switch the end cap around and put oatmeal here.' Never given it a thought; a lot of people are surprised at that and question me, but the stuff sells. What are you going to do?"

    Schnell says he believes that the availability of Steaz in cases is a key driver for what are traditionally considered off-season sales in the soft drink market.

    "The beauty is that there seems to be no seasonality to it," says Schnell of the success of case merchandising. "Even during the winter, sales remain strong because [Alwine] built up the reputation in the community that this was the place where people could buy soda by the case. They no longer had to go to a beer wholesaler or club store to buy soda by the case."

    In addition, the category is always merchandised prominently. And Steaz is always on discount: As part of the original agreement, Steaz gives Grapevine a bonus discount, and Alwine further discounts his cases by an additional 10 percent. The result has been a 100 percent increase in beverage sales in each of the past four years.

    "Has the success of Steaz had a runoff impact on the rest of our beverages? Probably," adds Alwine. "While I don't have any empirical data, there's no question it's boosted the sales of items we've merchandised around that end cap."

    The halo effect is having an impact on other categories as well. While chips and nuts are a no-brainer for cross-merchandising with soda during the holiday season, other, less likely products -- such as garden plants in the spring -- have had their sales boosted by placement near the magic end cap.

    "And don't think I'm a genius," says Alwine. "Sometimes things you do almost by accident tend to turn into gold. I've had garden plants there during the season, and gift baskets over the holidays, and it ties in real nicely. It gives the whole section a nice 'wow' factor, with all the colors flowing together as people walk through the door."

    At both Grapevine and Fairway Markets, the movement toward healthy consumption can be seen as an adult trend. At Grapevine the customers are largely educated, upscale adults who choose to shop at the location specifically because of the healthy attributes of the products offered there. Meanwhile Fairway serves a bigger cross-section of consumers, and while adults skew toward healthy organic, all-natural, and low-calorie beverages, kids still favor heavily sweetened products.

    "I'll use myself as an example," says Fairway's Weiner. "I'm a natural foods consumer. But I've got four boys aged teen and above. They want Coke and Pepsi, so Coke and Pepsi are in my cart. They also drink a lot of water. But I'm drinking better."

    That demographic breakdown generally holds true, says Weiner, from store to store, depending on the neighborhood the store serves. "For instance, we have a store in Plainview, Long Island," he explains. "A typical shopping cart there will include Coke, Pepsi, and Honest Tea. It's the family dynamic. The kids are drinking Coke and Pepsi, and the parents are drinking Honest Tea."

    But on the Upper West Side of Manhattan, where Fairway Markets has more than 100,000 customers per week walking through the door at its West 74th Street location, the clientele and their shopping behaviors are quite different.

    "It's more of a health food environment there," notes Weiner. "I'm selling less Coke and Pepsi, and more natural products. With beverages it's Honest Tea, VitaminWater, Tazo and Itoen, but the trend goes across the board. Eden Soy soy milk does quite well there.

    "Also, it's a walk-up crowd, meaning that single people and couples shop there, then carry their groceries home with them," continues Weiner. "In Harlem we have a store with a parking lot, so we get more families shopping there, and we sell a lot more 12-packs. Naturally Coke and Pepsi are going to do much better in that environment."

    The trend among adult consumers to skew more toward healthy food and beverage consumption has helped Steaz and other independent, newly mainstreamed healthy brands, including Honest Tea and VitaminWater, grow in traditional supermarkets.

    "Whether it's Wegmans, which we've just done phenomenally well in; Shaw's in Boston; or QFC [a division of Kroger Co.] out West, we're getting a lot of mainstream aisle penetration," says Steaz's Schnell. "Our mission as we break into supermarkets is not to be quarantined to any organic aisle. We want to be [in the] main aisle, right there with Snapple and SoBe and Red Bull. After four years it's no longer a niche segment of the market. It's a mainstream concept. People are getting it now. They're actively looking for these natural and organic ingredients."

    By Bob Phillips
    • About Bob Phillips

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