Consolidation and the Future of the Beverage Business

The quickening rate of consolidation across all beverage categories and segments over the past year leads to many questions and much speculation about the evolution of the industry. Attempting to address some of these vital questions offers ideas of what to expect in the future.

• Although combinations undoubtedly can capture efficiencies and cost savings, do they make the emerging companies better positioned to satisfy emerging consumer needs? The majority of break-through products addressing emerging consumer needs come from smaller entrepreneurial companies. Once these companies hit a scale that can be leveraged or develop leadership in a new segment, they become targets of major beverage players. Recent examples include Glaceau, Honest Tea and Herradura Tequila. Since most acquisitions are done to leverage infrastructure, gain high growth brands or enter emerging categories, they usually do not result in satisfying consumer needs beyond bringing existing products some small with an expanding base to a larger audience.
  


• Will consolidation accelerate volume growth in the relevant beverage categories? Spurring category growth through acquisitions can occur, as the examples of sports drinks after Pepsi acquired Gatorade and soymilk after Dean acquired White Wave indicate. However, that outcome is the exception in most cases, as the more typical examples of Cokes acquisition of Planet Java, Pepsis acquisition of SoBe or Anheuser-Buschs investment in craft brewers like Red Hook reveal.
  


• Do such deals result in less competition and the so-called death of the small guy? With fewer large players, consolidation does affect competition, but it has not prevented entrepreneurs or small companies from entering and succeeding in the marketplace. Retailers constantly look for fresh ideas to attract and maintain consumer interest and differentiate themselves from the pack. However, it will get a little more difficult for little, less established firms to reach smaller independent retailers as direct-store distributors consolidate. This is occurring with beer wholesalers as Miller Coors has initiated a major consolidation initiative and with spirit distributors as Southern/Glazers Distributors of America, the joint venture between Glazers and Southern Wine and Spirits, bringing their U.S. market share to near 30%. Food distributors are becoming viable alternatives but they do not service much of the overall retail universe. Thus, consolidation could make market access a little more difficult.
  


• Will consolidation continue to intensify? The recent waves of activity will likely lead to even more. The last twelve months saw transaction such as Coke buying Glaceau and stake in Honest Tea, Pepsi purchasing Lizzie Sparklers and a large juice business in Russia, InBev buying A-B, Miller Coors forming for the U.S. market, Heineken and Carlsberg acquiring Scottish and Newcastle, Diageo taking a 50% stake in Kettle One, Constellation buying Jim Beam Wines, and Pernod-Ricard buying V&S (Absolut), among others. This trend is accelerating and is likely to persist.
  


• Finally, what will the competitive market structure look like in ten years? The blurring of category participation is likely to produce a handful of giant global beverage companies selling everything from water and soft drinks to beer and distilled spirits.
  

The changing beverage landscape creates opportunities and challenges. Consolidation will certainly play a major, determinative role in future industry developments.

The Benefits of Smallness

Boxing lore includes the conviction that "A good big man will always beat a good little man", but in the beverage industry, such a notion has no currency. With beverages, small players often have an edge over their larger opponents.

Small, entrepreneurial companies have been more successful than larger companies in niche beverage segment, which, in turn, have been growing more vigorously than more developed categories in recent years.

This phenomenon can be observed both with refreshment beverages and with beverage alcohol. For instance, while the U.S. beer market has been more or less flat for several years, the craft component continues to grow forcefully. The big domestic brewers' growth, when it happens, cannot compare with the likes of Boston Beer and New Belgium, both of which saw their volume increase at double-digit percentage rates in both 2006 and 2007. Similarly, while fruit beverage volume as a whole has been declining, sub-segments like fresh-packaged juice and sparkling fruit beverages still advance rapidly.

Small companies have been pivotal in both creating new segments and in extending existing ones. Red Bull and Hansen's Monster brand pioneered the vital energy drink category, for example. Brands such as Grey Goose in the distilled spirits market and countless specialty brewers in beer helped to move old categories in new directions.

Entrepreneurial companies share a number of characteristics that position them for successful cultivation of emerging trends.

• They are willing, even eager, to take risks.
  
• They can respond rapidly to new developments and opportunities, unhindered by corporate bureaucracies.
  
• They innovate in reaction to what happens in the marketplace, not because of an entrenched product-development process.
  
• They can freely act on gut impulses without having to substantiate anticipated returns on invested capital.
  
• They tend to have family cultures instead of corporate political cultures.

Consequently, small companies generate take-over targets like Glaceau (acquired by Coca-Cola) and Naked Juice (bought by Pepsi). However, perhaps the industry heavyweights would benefit by looking closely at the process and qualities that led to those brands rather than only the attractive end results.

Boxing aficionados recognize that the most exciting bouts occur in the lower weight classes, where smaller athletes constantly move, fighting intensely for every minute of every round. Here, a similarity to the beverage industry holds: the action often happens with the little guys.

LRBs Uncharacteristic Slowdown

Over the past decade in the United States, liquid refreshment beverages (LRBs), including all non-alcoholic beverages except tap water, grew ahead of the total population at a 1.5% to 2.0% rate. However, for the first four months of 2008, LRBs experienced no growth, resulting in declining per capita consumption. This uncharacteristic slowdown occurred across all categories. Bottled water and ready-to-drink teas, after earlier very strong double-digit advances, are flat year-to-date. Soft drink volume continued to decline. Typically vigorous energy drinks growth slowed, while milk and coffee remained flat.

Beverage Marketing Corporation sees several likely factors for LRBs limpness lately:

The economy: Rising prices for gasoline and other goods have hindered the buying power of mainstream America. This is especially evident in the convenience and immediate consumption channels.

Input costs: Unprecedented input costs relating to multiple aspects of beverage manufacturing, including HFCS, PET, aluminum and fuel, have been passed on to the consumer in higher front line pricing, which has affected all LRB segments.

Trading down to smaller affordable sizes: Recently, there have been some moves by consumers toward selecting smaller package sizes. While people still are consuming the same amount of liquid, the impact of trading to smaller sizes such as going from the 20-ounce size to the 16-ounce may be the reduction of product waste. Consumers may be increasingly careful not to throw away 4 ounces of the 20-ounce size.

The weather: Significant portions of the country saw unusually cold or wet weather, which dampened demand for cold drinks.

The environment: Consumer concerns about the environment may have affected some buying decisions, particularly as a result of campaigns targeting bottled water. Some observers have speculated that these factors have prompted some consumers to opt for tap water in place of packaged beverages.

Of all these factors, Beverage Marketing believes the economy, input costs and package downsizing are the most serious culprits. If all goes well, the weather will not be an issue for the remainder of the year. Further, Beverage Marketing does not believe environmental concerns, while getting much attention, have been a major factor in LRBs recent performance. Moreover, as the industrys actual environmental impact becomes better understood, scapegoating of beverages should cease to be an issue.

Looking forward, Beverage Marketing expects the slowdown to be a temporary phenomenon. After the initial sticker shock wears off, they will adjust to price increases. While the current softness, which has affected all segments of the LRB market, could persist through the second quarter and into the third quarter, Beverage Marketing foresees growth slowly returning to the 1% range for LRBs by the end of the year.

DPS: A Strong Company Facing Headwinds

Content The Dr Pepper Snapple Group (DPS), the former beverage business of Cadbury Schweppes that formally separated from it on May 7, enjoys many strengths but it faces an exceptionally tricky competitive environment.

DPS has some definite advantages. It is a sizeable company with $5.7 billion in sales and strong cash flow. It has established brands in both the carbonated soft drink (CSD) and non-carbonated beverage categories. This puts it in the unique position of participating in markets for both concentrates and finished products. Moreover, it distinguishes itself from Coca-Cola and PepsiCo by possessing a network of bottlers that effectively gives it control of 75% of its route to market. This integration allows it to offer big-box retailers like Wal-Mart direct shipping, which can translate into more shelf-space in a critical distribution channel. With 15% of U.S. CSD market, the company has a brand roster consisting of diverse popular flavored brands, and such non-colas have generally outperformed colas in recent years. Moreover, the Snapple brand has revived with the successful introduction of new high-end teas.

However, DPS confronts several challenges. On the concentrate side, CSDs represent a declining category, and contractions do not appear to be abating. While non-colas and diets had previously been performing more strongly than regular CSDs and colas, this was not the case in the first quarter of 2008. Consequently, the flavored CSD lineup that gave it a leg up preceding the spin-off cannot be counted on for growth in the future. With regard to the bottling business, the company is losing in-demand brands such as Glaceau and Monster when companies like Coca-Cola and Anheuser-Busch acquire them or strike distribution deals with their owners. Unprecedented input costs relating to all aspects of manufacturing operations, including HFCS, PET, aluminum and fuel, as well as slowdowns in CSD volume growth give cause for concern. Further, it remains to be seen if the revitalization of Snapple will prove to be sustainable. Moreover, some of its other non-carbs, such as Motts, participate in intensely competitive categories, or, like Clamato, are strong but relatively small.

Moving against these headwinds, DPS remains poised for growth, albeit possibly not as strong as in the period prior to the demerger. Growth in todays marketplace requires both successful innovation and strong marketing. The company has done well with marketing in the past, but has not been especially innovative in an arena where newer beverage styles like sports beverages, energy drinks and enhanced waters have given rivals competitive edges.

Marketing Investment. Big Bucks vs. Grassroots. What is the Wiser Way of Spending Money?

There has always been a debate as to how to spend marketing dollars. Large companies, whose brands are global household names, spend significant amounts of money in global/regional/national campaigns to support their brands. Logic indicates that with such support, these brands should continue growing, taking share away from smaller brands that do not enjoy the same type of support and, as such, enjoy profitable growth. However, this has not translated into performance in recent years as much smaller brands are growing at rapid rates, without the benefit of large marketing budgets and/or the backing of a major multinational corporation. This holds true in many countries and across different beverage categories, such as CSDs, water, beer, or spirits.

Many factors are in play and it is impossible to generalize, but certain factors can be found across the board, regardless of geography or type of product to include:

• Entrepreneurs are focused on finding the slightest opportunity to address the consumer in the most appropriate way;
• Day-to-day in market contact with the consumer leads to a better understanding of the market place than drawing plans from a corner office;
• Well-spent money at the point of sale is a very effective way of creating product awareness and can, in many instances, match or outweigh a large media budget;
• Media itself has become very tricky. The impact of traditional campaigns has eroded; grassroots and viral campaigns have become a useful tool for smaller brands;
• Given environmental concerns, smaller/local brands play better with influential consumer segments than the traditional multinational brands that are associated with the global economy;
• It is easier to take risks with a small product than with a large brand/organization.

It is difficult to come up with one formula and/or apply the recent success of so many small brands in developing a sure bet proposition in a highly competitive marketplace. A key lesson for large brands/corporations is to go back to their archives and discover what made them successful in the first place. Many brands began with entrepreneurial characteristics. On the other hand, smaller brands that are successful today will face increasing challenges as they gain scale and visibility. It is important to lose sight of the entrepreneurial spirit as a small brand begins to hit scale and maturity.

Success seems then to be defined not by the size of a brands or corporations pockets, but on the ability to understand the consumer and give her/him a compelling reason to desire a specific product versus alternatives.

Big Brands Risk Losing Distribution as Many Retailers Seek Own Identities

One would think that given the importance of many beverage categories to retailers’ overall sales and profits, that they would be well positioned for continued retailer prioritization and support. After all, four out of the top eight consumer package goods categories sold in U.S. retail stores are beverages including carbonated soft drinks, refrigerated milk, beer and bottled water according to the latest Nielsen Company annual information.

Further, beverages are a key source of consumer innovation and new product introductions, particularly incorporating functional/health and wellness benefits, and are growing at rates significantly higher than retailer same-store-sales. Categories like bottled water, enhanced water, energy drinks and super-premium fresh juices offer benefits which retailers themselves see as extremely important for the “healthy” positioning many are pursuing.

So what’s the concern? Many retailers are trying to find ways to re-capture consumer shopping trips and occasions by pursuing image-enhancing and differentiation strategies, and focusing on those categories and brands that they think their shoppers will perceive as “different” and “unique” to them. In many instances, this is occurring at the expense of category-leading brands. In fact, many leading retailers are reporting to BMC Strategic Associates that they are reducing retail distribution and support for big brands, because their customers “can buy them anywhere” and big brands don’t reinforce their differentiation strategy. There are even instances of retailers opening their latest “neighborhood” or “prototype” format, and excluding entire “mainstream” categories like domestic beer!

Some suppliers tell us that retailers “are making a big mistake” as they do this. But the fact remains, retailers control the route to consumer, and they are experimenting with product assortment and expanding their offerings of specialty and niche items, certainly at the expense of big brands distribution, space allocation and retail weight-of-stock.

As retailers seek to find their own identities, suppliers must step up and present the facts about category profitability and retail productivity, and the key role big brands can and should play based on true shopper insights. Otherwise, big brands will continue to be pressured (and lose), and category fragmentation and SKU proliferation will continue beyond true variety requirements.

Are big brand suppliers up to the challenge?

For further information, contact Gary Hemphill at Beverage Marketing Corporation
| 646-313-1958

Sometimes Simpler is Better

There has been much discussion in recent years about the growing complexity of the beverage industry, every facet of which has become more challenging – from distribution to operations and marketing to the actual products.

Consider these segments:

• Energy Drinks: Sales have surged in recent years as products in this category have been enhanced with, in addition to caffeine, a bevy of complex ingredients including taurine, various B vitamins and more.
• Enhanced Waters: Products in this segment rode the wave of success of the bottled water category by innovating with a host of added minerals, vitamins and nutrients.

In addition to the products themselves, companies have taken a more sophisticated approach to marketing their products.  Companies are building their portfolios around consumer need states – to some extent eschewing traditional category definitions.  For starters, water is no longer just water; it’s a hydration beverage. The list of unconventional classifications also includes indulgence, pick-me-up, social/fun, and refreshment – hardly straightforward descriptions of a beverage’s contents.

But increased complexity isn’t the only way to hit on a successful new product in today’s market.  Honest Tea, for example, owes its success in part to its simplicity.  It’s a straightforward tea that is lightly sweetened. (It’s been reported that Coca-Cola is close to potentially making an investment in Honest Beverages, maker of the RTD brand Honest Tea, which could help boost Coke’s non-carb business.)

The same can be said for perhaps the most successful category innovation in the last couple decades – PET water.  It’s healthy, convenient, pure and an extraordinarily simple product proposition; a combination that has it gaining ground on the once invincible CSD category.

As a number of complex and sophisticated new products become successful, it’s important to keep in mind that, at least sometimes, simpler is better.

For further information, contact Gary Hemphill at Beverage Marketing Corporation
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How Far Will Beer Consolidation Go?

Wall Street has lately made a hobby of speculating about the next move in the consolidation of the global beer business. And it might be onto something: It is indeed interesting to look at what is driving the race to consolidate the industry and the potential resulting scenarios.

There are two basic arguments for consolidating – one rational, one not. The rational argument is very straightforward: Beer companies need to enter new markets, realize cost synergies, and/or solidify competitive position in key strategic markets or segments. These all relate to creating a competitive advantage that will drive long-term growth. The assumption is that all transactions will provide a return in excess of the acquiring enterprise's weighted cost of capital.

Then there is the irrational argument, which often includes telltale comments from management like, 'It is a strategic market we need to enter;' the benefits will become apparent over time;' or 'The ROI is not clear because you don't understand our business.' The true motivation in many of these cases, however, involves egos at the highest level - they'll make the numbers seem to work to justify the desired acquisition.

It is likely that acquisitions inspired by both arguments will occur over the next five to ten years, creating a totally different marketplace. The first likely consolidation will involve the acquisition of S&N. A deal is almost certainly going to happen, with Carlsberg getting the 50% of Baltica (the leading player in Russia by a wide margin) it doesn't already own, and Heineken getting the European brands and assets. Very rational transaction.

Next up is Coors/SABMiller. The US JV will likely close and assuming the combination is successful, it will likely be only a matter of time before they are aligned globally. Another rational transaction.

Then comes the potential big one: A-B getting acquired by InBev or merging with Heineken. The cost of such a deal will ultimately determine whether this is a rational or irrational consolidation. If InBev combines with A-B globally, then you have a player that is in a strong market position in every major region except for Africa. It gives InBev access to China and the U.S. and A-B access to South America and Eastern Europe, two of the fastest margin growth markets in the world. If A-B aligns with Heineken, it will create the number one global brand, plus a fairly strong presence in emerging markets, with footholds in Western Europe and, to a lesser extent, Africa.

In either case, the deal will kick off a trend of consolidation in the industry. If it’s InBev and A-B, then perhaps Heineken will subsequently align with SABMiller, and then FEMSA will fall in line, creating a global giant. These moves might then spur InBev/A-B to team up with Modelo and Carlsberg.

But things could get even more interesting in the next wave. How about SABMiller et al buying CCE and other Coke bottlers and InBev et al buying PBG. Then Diageo falls to one of the big brewery giants, with resulting synergies across all beverage platforms as distribution becomes king. Where would Coke and Pepsi fit into all this?

Is it possible that we'll end up with four or five giant global beverage companies in the end? Absolutely, but many things need to happen before we get there. Did anyone imagine that there would be only a handful of giant car companies 15 years ago?

For further information, contact Gary Hemphill at Beverage Marketing Corporation
| 646-313-1958

Did Negative Publicity Damage the Bottled Water Market?

Downbeat press reports about bottled water appeared with regularity during mid-2007, and the retail PET segment (consisting of water in single-serve packages made of a particular plastic) registered an unprecedented decline in volume during one summer month. Is the category's heyday over? Did negative news ground the once high-flying beverage category?

After a remarkable 40 consecutive quarters of high double-digit percentage rate enlargement, PET water growth slowed in the summer and, for the first time, declined by 1.7% in August, according to data from Information Resources Inc.

This change of fortune surprised many industry observers. As noted in an earlier " BMC Viewpoint" some attributed the turnabout to incidents like San Francisco's well publicized move to banish bottled water from city buildings, municipal efforts to encourage tap water consumption, and reporting focusing on issues of water use, recycling and the beverage industry's carbon footprint.

However, other factors actually explain the momentary pause in PET water's forward motion. After heavy discounting and couponing in 2006, prices stabilized or increased in 2007, making it difficult to compare volume in 2007 with the previous year. Pockets of weather in which consumers were disinclined to purchase water also affected the marketplace. Furthermore, the category saw some impact from the growth of flavored and enhanced waters.

Water's rebound after August shows its resiliency and suggests that the market factors outlined above, rather than factors of negative publicity and consumer perception, lie behind the anomalous August decrease. Bottled water's convenience, coupled with the widespread awareness of the need for hydration, outweighed any negatives. In September, October and November, PET water again achieved volume growth rates in the low- to mid-teens. For the year as a whole, Beverage Marketing Corporation (BMC) expects growth at that level, which would be consistent for a gradually maturing category.

Looking forward, BMC anticipates growth of approximately 10% in 2008 and a very soft landing in growth over the longer term. We also still predict that bottled water will surpass carbonated soft drinks to become the largest beverage category by volume within the next five to seven years. Beyond the hype, the news for bottled water remains positive.

For further information, contact Gary Hemphill at Beverage Marketing Corporation
| 646-313-1958

Is the U.S. Beer Market Healthy?

In 2006, the U.S. beer market experienced its strongest volume growth of the new millennium, advancing over 2 percent and leading many to proclaim the return of the beer business.  But a look behind the numbers reveals a different story:

• The growth was extremely uneven, with imports accounting for nearly 90 percent of the absolute volume growth despite entering the year with only 12.4 percent share of volume.
  
• The 2005 comparables were somewhat understated due to wholesaler inventory adjustments.
• Craft beer accounted for most of the growth in domestics.
• System wide inventory levels for the leading importer were rising in anticipation of the formation of Crown, thereby inflating growth.
• Pricing growth in 2006 was modest -- in the 1.5 to 2 percent range -- despite overall flat pricing in 2005.  The 2006 performance was much better than 2005 but the quality of growth was not terrific.

At the start of 2007, then, the U.S. beer market remained fickle: The two largest domestic brewers in Q1 saw organic volume declines; transition issues began to emerge at Crown and Inbev/A-B, negatively impacting imported beer growth; and rumors were circulating about the sustainability of pricing moves.

But although the year started slow, it has begun to accelerate.  The industry finished the first half up 1.6 percent.  This growth was achieved at the same time overall beer pricing as measured by the CPI grew 2.9 percent through July.

Despite some local market pricing pressures, overall pricing remains strong.  The brands that led this pricing move, such as Corona and Heineken, are regaining momentum, as are the Inbev brands that were transitioned to A-B.

For the domestic players, business has also recovered.  In July and August, A-B experienced organic beer volume growth for the first time in over a year.  Miller has also reported solid organic growth of 1.3 percent for the April to August period.  Coors has continued to expand at the 2 to 3 percent range.

Craft beer continues to expand, as well, approaching double digit levels, and imports are growing in the mid to high single digits.

In other words, the entire industry is beginning to experience growth.

The quality of the volume growth over the past five months is much better than the 2006 numbers despite the lower growth rate.  This supports the position that beer is no longer growing in the 0 to 0.5 percent range but in the 1 to 1.5 percent range, with positive pricing dynamics and trading up resulting in value growth at the 6 to 8 percent level.  Based on the above, it is safe to say that the U.S. beer industry continues to recover and is the healthiest it has been in many years.

For further information, contact Gary Hemphill at Beverage Marketing Corporation
| 646-313-1958

The Future of Bottled Water

The bottled water category has been one of the great success stories in the history of the beverage industry.  Per capita consumption has more than tripled since 1990 driven by the vibrant growth of the Retail PET segment.  And as 2007 began, the category seemed poised for yet another great year.  But this summer several highly-publicized developments have put a question mark on the category’s future. First there was the mayor of San Francisco banning the product in city offices – as both a cost-cutting measure and for what he deemed environmental reasons. In addition, a number of high-profile restaurants have eliminated the product from their menus.  The rationale is that tap water is just as good as bottled and people can save money and help the environment by opting for tap.

These recent developments raise several questions about the bottled water category:

Is the recent publicity a threat to the category?  The argument is actually specious:  Consumers who purchase single-serve water sizes are mostly buying water instead of other refreshment beverages as a form of healthy refreshment – not as an alternative to tap water.  No matter: Recent scanner data for the Retail PET category reveals that volume actually declined by 1.4% for the four week period ending August 12th.  These recent developments and subsequent press coverage are a threat to the category -- evidence that sometimes perception is reality.

What should the category do? Being proactive is the best way to address the issue. Most bottled water companies have good environmental records.  Companies need to tell their positive environmental stories.  They must also make inroads at light-weighting their packaging and addressing additional environmental concerns.

Could this spill over into other categories?  The most common argument against water is that people can just go to the tap.  This of course isn’t true of other beverage categories.  But it could spill into other categories if consumers decide the plastic bottle itself is an environmental enemy.  In many ways, the plastic bottle is the perfect beverage package – unbreakable, lightweight and resealable, but there is probably an opportunity to improve on recycling rates.

BMC predicts that the recent public concerns will subside, but that the political threats may linger, so the industry must continue to be proactive.

For further information, contact Gary Hemphill at Beverage Marketing Corporation
| 646-313-1958

Can Sam Adams Sustain Recent Growth Levels?

Over the past three years, craft beer has returned to double-digit growth after nearly 10 years of flat to minimal gains. The company leading the charge forward is Boston Beer, the U.S.'s largets craft beer company and maker of Sam Adams. After several years of focusing on the largest U.S. beer styles, lager and light beer, it has returned to its early 1990's form, introducing new styles that have captured consumer intrigue and satisfied palates. Still, many questions about the future remain:

• Can Sam Adams sustain double-digit growth as it nears one percent of total beer market? There is precedent for such sustained growth for high end brands in other categories. When Absolut arrived on the scene, for example, no one thought a super premium spirits brand could achieve one percent of the total market. Absolut now accounts for over two percent of the total spirit market. Premium wine brands like Beringer and Kendall Jackson have also soared beyond one percent.
  
  
• Is the craft surge the same now as in the early 1990's? Some similarities exist, but there are many differences between then and now, as well. For example, the quality of beer has improved and consumers have demonstrated a willingness to experiment with new taste, as well as to pay for it. Just look at spirits and wine. In the early 1990's, overall per capita consumption of alcohol was contracting. Today it is growing and playing a bigger role in the American consumer's lifestyle.
  
  
• With its Lehigh Valley brewery acquisition, has Boston Beer gone too far? As Boston Beer has grown, the risk of not finding enough third party production capacity has likewise increased. This risk became a reality when Miller announced it was going to terminate its co-packing arrangement with Boston Beer. With the Lehigh deal, Boston Beer bought 1.5 million barrels of capacity at a discount, thus ensuring that it will have plenty of capacity to grow. It is not without risk of underutilization and high fixed cost burden, but this risk was recognized in the price.

Although the sustainability of double-digit growth for craft beer over the next five years will meet significant challenges, Boston Beer has positioned itself for continued leadership in the category.

For further information, contact Gary Hemphill at Beverage Marketing Corporation
| 646-313-1958

Jones Soda's Third Quarter to Provide Clarity

Jones Soda, the Seattle-based purveyor of alternative beverages, has plenty to prove in the third quarter of 2007. The company's disappointing second quarter sales resulted from weaker than anticipated performance by its new concentrate business. Although its packaged soft drinks showed a solid 30% increase in sales, the lack of immediate success in its new concentrate venture inevitably affects evaluations of Jones Soda and its future prospects.

In the fourth quarter of 2006, the first period of Jones Soda's distribution deal with National Beverage, Jones concentrate sales reached 2 million cases, but volume failed to meet expectations in each of the following quarters. First quarter volume fell to 1.1 million cases, and the second quarter saw fewer than 800,000 cases. Many analysts had predicted volume for each quarter ranging from 1.5 million to 3 million cases.

With observers inevitably regarding Jones with caution in light of its second quarter showing, the company must show it can address a number of key questions:

Jones is known for putting its quirky flavors like Blue Bubble Gum and Fufu Berry in 12-ounce glass bottles, but its concentrate endeavor involves conventional cans. Does less distinctive packaging irrevocably undermine the brand's image?

The company has made much of its move to use pure cane sugar in place of the industry-standard sweetener high fructose corn syrup. But is this enough of a point of difference for consumers?

The move to pure cane sugar is an especially pressing matter since it puts Jones Soda's price point above that of other national CSD brands. Are consumers willing to pay more for a high-calorie cane sugar product?

Coca-Cola and PepsiCo enjoy remarkably powerful direct-store delivery systems, with representatives in stores regularly, in some cases daily. In comparison with such formidable competitors, is Jones receiving adequate merchandising support when shipped to retailers?

Finally, can the company realize sufficient volume to offset the significantly higher promotional, selling and administrative costs that accompanied the launch of the concentrate business?

Jones needs to address these questions in the third quarter. Successfully resolving them could spur sales of its concentrate and bolster its position as a contributor to the company's overall earnings. This would demonstrate the potential viability of the company's new strategy. Another disappointing quarter would lead to more challenging concerns.

For further information, contact Gary Hemphill at Beverage Marketing Corporation
| 646-313-1958

How is Cott Coping?

Cott Corporation, the leader in private label carbonated soft drinks, suffered a disappointing second quarter and confronts a difficult situation moving forward.

Historically, private label has thrived when the price gap between it and brands like Coke and Pepsi was wide. While its products are good-tasting and attractively packaged, it competes primarily on price. When it is able to offer significantly lower prices, its share of the CSD market grows. The inverse is also true. Increases in input costs, especially for aluminum and high fructose corn syrup, have made it difficult for Cott to maintain its relative price edge. While greater costs also affect purveyors of branded CSDs, the largest increase in input costs in memory makes for an especially challenging situation for the particularly price-sensitive private label segment. Cott has responded by passing along higher costs to retailers which could constrain future demand for its products.

In an attempt to offset it troubles in the CSD market, which accounts for the vast majority of its U.S. volumes, Cott has begun introducing some of the non-carbonated products that are outperforming conventional soda. But here, too, Cott would need to clear high hurdles to reach success. In categories such as sports beverages, energy drinks and ready-to-drink tea, it must compete against established brands like Gatorade, Red Bull, Vitamin Water and Snapple no easy task. Brand recognition plays a vital part in these categories, which puts late-entrant Cott at a definite disadvantage. Further, grocery stores, where Cott has its greatest presence, are often not the largest or most profitable venues for these products. Add in the supply-chain complexities that invariably arise with the expansion of product offerings, and its immediately evident that diversification beyond core CSDs does not offer Cott an easy route to recovery.

While Cott's performance in international markets such as Mexico and the U.K. has been notable, it has not been enough to counterbalance its relatively poor showing in the United States. Commendably, it has instituted cost reductions which will benefit the company in the coming months.

Consequently, the companys future is uncertain, dependant largely on whether its new pricing initiatives, non-carb entries, supply chain improvements, and cost reductions can come together to improve its bottom line. Further, will anyone endeavor to buy Cott this year? Big question marks remain for at least the balance of this year.

For further information, contact Gary Hemphill at Beverage Marketing Corporation
| 646-313-1958

Hansen's Well Positioned to Outperform the Energy Segment

In recent years, Hansen's has been a top performer within the US energy drink market. But with the category beginning to slow, will Hansen's inevitably follow suit?

The energy drink category continues to grow at a rapid pace, with projections at 35% to 40% for both the first half and the full year. BMC sees continued market share gains for Hansen's Monster brands, with growth in excess of 50% for the first half of the year as it continues to gain on category leader Red Bull. Key contributors to this growth include multi-packs of Monster Energy (for big box retailers), as well as new products. One such new product is the 16-ounce Java Monster, which consumers regard as a value alternative to Frappuccino. The three Java Monster flavors beat Rockstar/Cokes forthcoming ready-to-drink coffee/energy drink combo to the market, giving wholesalers and retailers the first high-margin competitor to the Starbucks/Pepsi brand. As long as production capacity proves adequate, the brand is expected to be a major player in the space.

In addition, Hansen's 2006 distribution arrangement with A-B is finally paying off, with more than half of Monster volume now moving through A-B distributors, which are outperforming non-A-B distributors. A-B is providing Monster with entree into on-premise accounts, in which it is highly underdeveloped, and providing benefits in terms of preferred aluminum costs related to A-B sourced aluminum cans. Distribution agreements in Canada (with Pepsi) and Mexico (with Cadbury) are also likely to have a positive impact for the company.

The only real negative in this otherwise rosy outlook for Hansen's involves input costs, such as for high fructose corn syrup, which remain a concern for most players in the industry.

Still, Hansen's is in a strong position as the first half of 2007 ends, thanks to the continued growth of the energy category, the momentum of Monster brands, and the impact of its distribution agreements. To a lesser extent, speculation of interest in Hansens from Pepsi, following Coca-Cola's high-profile deal with Glaceau, is also having a positive effect.

During 2008, BMC predicts that Hansen's growth will slow, as the company laps some of these initiatives. For the remainder of 2007, however, things are looking good for the company.

For further information, contact Gary Hemphill at Beverage Marketing Corporation
| 646-313-1958

Where Will V&S Land?

On June 20th, the Swedish government formally approved the divesture of Vin and Sprit (V&S), maker of Absolut Vodka. Speculation over who will buy the firm has circulated in the press over the past few weeks, with Bacardi, Fortune Brands and Pernod Ricard considered the front runners, and Diageo circling in the background. The government has also not ruled out a potential IPO. It will be interesting to see whether V&S remains intact or whether pieces such as Fris Vodka (Denmark, 285k 9-liter cases in US), Cruzan Rum (555K 9-liter cases in the US), and Plymouth Gin are eventually sold as separate properties. Each of the three frontrunners carries unique benefits and hurdles in the V&S chase:

Fortune Brands: This is the company with the most to lose. If Absolut were to be purchased by one of the other two front-runners, it would most likely pull out of Maxxium, the joint venture between Jim Beam Global Spirits, The Edrington Group, V&S, and Remy Martin. As Remy Martin has already indicated it will be withdrawing from the venture, this would leave Maxxium and Fortune Brands with a very weak global portfolio, and hurt Fortune's premium position within the US market.

Pernod Ricard: As the number two global distiller and leader in many regions, Pernod Ricard offers the greatest opportunity for the acceleration of Absolut's global growth, which currently accounts for 50% of V&S's business. There are few regulatory hurdles to completing the deal on a global basis, although the possibility of having to unwind the US Stoli Vodka distribution relationship does exist.

Bacardi: Bacardi has a well developed European route to market but is fairly underdeveloped elsewhere. A deal with V&S would transform the company into a global white goods leader, with leadership positions in both vodka and rum. In the US, they would have the number one super premium vodka with Grey Goose, number one premium vodka with Absolut (Smirnoff is more mainstream), number one super premium gin with Bombay Sapphire, and number one rum with Bacardi.

We do not feel that Diageo will be able to overcome regulatory hurdles and therefore view the possibility of them acquiring V&S as low.

Still, with three highly motivated buyers, BMC predicts that the price for V&S will likely exceed the $6 billion that is currently being cited in the press.

For further information, contact Gary Hemphill at Beverage Marketing Corporation
| 646-313-1958

The Future of CCE

For Coca-Cola Enterprises (CCE), the future is now. The bottling behemoth has long struggled, performing mostly in the shadows of its closest competitor, the Pepsi system bottling giant PBG. CCE stock has languished in recent years at roughly $24 a share, after reaching a high of $38 back in 1998.

After taking over the CEO reins a year ago, the pressure is on John Brock to pull the company out of its doldrums. What must Brock and CCE do? Beverage Marketing sees three performance areas that are key to a brighter future:

• Operational efficiency – CCE must become more customer-oriented and improve its operational efficiency. Its Collaborative Customer Relationship Model, a program designed to help it work better with retailers, is a step in that direction.


• Better product portfolio – CCE still needs more non-carbonated products like Glaceau (which Coca-Cola recently acquired) and V8 (with which CCE has cut a distribution deal).  The addition of even more brands will certainly help. In this vein, Coke's potential acquisition of Snapple would provide yet another building block for the bottler, although Tata Tea's recent interest in the Snapple brand clouds that picture. Either way, CCE needs to continually analyze its portfolio, and study questions like whether it should add other high-margin products to its trucks, including possibly beer.


• Improved economics – In general, CCE must be more nimble in improving its financial picture. The market is changing faster than ever and CCE has been slow to evolve and adapt. Its current reorganization will help shed redundant employees, but this is not enough. Improving its economic picture must be an ongoing process.  Certainly, the addition of an expanded portfolio of high-margin products will help.

In the last several months, some key financial analysts have upgraded CCE based on its recent efforts. Still, the turnaround is not complete and the next year will be crucial in determining whether or not the company is on the right track.

For further information, contact Gary Hemphill at Beverage Marketing Corporation
| 646-313-1958

If Coca-Cola Buys Snapple

Coca-Cola may be considering an acquisition of Snapple, according to media reports.

Such an acquisition could occur because the brand's current owner, Cadbury Schweppes, is in the process of either spinning off or selling outright its beverage unit, most likely to a private equity firm, which would in turn sell the unit's brands individually. Snapple appeals to Coke because of the company's desire to bolster its non-carbonated portfolio and improve its North American performance.

But what impact would a Snapple acquisition have for Coca-Cola?

Would it level the playing field in the tea category with Arizona and Pepsi/Lipton?

It would close the gap, but both Arizona and Pepsi/Lipton would maintain leadership over a Coke combination of Snapple/Nestea based on current market shares.

What transition issues would come up in moving the brand from the Cadbury distribution system to the Coke system?

A transition would likely add an extra layer of cost onto any deal.

How would this impact the distribution agreement between CCE and Arizona?

An acquisition could potentially raise conflicts between Arizona and CCE that would need to be resolved during the transition.

Can Coke get the brand growing again?

Snapple has not generally participated in the strong growth of the tea category over the last couple years, but it's still recognized as a great trademark.

Stay tuned.