Click image for details Preface: Since the Civil War, Americans have enjoyed soda water and sarsaparilla to quench their thirst, the latter said to be a cooling drink of indigenous Mexicans. In 1885, veteran John Pemberton invented a carbonated beverage mixing coca and alcohol. The following year, due to Atlanta's prohibition, John Pemberton removed the alcohol from the formula, creating the first generation of Coca-Cola. Coca-Cola quickly became the leading carbonated drink across America, and over the next hundred-plus years, it spread globally, becoming part of American culture. As we entered the new century, many things changed. Consumers increasingly focus on health and reduce sugar intake. The public realized that the culprit of obesity is excessive sugar intake, not fat intake. Thus, reducing daily carbohydrate intake has become the most mainstream weight-loss method, and traditional carbonated drinks like Coca-Cola have seen slowed growth in developed and relatively developed economies. Considering that many consumers have already switched to other relatively healthy drinks, and no healthy beverage has yet captured the market Coca-Cola is gradually vacating, there is likely a huge opportunity for beverage development combining consumption upgrade and health trends.
This article will first briefly review the difficulties Coca-Cola currently faces and its attempts to transition to healthy beverages. Then, it will categorize and explain several types of healthy beverages with significant market size, focusing on three categories:
(1) Sports and energy drinks
(2) NFC juice drinks
(3) Unsweetened tea drinks Undoubtedly, coffee remains a popular mass beverage, and many successful companies have emerged, such as Starbucks and Blue Mountain Coffee, but as a leisure drink, it is outside the scope of this article. Additionally, meal replacement powders like Soylent and Ruofan are also excluded, as their food attributes far outweigh beverage attributes, and food and beverage attributes are distinctly different. The following quote from Buffett illustrates this and shows why we believe finding healthy beverages is crucial. Buffett: In the food industry, you can never achieve the same dominance from a product as you can from Coca-Cola or Gillette. People are more fickle in their food choices, so they might love McDonald's, but at different times, they will go to different restaurants... The soft drink industry will never see a second Coca-Cola. It took Coca-Cola over 100 years to achieve its current position; I recall Coca-Cola was founded in 1886, so it has a history of 111 years. Thus, in terms of invincibility, I think McDonald's and Coca-Cola are not on the same level. Conversely, decisions about what to eat often depend on what you see. Convenience is a big factor, so if you're hungry and pass by McDonald's or Burger King, or see their signs while driving, you might stop at whichever you see. There's a loyalty issue; loyalty in the food industry is not as high as in the razor industry. Also, people like to change tastes in food; I'm happy eating the same thing every day, but most people change tastes weekly, monthly, or yearly. In the soft drink industry, people don't have as much desire to change tastes. It's completely different. — Source: Berkshire Hathaway 1997 Annual Meeting Coca-Cola's Predicament and Transition to Healthy Beverages In recent years, Coca-Cola's sales growth has slowed globally, dropping from a 5% growth rate in 2010 to 2% in 2015. In Europe and North America, it even experienced negative and zero growth. In other words, Coca-Cola's ability to maintain growth largely relies on sales outside developed economies, particularly in Asia-Pacific, Eastern Europe, and Africa. The sluggish sales are reflected in net operating revenue and gross profit, with both growth rates slowing. In 2014 and 2015, Coca-Cola's net operating revenue and gross profit growth were both negative, whereas as recently as 2011, both maintained double-digit growth. To increase profits, Coca-Cola is gradually divesting its bottling operations globally, including in China, North America, Germany, and South Africa. In the carbonated drink production chain, the upstream concentrate production and sales have a gross margin of about 50%-60%; the midstream bottling business, though contributing about 60% of revenue, has a gross margin of only 10%-15%; the downstream brand and channel have a gross margin of about 40%. Production and sales are the most capital-intensive links. By selling bottling operations to franchise partners, in the future, Coca-Cola will no longer be responsible for equipment, materials, and logistics, except for providing concentrate. Coca-Cola has always wanted to project a healthy image to the public, not only through self-developed new products but also through extensive external investments. From 1997 to 2016 (as of December 9), it made over 400 external investment events. By broad category, the target industries include food and beverages, information technology, traditional retail, agricultural planting, and healthcare, with food and beverage companies receiving 177 investments. The invested beverage companies are mainly sports and energy drink companies, juice companies, tea companies, yogurt companies, and coffee companies. The types of beverage companies Coca-Cola invests in may reveal some interesting information. In the following chapters, we will introduce sports and energy drinks, NFC juice drinks, and unsweetened tea drinks. Sports and Energy Drinks: The Rise of "Monster" In 2002, Monster Beverage launched Monster energy drink, with an M on the can that looks like a claw mark left by a monster in the dark, quickly memorable to young people who like to be unconventional. Besides the M logo, the can size also has visual impact. A comparable priced wine drink is 450 ml per can, while Monster is 960 ml. The U.S. beverage industry publication Beverage Digest commented: "Monster may place far more emphasis on can design than on taste research." The highly recognizable can design quickly brought Monster closer to its target consumer group. In the U.S. beverage market, Monster holds a 39% market share, second only to Red Bull's 43%. From 2002 to 2015, Monster's sales grew nearly 24 times, with a compound annual growth rate of about 25.36%. Monster Beverage's popularity is closely related to the rapid growth of the sports and energy drink market. Globally, sales in the sports and energy drink market grew from $5 billion in 2002 to $28 billion in 2013, an increase of about 5.6 times. In the U.S., sales grew from $1.6 billion in 2002 to $9 billion in 2013, an increase of about 9 times. Monster Beverage targets young people aged 18 to 30, who are the largest consumers of energy drinks in the U.S. At the same time, Monster Beverage's gross margin has remained high, consistently above 50%, reaching 60% in 2015. Thanks to high brand awareness and gross margins, channel partners are more willing to stock Monster Beverage among the many sports and energy drinks, further helping Monster expand its market share. Both Coca-Cola and Red Bull, the leader in sports and energy drinks, are keen to sponsor various sports events, from the four major North American ball sports to NASCAR, with brand exposure. Interestingly, Monster Beverage largely avoids TV advertising channels and instead focuses on relatively niche extreme sports such as motocross, surfing, skateboarding, and BMX. First, extreme sports events have long lacked large-scale well-known sponsors, so competition is not fierce, making entry relatively easy. Second, compared to mainstream sports, extreme sports are more avant-garde and exciting, aligning better with Monster's brand. Over the past decade-plus, the extreme sports market has grown rapidly, and Monster Beverage, with its long-term focus, has shared in the huge growth dividends. Extreme sports enthusiasts have their own cultural circles, similar to a subculture community. Subculture groups often have distinct emotions, values, and identity, more like a tribe with a hobby as a totem. Once a commercial brand successfully integrates with a subculture community, consumer brand loyalty is typically high (a typical case is bilibili users' astonishingly high community cultural identity compared to users of other video sites). Additionally, due to the proliferation of mobile internet, subculture dissemination is stronger than ever. Monster Beverage, by sponsoring motocross godfather Mike Metzger and strong rider Ricky Carmichael, has secured a large base of loyal fans. China's sports and energy drink market is in a period of rapid development. From 2010 to 2014, the industry's average growth rate reached 28.9%. By 2019, industry sales are estimated to reach 69.2 billion RMB. There are huge development opportunities here. With the shift in Chinese public health concepts, rising enthusiasm for sports participation, and upgrading of sports consumption concepts, the sports and energy drink industry has favorable conditions. Traditional large companies in the market have significant first-mover advantages in R&D, manufacturing, channels, and branding, but new entrants can potentially overtake if they choose a less competitive niche market, capture consumer psychology, and build good products and reputation. NFC Juice Drinks: New Flavors, New Gameplay Juice drinks can be divided into four categories by concentration: (1) Fruit-flavored drinks with concentration below 15% (2) FC fruit drinks with concentration above 30% (3) NFC juice (Not From Concentrate) (4) 100% fresh-squeezed juice Among these, fruit-flavored drinks and high-concentration juices (including 100% FC juice) are made by reconstituting concentrated juice with water, white sugar, and other additives. NFC juice is made by cold-pressing fresh fruit and refrigerating without any additives. The manufacturing process for NFC juice differs significantly from the more common concentrated juice. Concentrated juice is made by first squeezing fresh fruit, then highly concentrating it, storing it for a period, then reconstituting with water, followed by high-temperature sterilization and packaging. NFC juice, on the other hand, is squeezed from fresh fruit, instantly sterilized, and immediately bottled. Since common fruit-flavored drinks contain various additives, health-conscious individuals often avoid them and instead purchase NFC juice. In the U.S. and Japan, NFC juice is favored by many consumers for its better taste and higher nutritional value without concentration. In the U.S., NFC juice accounts for about 20% of all juice sales and is still rising. In Japan, with a dietary culture similar to China, per capita annual consumption of NFC juice is 2.5 liters, accounting for 8% of all juice. In China, per capita annual consumption of NFC juice is only 0.013 liters, accounting for 0.1% of all juice. China's NFC juice business may have huge development prospects. Currently, the biggest obstacle for NFC juice in the Chinese market is its high price. The reasons for the high price include: First, many juice producers lack stable local orchards. NFC juice production ideally requires a stable fruit source; if orchards cannot be self-built, stable cooperation partners are needed. In the past, concentrated juice manufacturers imported fruit from Brazil, but this model is no longer suitable due to freshness concerns. Second, the processing technology and equipment for each fruit type differ significantly. Adding a new flavor means adding a production line, increasing production costs. If a line is removed due to poor market response, the huge initial investment cannot be ignored. Third, NFC juice requires cold chain during transportation to ensure time and temperature. This has a high technical barrier, while traditional concentrated juice transportation does not involve cold chain technology. Fourth, for channel partners, NFC juice brands have low awareness, so channels lack strong motivation to stock them. Finally, consumption habits also affect NFC juice sales in China. After all, the most common scenario for American consumers drinking NFC juice is breakfast, while Chinese breakfasts prefer porridge and soy milk over juice. Although China's juice drink market already has several FC juice giants, there is no leading NFC juice company. We believe there may be an opportunity for startups to overtake on a curve, provided they can control costs in orchards, manufacturing, transportation, and channels, and create flavors and brands that match consumer preferences. Unsweetened Tea Drinks: Taste Evolution Under Consumption Upgrade Tea is one of China's traditional beverages, and the tea market has seen strong supply and demand in recent years. From 2005 to 2014, China's actual tea garden area grew from 1,352 thousand hectares to 2,650 thousand hectares, and the area harvested that year grew from 1,041 thousand hectares to 1,989 thousand hectares. During the same period, per capita tea consumption in China rose from 0.5 kg to 1.17 kg. Due to China's long tea culture, tea drinks, as derivatives of tea, are also popular among consumers. The upstream of the tea drink industry chain is the tea gardens built or leased by tea drink manufacturers, the midstream is the tea drink processing plants, and the downstream is the distribution, including wholesale and retail supermarkets. In recent years, with the rise of e-commerce, the role of wholesale has diminished, allowing tea drinks to reach retail/supermarkets directly, or even end consumers. Currently, China's tea drink market is dominated by four major players: Master Kong, Uni-President, Wahaha, and Daliyuan. Their main tea drinks (whether black tea, green tea, or oolong tea) have high sugar content and sweet tastes. This is related to the product positioning of Chinese tea drinks: tea drinks are just tea-flavored beverages, not substitutes for tea, so they need to emphasize taste. In Japan, where unsweetened tea drinks are most popular, tea drinks are an extension of tea, a convenience product for easy tea drinking, so they are unsweetened or low-sugar. But Japan's trend toward unsweetened tea drinks was not always so. In 1970, sugary tea drinks accounted for 65% of Japan's tea drinks; by 2010, only 7%. During this period, Japan's per capita disposable income grew significantly, and affluent consumers consciously reduced sugary drink consumption (similar to Coca-Cola's sales decline in North America and Western Europe). In 2010, sugary tea drinks accounted for up to 98% of China's tea drinks, and China's middle class is rapidly expanding, with their health concepts gradually forming (whether actively or passively). In this process, consumers will actively manage sugar intake. Therefore, in the foreseeable future, unsweetened tea drinks may become the mainstream choice. The four major Chinese tea drink companies (Master Kong, Uni-President, Wahaha, and Daliyuan) maintain their leading positions mainly due to their excellent channel capabilities. Master Kong's iced black tea can even reach small shops in western county towns, but the target customers of these channels may not be the main group in this consumption upgrade. Additionally, the traditional brand images of these companies may be perceived as not fashionable or healthy enough (similar to the decline in sales of once-ubiquitous instant noodles). In summary, in the unsweetened tea drink segment, startups focusing on product taste may still carve out a place if they can find alternative channels and branding. Compared to NFC juice startups, unsweetened tea drink startups may face greater difficulty because they do not involve fruit sources and cold chain technology. Source: Arterial Network - Eggshell Research Institute -END-