Li Jiaman

The carbonated beverage market has maintained steady growth over the past few decades. As the market scale expanded, major brands launched various flavors and packaging to compete for market share, attracting consumers through advertising and promotions. However, over time, the growth rate of the carbonated beverage market has gradually slowed, and consumer demand has begun to shift, presenting new challenges. The market environment is constantly changing, and in 2023, the carbonated beverage market seems to have fallen into a predicament.

Carbonated Beverages in 2023: "Difficulties Within Difficulties"

The first difficulty for carbonated beverages in 2023 is slowing market demand. NielsenIQ's July FMCG monthly report showed that from January to July 2023, the beverage industry grew 7.7% year-on-year across all channels, with offline channels growing 7%. In the traditional peak season of July, beverage industry growth slowed, with all-channel growth of 4.8% and offline growth of 3.9%. Among specific beverage categories, ready-to-drink tea, functional drinks, ready-to-drink coffee, and fruit juice saw offline growth exceeding 10%, while carbonated drinks—once considered "essential"—experienced negative growth. Data shows that the soda business of Coca-Cola's two major bottlers in China has slowed. China Foods (00506.HK) reported that in the first half of the year, revenue reached 12.46 billion yuan, up 4.7% year-on-year, with sales volume up 5.5%. However, due to the decline in soda category sales in its exclusive regions, soda revenue growth slowed, while fruit juice achieved double-digit growth.

The second difficulty is the health constraint. In recent years, with the upgrading of health awareness, people have become more aware that some carbonated drinks (which may contain preservatives like sodium benzoate that can damage a key area of mitochondrial DNA in human cells, and apart from sugar providing energy, carbonated drinks contain almost no nutrients) can cause severe cellular damage. As a result, consumers increasingly prefer healthier beverages like fruit juices and tea drinks, leading to a slow growth pattern in the carbonated beverage market. After years of development, the carbonated beverage market has matured, but consumers now recognize the health hazards of high sugar, and a sugar-reduction trend is emerging.

A major disadvantage of carbonated drinks is their high sugar content, so reducing sugar is a necessary choice. Despite the "guilty pleasure" drinks making a comeback during the COVID-19 pandemic in 2020, health has been put on the agenda, and carbonated drinks must adapt to market demand by reducing sugar. Additionally, the actions of companies entering the carbonated beverage market show that many brands still see potential, and innovation and upgrading will be crucial amid fierce competition.

The third difficulty in 2023 is reduced purchase frequency. Survey data shows that Chinese consumers purchase carbonated drinks mainly 1-2 times per week (54.5%) or 3-4 times per week (24.4%); the average monthly spending on carbonated drinks is 50-100 yuan (46.4%) or below 50 yuan (36.5%). Compared to packaged water, Chinese consumers have lower purchase frequency and spending on carbonated drinks. In terms of beverage categories, in 2022, the most frequently consumed beverages were packaged water (62.7%), carbonated drinks (55.0%), dairy products (54.0%), and sparkling water (42.0%). In summary, the purchase frequency of carbonated drinks is moderate, but they are at risk of being surpassed by sparkling water and dairy products.

Another difficulty is the uneven distribution of production. Data shows that in 2021, China's cumulative production of carbonated beverages was 23.373 million tons, a year-on-year increase of 18.22%. Currently, production is unevenly distributed, mainly concentrated in East, South, and Central China. In 2021, East China produced 6.4047 million tons, accounting for 27.4%, making it the largest production region; followed by South China (5.3249 million tons, 22.78%) and Central China (3.1385 million tons, 13.43%). By province, Guangdong, Shanghai, Beijing, Hunan, Henan, Shandong, Fujian, Zhejiang, Jiangsu, and Hubei were the top ten producers. Guangdong was the largest, producing 4.696 million tons. In short, the uneven production distribution can affect supply-demand balance, logistics, and competition patterns. For example, oversupply in some regions and undersupply in others may lead to significant price fluctuations. Additionally, uneven distribution increases logistics costs and difficulty. Carbonated drinks are fragile and require special transportation and storage. If production is concentrated in one area while demand is nationwide, long-distance transport increases costs and risks product damage. Finally, regions with higher production may have brands with greater market share and competitive advantages, making it difficult for brands from other regions to enter or compete.

The 2023 Carbonated Drink Crisis?

Globally, carbonated beverage growth is also slowing. What caused the predicament in 2023? There are three main reasons: First, raw material supply issues: The supply of gum arabic, a key ingredient, has tightened due to armed conflict in Sudan, its main producer. Sudan is the world's largest exporter, accounting for 70% of global exports, significantly impacting producers. Second, intense market competition: Brands have resorted to price cuts and promotions to gain market share, compressing profit margins. Additionally, some consumers are shifting to healthier drinks, impacting the market. Third, cost pressures: Rising raw material prices and labor costs have increased production costs. Higher global transportation and logistics costs have also raised shipping and storage costs, adding to the burden.

From a domestic macro perspective, the Chinese carbonated beverage market is highly competitive, with brands cutting prices and promoting, squeezing profits. Raw material costs are rising, as the industry requires large amounts of sugar, citric acid, and other materials, whose prices are affected by supply-demand and natural disasters, causing profit fluctuations. Finally, government policies are becoming stricter, such as advertising restrictions and higher taxes, impacting the market.

From a micro perspective, factors include economic conditions, updated health awareness, changing consumer habits, and evolving distribution platforms. In recent years, the growth of online retail and social media has provided new sales channels for beverage companies, boosting sales of new categories and changing consumer purchasing behavior. Additionally, new product launches have greatly impacted traditional carbonated beverage brands.

2023: Carbonated Beverages Must Break Through!

To break through in 2023, it's essential to understand that "sugar is outdated; functionality is key." IBISWorld, a US market research firm, notes that more beverage producers are adapting to consumer demands for reduced sugar, prompting traditional carbonated soft drink (CSD) producers to diversify their product offerings to survive in a declining traditional market. "To counter declining CSD sales, producers have introduced low-calorie and zero-calorie products. Additionally, some companies have shifted focus to non-carbonated beverages, including bottled water, flavored water, and ready-to-drink tea, which often have lower sugar and calories." BMC experts echo this view: low-sugar soft drinks are driving category growth. "The emergence of new sweeteners and improved flavors have helped boost these products. The growth of reduced-sugar CSDs has been the most important driver of category success." Major brands like PepsiCo are fine-tuning their zero-sugar offerings. PepsiCo has announced a new improved version of zero-sugar Pepsi with a reformulated recipe using a new sweetener system for bolder taste. Coca-Cola, in collaboration with Grammy-nominated artist Rosalía, launched the limited-edition Coca-Cola Move, available in full-sugar and zero-sugar versions. Some manufacturers are also adding zero-sugar products as part of line extensions. IBISWorld states that new CSD products can attract a broader consumer base. As preferences shift toward healthier, more natural products, a "new niche market" has emerged for CSDs. "Furthermore, producers are diversifying their CSD portfolios with new flavors to attract consumer attention. For example, limited-edition seasonal or holiday flavors, flavor fusions combining two or more flavors, and natural flavors from plants or fruits have all been successful for soft drink producers."

As more consumers seek health-beneficial and functional beverages, beyond sugar reduction and functional trends, other trends are influencing packaging and new product development. IBISWorld experts say consumers needing better time management often seek convenient, quick options, prompting more producers to offer portable and single-serve options. Sustainability is also important to consumers, affecting the types of ingredients and packaging used. Mixed drinks are another trend encouraging product diversification. Many manufacturers have blended CSDs with flavors, and soda with other beverage categories. For example, some producers mix soda with tea, juice, energy drinks, and coffee to cater to changing tastes. Coca-Cola introduced "Coca-Cola Coffee." These products have expanded their popularity among consumers seeking unique beverages.

For healthier carbonated drinks to gain recognition, they need more "overwhelming" marketing. The following strategies can be adopted:

Strategy 1: "Internet celebrity" route, focusing on online sales. A prime example is Wuhan No.2 Factory Soda. The young Hankou No.2 Factory is the most interesting soda in new media content marketing, collaborating with food and consumer public accounts, appearing at music festivals, and doing cross-industry marketing with trendy brands to continuously communicate consumption scenarios with young people. Within just over a year of launch, its total merchandise value (GMV) reached 300 million yuan.

Strategy 2: Rooted in national trends, laying out omni-channel distribution. Tianfu Cola, which returned to the market through agents for four years with poor results, introduced private capital in March 2019 to face the market directly. That year, this old soda brand placed products in 11,000 offline convenience stores and supermarkets in Chongqing, with plans to enter catering and e-commerce channels next.

Strategy 3: Deep cultivation of catering, imprinting regional symbols on the brand. Bingfeng has been accelerating its national expansion, with nationwide catering channel expansion as the main theme. By developing distribution channels in both breadth and depth, Bingfeng has become a representative and iconic consumer choice for Xi'an snacks. Of course, it can also become an internet celebrity, collaborate with food and consumer self-media, partner with music festivals, and do cross-industry marketing with trendy brands to continuously build closer relationships with young consumers.

Conclusion

As consumers place greater emphasis on healthy eating, the carbonated beverage market is moving toward low-sugar, low-calorie, and low-fat directions. The industry is developing new drinks such as sugar-free beverages, fruit juices, and tea drinks. Additionally, the industry is adopting more advanced production processes and equipment to improve efficiency, and using more advanced packaging materials to reduce costs. In summary, China's carbonated beverage market still has significant development space and potential, but attention must be paid to health trends, personalized demands, digital marketing, environmental sustainability, and cost control.

References:

  • "2023 Carbonated Beverage Industry Report: Market Shows Slow Growth Pattern"
  • "2023 Carbonated Beverage Market Analysis"
  • "How to Innovate in Carbonated Beverages?"