The Canadian Soft Drink Industry

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Index

Introduction Industry Structure Performance Regulatory Framework Challenges and Opportunities Industry Association Agriculture and Agri-Food Canada Contact The Canadian Soft Drink and Ice Manufacturing Industry - Appendix A The Canadian Soft Drink Industry - Appendix B

Statistics for the Canadian soft drink, bottled water and ice manufacturing industries are aggregated under Statistics Canada's North American Industry Classification System (NAICS) 31211 Soft Drink and Ice Manufacturing. NAICS 31211 comprises establishments primarily engaged in manufacturing soft drinks, ice or bottled water, including that which is naturally carbonated. Such soft drink establishments make non-alcoholic, carbonated, flavoured beverages, including fruit drinks and iced tea (bottled or canned). Beverages which contain flavours at a rate of more than one percent by weight (including flavoured bottled water) are classified as soft drinks by Statistics Canada. Similarly, soda water, seltzer water and tonic water are also classified as soft drinks. Although data for bottled water manufacturing is included in NAICS 31211, this profile does not cover bottled water manufacturing. A separate profile has been written for the Canadian bottled water industry. Establishments primarily engaged in manufacturing concentrates and syrups for the manufacture of carbonated beverages are included in Statistics Canada NAICS 31193 Flavouring Syrup and Concentrate Manufacturing. Statistics Canada does not provide separate statistics for the soft drink industry other than export and import statistics and per capita consumption data. Statistics Canada data for NAICS 31211 have been included for reference purposes at the end of this profile as Appendix A. Trade data for soft drinks can be found in Appendix B.

Introduction
The Canadian soft drink manufacturing industry makes and bottles non-alcoholic carbonated beverages, including fruit flavoured beverages, colas, ginger ales, ginger beers, root beers, bottled or canned iced tea and iced coffee, soda waters, tonic waters and other mixers. While the term 'soft drinks' sometimes means different things to different people, for the purposes of this profile these soft drink beverages are referred to as carbonated soft drinks (CSDs). The industry also makes other non-alcoholic beverages, including but not limited to, iced tea, iced coffee, dairy-based beverages, fruit juices and fruit drinks, bottled water, sports drinks and energy drinks. The Canadian carbonated soft drink industry was historically based on a franchise system which characterized the CSD industry worldwide. The system provided a bottler with a defined market area and exclusive manufacturing and distribution rights for certain CSD brands within that area. The bottler was restricted to purchasing the proprietary formula concentrates and/or syrups from a single source - the franchise company (franchisor) which held the registered trademarks of a number of CSD brands. The franchisor established pricing policies and provided overall marketing and brand promotion support. During recent decades, however, the major brandowning CSD firms have been buying their former franchisee-bottlers, so that few independent bottlers remain today. The industry serves primarily the domestic market. Although CSD sales account for a major portion of the non-alcoholic beverage market, they have remained relatively flat or decreased over the past few years. A trend toward healthier beverage choices by Canadian consumers has caused the carbonated soft drinks (CSDs) industry to seek new ways to capitalize on the market. Soft drink multinational corporations are bringing more alternative drinks to market. Many of these beverages, such as sports drinks, energy drinks, retail PET water, single-serve fruit drinks, juices, sparkling water, premium soda, dairy beverages, and ready-to-drink (RTD) tea and coffee promise more than quenching thirst; they offer extra energy, essential vitamins and more "cachet". Top of Page

Industry Structure
The Canadian Soft Drink and Ice Manufacturing industry represented 4.8% of the total value of sales of goods manufactured by the food and beverage industry, 4.5% of employment in the sector, and 3.2% of the number of food and beverage plants in 2009. In 2009, 287 establishments Footnote [note 1] (plants) in the Soft Drink and Ice Manufacturing Industry shipped $4,032.6 million worth of product and employed 11,162 people. Canadian Soft Drink and Ice Manufacturing Industry exports totalled $127.3 million in 2009 (Figure 1). The

Canadian market absorbed the remaining $3,905.3 million in domestic shipments and a volume of imports worth $593.9 million. This industry has become a net importer since 2006. Figure 1: Soft Drink and Ice Manufacturing Industry Imports, Exports and Sales of Goods Manufactured, 2009

Expand: Description - Figure 1

Statistics Canada data for sales of goods manufactured for carbonated soft drinks is not available. However, using per capita consumption data and adjusting for trade, it can be estimated that Canadian production was approximately 3.53 billion litres in 2009. Footnote [note 2] The Canadian CSD industry is highly concentrated. Three of the four major brand owners are subsidiaries of foreign-based multinationals and account for the overwhelming majority of industry production. A very small number of CSD manufacturers supply niche products. According to Statistics Canada data Footnote [note 3a], the majority of Soft Drink and Ice Manufacturing takes place in Ontario (85 establishments), British Columbia (62 establishments), Quebec (53 establishments), followed by Alberta (29 establishments), Manitoba (14 establishments), Saskatchewan (14 establishments), Nova Scotia (12 establishments), New Brunswick (8 establishments), Newfoundland and Labrador (7 establishments), and Prince Edward Island (3 establishments).Footnote [note 4a] Statistics Canada's Business Patterns Database indicates that in 2009 production facilities ranged in size from small one-or two-person operations to large plants employing up to 500 people.

Production tends to be located close to large urban centres, although there has been a trend to larger plants serving larger markets. There are numerous CSD bottling and distribution centers across Canada to serve local domestic markets. Manufacturing is located in major cities in Canada, with a large number of distribution warehouses located across the country. Bottling and distribution systems in the bottling component of the industry are highly automated and very efficient. Product concentrates (flavours, etc; in liquid and powdered forms) are brought into bottling plants where sweeteners are added to make syrups. Then water and carbon dioxide are added and the resulting drinks are bottled. Some syrup is sold to foodservice operators for "fountain" sales. Key commodity inputs needed to make carbonated soft drinks include concentrates, sugar (cane or beet), glucose/fructose, aspartame, acesulfame-potassium, caramel colour, sodium benzoate, phosphoric and citric acids, caffeine, seasonings, carbon dioxide and specially treated water. (Glucose/fructose is a generic term for high fructose corn syrup or HFCS, now more commonly referred to as 'corn sugar'.) The industry uses about 20 times as much corn sugar as it does cane/beet sugar as the sweetening agent. Except for water, the bulk of raw inputs for this industry are imported, mostly from the U.S. However a small portion of the corn sugar is supplied domestically. The industry has faced an array of price increases. The cost of aluminium (for cans) has recently increased substantially thus having a negative impact on profits. The increase in demand for corn for use as fuel ethanol has contributed to increased grain costs both in Canada and the U.S., thus driving up the cost of corn sugar as well. The majority of carbonated soft drinks are sold in aluminium cans and PET bottles. They are also sold in bulk in the foodservice industry through soda fountains. Only a very small portion of CSDs are still packaged in glass bottles, and these are usually packaged in smaller sizes, due to changing consumer preferences and lifestyles as well as increased costs associated with transporting heavy, low-volume glass containers versus high volume-to-packaging ratio PET bottles and aluminum cans. Products are sold through retail stores for the "take home" market and through hotels, restaurants and institutions (HRI) and vending machines for the "on-premises" market. Foodservice plays an important role in CSD sales as consumers on-the-go add carbonated soft drinks to their fast-food and restaurant purchases. The "take-home" market is the larger segment, accounting for an estimated two-thirds of sales. The majority of carbonated soft drink companies have embarked on a diversification strategy to become total beverage companies by offering a range of products (i.e. CSDs, bottled water, juices, fruit flavoured beverages, dairy-based beverages, iced tea, RTD iced coffee, sports drinks and energy drinks). Top of Page

Performance
Domestic Market
From 1999 to 2009, sales of goods manufactured by the Soft Drink and Ice Manufacturing Industry increased 31.7% from a value of $3,062.3 million to $4,032.6 million Footnote [note 3b]. From 1999 to 2009, per capita consumption of CSDs declined 14.0% from 121.8 litres to 104.7 litres. Per capita consumption declined by 1.2% between 2008 and 2009. Footnote [note 5] According to Beverage Marketing Corporation, carbonated soft drinks (CSDs) continued to account for the largest beverage category both in volume and in per capita consumption in spite of losing ground to healthier and more popular non-alcoholic beverages, such as tea. Measured by volume, sales of CSDs made up about 16.3% of all non-alcoholic beverage sales in 2009 (Figure 2). Figure 2: Share of Canadian Non-Alcoholic Beverage Market by Volume, 2009

Expand: Description - Figure 2

From 2008 to 2009, total CSD sales volume remained relatively stable at 3.53 billion litres (Table 1). Table 1: Canada's Non-Alcoholic Footnote [note 6] Beverage Market, Share of Volume Billions of Litres Share of Volume % Change

Table 1: Canada's Non-Alcoholic Footnote [note 6] Beverage Market, Share of Volume Billions of Litres Share of Volume % Change *CSDs: Carbonated soft drinks. ** Assumes 48 grams of coffee per litre. *** Includes tap water, vegetable juices, sports drinks and miscellaneous others. Source: Beverage Marketing Corporation 2008 CSDs* Coffee** Milk Tea Bottled Water Fruit Beverages Subtotal All Others*** Total 3.5 3.4 2.7 2.6 2.4 2.0 16.7 4.7 21.4 2009 3.5 3.6 2.8 2.8 2.3 1.9 16.8 4.9 21.7 2008 16.5% 16.0% 12.8% 12.2% 11.1% 9.4% 77.9% 22.1% 100% 2009 16.3% 16.6% 12.7% 12.9% 10.6% 8.7% 77.6% 22.4% 100% 0.0% 5.0% 0.4% 7.3% -3.4% -6.0% 1.0% 2.8% 1.4% 2008/09

The domestic market continues to be the most important for this industry. Domestic market demand has grown to the point where there are now more than 30 different brands and a multitude of flavours distributed throughout Canada. Based on data from The Nielsen Company, the value of Canadian domestic retail sales for 'flavoured soft drinks' in 2009 grew 7.7% to $1.4 billion from a value of $1.3 billion in 2007. Statistics Canada data show that the Canadian market for the Soft Drink and Ice Manufacturing Industry totalled $4.5 billion in 2009. The industry has experienced intense price competition with the expansion of private label sales and decreasing consumer demand for CSDs. Price reductions have been an important element to enable the industry to maintain its dominant market share in a beverage market where the choice of products is increasing. During the recent difficult economic climate, price reductions are still occurring, especially in the retail grocery sector where chains have reduced prices to encourage consumers to visit their establishments. However, with increasing aluminium, corn, and transportation costs, the industry may be under pressure to reverse this trend. Euromonitor forecasts that the Canadian CSD market will continue to decrease as consumer preferences for healthy lifestyles increases. However, with 60% of sales of carbonated soft drinks coming from consumers aged 50 and over Footnote [note 7], an older Canadian demographic could fuel a resurgence in CSD sales. CSD sales tend to be seasonal, with higher consumption occurring during the hotter summer months. Unusually cold or rainy weather during the summer months can have a negative impact on sales.

Strong competition by industry firms for market share has brought about industry consolidation and cost cutting by major industry players. In order to reduce marketing and transportation expenses, to utilize existing capacities more efficiently, and to increase share in the marketplace, industry players have employed strategies such as mergers and acquisitions to acquire brands in multiple beverage categories, including CSDs, bottled water, flavoured drinks, juices, dairy beverages, and sport drinks. Due in part to the impulse nature of many purchasing decisions, competition is based on brand name, advertising and promotion, product quality, and cost. Shelf image is an important consideration and market promotion plays a significant role especially among the larger firms. Value-added is a measure of the value of an establishment's outputs minus the cost of inputs. Value-added in the Soft Drink and Ice Manufacturing Industry fluctuated between 1999 and 2009, from a low of $1,037.1 million in 1999 to a peak of $1,886.8 million in 2009 Footnote [note 3c]. The proportion of value-added to sales of goods manufactured was 46.8% in 2009. This figure is higher than the Canadian food and beverage industry as a whole for which the proportion of value-added to the total value of sales of goods manufactured in 2009 was 36.4%. Footnote [note 4b] Top of Page

Employment
From 2004 to 2009, employment in the Soft Drink and Ice Manufacturing Industry increased 11.3% from 10,033 employees to 11,162 employeesFootnote [note 8] (Figure 3). Between 2005 and 2007, employment increased, but then declined again due to a tightening economy. Figure 3: Soft Drink and Ice Manufacturing Industry Sales of Goods Manufactured and Employment, 1999-2009

Expand: Description - Figure 3 The overall decline in employment was accompanied by an improvement in labour productivity for the Soft Drink and Ice Manufacturing Industry from 2005 onward as measured in output per production worker. A reduction in the number of employees and a streamlining of operations along with other cost-cutting measures has improved industry productivity. In making these improvements, the industry better positioned itself to compete in the domestic market against other beverages and in foreign markets such as the U.S. Data from Statistics Canada on employment specific to the soft drink manufacturing industry is not available. According to the Canadian Beverage Association, the non-alcoholic refreshment beverage industry employs 12,000 people across Canada in manufacturing, bottling and distribution centers.

Investment
Data from Statistics Canada on investment in the CSD industry is not available. This industry is very capital intensive and because bottling facilities are highly automated, capital investments are estimated to be valued in the hundreds of millions of dollars.

Profitability
Profitability is affected by the prices firms have to pay for inputs to production. In order to maintain profits, manufacturers are under increased pressure to improve productivity and cut

costs. For the CSD manufacturing industry, increasing costs for sweeteners derived from corn, increased energy and transportation costs and increased packaging costs have affected the cost of production. The value-added per production worker provides some indication of profitability. Since 2005, the value-added per production worker in the Canadian Soft Drink and Ice Manufacturing industry increased from $321,000 thousand to $369,000 thousand in 2009 Footnote [note 3d]. Profitability for the Soft Drink and Ice Manufacturing industry has improved, especially since 2005 (Figure 4). Figure 4: Soft Drink and Ice Manufacturing Industry Value-Added Per Production Worker, 2004-2009

Expand: Description - Figure 4 Top of Page

Trade Performance
The Canadian CSD industry serves mostly the Canadian market. Between 2000 and 2010, Canadian exports of carbonated soft drinks declined 40.6% from a value of $168.4 million (191.0 million litres) to a value of $100.0 million (150.4 million litres) Footnote [note 9] (Figure 5). This decline was mainly due to the rising value of the Canadian dollar which has made domestic product more expensive relative to products from other countries. A difficult economic climate has also recently contributed to lost sales. Canada's main export destination for carbonated soft drinks has been the U.S. with 2010 exports valued at $97.0 million representing 97.0% of total soft drink exports. This was a sharp decline of 45.7% from 2005 when exports to the U.S. peaked at $178.8 million. The decline in exports to the U.S. can also be attributed to the strengthening Canadian dollar. Figure 5: Exports and Imports of Soft DrinksFootnote [note 10], 2000-2010

Expand: Description - Figure 5 From 2000 to 2010, imports of soft drinks more than tripled from $82.1 million (86.6 million litres) to a value of $275.4 million (259.3 million litres).Footnote [note 11] In 2010, Canada's largest supplier of imported carbonated soft drinks was the U.S. with imports valued at $248.6 million (or 90.3% of total carbonated soft drink imports). The second largest supplier was France which accounted for 3.3% of total carbonated soft drink imports, followed by Italy with 3.0%. Canada's exports of syrups and concentrates used in the production of carbonated soft drinks increased 94.6% from a value of $36.8 million in 2000 to a value of $71.6 million in 2010. Imports of syrups and concentrates were valued at $33.1 million in 2010, an increase of 69.7% over 2000 when imports were valued at $19.5 million.Footnote [note 12] Although there are no customs duties and sales taxes on finished products under the Canada-U.S. Free Trade Agreement, the largest CSD companies tend not to ship finished product across the Canada-U.S. border because of differences in ingredient and labelling regulations. In the U.S., some types of non-colas contain caffeine, which until just recently was not allowed in such drinks in Canada. Another ingredient, saccharin, is allowed in the U.S. but is currently banned in Canada for most food/beverage products. As well, Canada has metric and bilingual labelling requirements. Top of Page

Regulatory Framework
Food and Drugs Act
Health Canada is responsible for establishing standards for the safety and nutritional quality of all foods sold in Canada. The department exercises this mandate under the authority of the Food and Drugs Act and pursues its regulatory mandate under the Food and Drug Regulations.

All health and safety standards under the Food and Drug Regulations are enforced by the Canadian Food Inspection Agency (CFIA). The CFIA is also responsible for the administration of non-health and safety regulations concerning food packaging, labelling and advertising. The Food and Drug Regulations set out conditions regarding health, quality, composition and labelling requirements that would apply to non-alcoholic beverage manufacturers just as they would to other food manufacturers so that consumers will have confidence in the safety of the products they purchase.

Caffeine
Division 16, Table VIII, Item C.1 of the Food and Drug Regulations provides for the addition of caffeine to foods. Health Canada has recently granted clearance for the use of caffeine in all carbonated, flavoured soft drinks, not just for use in cola-drinks, as was previously the case. Beverage manufacturers are now permitted to add up to 150 parts per million (ppm) of caffeine to non-cola carbonated flavoured soft drinks while a maximum of 200 ppm continues to be permitted for cola-type carbonated soft drinks. Health Canada states that allowing the use of added caffeine at up to 150 ppm in these additional non-cola carbonated flavoured soft drinks does not pose a health risk to consumers. However, Health Canada has urged manufacturers to voluntarily list and display total caffeine content on all non-cola products that did not previously contain caffeine but where it has now been added. At present, there have not been any non-cola CSDs introduced into the Canadian market that have been so augmented with added caffeine.

Energy Drinks
In the fall of 2011, Health Canada released a Proposed Approach to Managing Caffeinated Energy Drinks. Comments from stakeholders on the proposed approach were required by November 15, 2011. Health Canada also published General Guidance for Temporary Marketing Authorization for Foods and Category Specific Guidance for Temporary Marketing Authorization - Caffeinated Energy Drinks. Energy drinks were previously regulated under Health Canada's Natural Health Products Regulations as natural health products.

Health Claims
A health claim is any representation in labelling or advertising that states, suggests, or implies that a relationship exists between consumption of a food, or an ingredient in the food, and health. All health claims are subject to subsection 5 (1) of the Food and Drugs Act which prohibits false, misleading or deceptive product representations. In Canada, specific health claims are permitted for foods (including beverages). The term "food" is defined in the Food and Drugs Act. Foods (including beverages) are permitted to make a function claim when used under the specific conditions set out in Table 8-2 of the CFIA's Guide to Food Labelling and Advertising (GFLA). Function claims are claims about the specific beneficial effects that the consumption of the food or a constituent of the food (i.e. nutrient or other component) has on normal functions or biological activities of the body. Permitted variations on function claims can be

found in Table 8-2 of the GFLA. Manufacturers of foods/beverages may wish to make a new function claim but must have scientific evidence to validate the claim prior to its use on food labels or in advertisements. The Food Regulatory Issues Division of AAFC can provide assistance to manufacturers considering making a new function claim or another claim requiring a pre-market submission to Health Canada. For more information on regulatory issues or information on making health claims, please contact the Food Regulatory Issues Division. Top of Page

Mandatory Nutrition Labelling

On December 12, 2007, nutrition labelling became mandatory on most pre-packaged products. Exemptions can be found in section [B.01.401 (2)] of the Food and Drug Regulations. Products lose their exemption status if a health claim or nutrient content claim is made. For more information on food regulatory issues visit the Food Regulatory Issues Division.

Consumer Packaging and Labelling Act

The Consumer Packaging and Labelling Act, also enforced by the CFIA, requires that prepackaged foods either imported or made in Canada, must not bear any false or misleading information regarding its origin, quality, performance, net weight or quantity.

Pest Control Products Act

Under the Pest Control Products Act and regulations pursuant to this Act, Health Canada determines which pesticide sprays are approved for use and how they are to be used. Firms check pesticide residue levels in their products to ensure that they are within regulation levels. Consumer awareness of pesticide residues and their impacts on human health and the environment is increasing.

Environment
With respect to the environment, food and beverage manufacturers must meet all federal laws (e.g. the Canadian Environmental Protection Act, the Canadian Environmental Assessment Act) and each province's legislation and regulations. One environmental issue that food and beverage manufacturers in general have faced is waste remaining from packaging after it has fulfilled its intended purpose. Reductions in container weight can result in reductions in fuel used by large trucks as well as wear and tear on tractor trailers when hauling product to market, with the added environmental benefits of reducing the amount of used materials as well as reducing emissions of greenhouse gases and other air pollutants

Waste reduction is important everywhere and particularly for large urban centres that are rapidly using up their landfill capacity and are experiencing difficulty and expense in finding, developing and ultimately being able to use acceptable new landfill sites. Reduction of materials in secondary packaging (e.g. cartons) can potentially provide both financial and environmental benefits. There are some difficulties with reducing bulky packaging. Plastics and cardboard can help protect foods during transportation. There is a trade-off between the volume of packaging materials (complete with graphics, etc.) needed to identify brands and increase the attractiveness of a product on the one hand, while minimizing packaging requirements from an environmental and cost control point of view, on the other hand. Beverage manufacturers have been at the forefront of post-consumer recycling of used beverage containers in all Canadian jurisdictions for many years. On average over 70% of used beverage containers are captured for recycling (one of the highest rates for any food product). Similarly, reductions in waste go hand-in-hand with cost savings as food and beverage manufacturers make increasing use of plastic, rather than wooden, pallets. Although more expensive to buy, plastic pallets, which can be made from recycled plastic, can be used many more times than wooden pallets which tend to get mangled fairly quickly by fork lifts and then must be handled by waste diversion programs. Prior to plant construction, food and beverage manufacturers must meet municipal zoning requirements. A proposal to build a new state-of-the-art plant or to substantially enlarge an existing facility could result in hearings to assess environmental impacts before construction may proceed. Provinces and municipalities have to be satisfied that systems will be put in place for waste water treatment. Major beverage manufacturers already take a pro-active approach by developing "best practices" with respect to the environment, for example reducing their energy and water usage as well as their creation of both solid and water waste. Top of Page

International context
Overall, there is a trend to internationalize regulations through general trade treaties, and the industry will face the challenge of looking at regulations that could be harmonized, either bilaterally with the U.S. or multilaterally through the World Trade Organization and Codex AlimentariusFootnote [note 13].

Organic Products
Organic CSDs represent an emerging market that is showing potential for growth. Capitalizing on Canadian consumers' growing desire for organic foods and beverages that are environmentally friendly, some Canadian CSD companies have extended the organic food movement to CSD products which are marketed as high-quality products produced in a way that encourages sustainable agriculture.

As producers and retailers continue to raise awareness about organic beverages to gain market share, the coming years may see more CSD manufacturers tap into this niche market as the trend toward organic and green products continues to expand in Canada and abroad. The Organic Products Regulations came into force on June 30, 2009. These regulations aim to protect consumers against false or misleading organic claims and to support the continued growth of the Canadian organic industry. Certification to the Organic Production System standards is mandatory for organic products that are being used in interprovincial and international trade, and for products bearing the "Canada Organic" logo. Such interprovincially/internationally-traded products must be certified by a CFIA-accredited certification body and must bear the name of the certification body. The Organic Products Regulations allow for the following organic claims:

Only products with organic content that is greater than or equal to 95% may be labelled as "Organic" or bear the organic logo shown below;

Multi-ingredient products with 70-95% organic content may have the declaration: "contains x% organic ingredients." These products may not use the organic logo and/or the claim "Organic". Multi-ingredient products with less than 70% organic content may only contain organic claims in the product's ingredient list. These products may not use the organic logo.

The following web sites provide additional information: Organic Products Regulations CFIA accredited certification bodies Organic Production Standards Agriculture and Agri-Food Canada Organic web Site Top of Page

Challenges and Opportunities

Challenges

In a rapidly changing business climate, the carbonated soft drink manufacturing industry, as well as other food and beverage manufacturing industries, must address a number of challenges if it is to continue to grow and prosper. The concentration of major retail chains has continued to be a challenge to the CSD industry and has resulted in a higher degree of competition for shelf space. For CSD manufacturers, the domestic market will likely continue to be the most important market for the foreseeable future. The Canadian market is small, but sophisticated, and extremely well served which means that competition will continue to be strong. During the past decade, the growth of warehouse club stores that emphasize value, as well as the increasing concentration of the distribution sector in general, have increased pressure on manufacturers to reduce prices and focus on efficiencies. Furthermore, the introduction and increasing prevalence of private or own-label products by retailers have further pressured manufacturer margins and increased retailer leverage. Although making goods for private label leaves retailers in control of the "brand equity" resulting from consumer loyalty and leaves lower margins for manufacturers, it has provided real growth opportunities for some small- and medium-sized manufacturers without requiring the expenditures needed to launch their own brands. These market forces will continue to be a challenge in the future. Although retail concentration has increased over the years, CSD manufacturers enjoy a wider variety of distribution channels than many other manufactured food products, channels that they must continue to exploit. The industry distributes its products through supermarkets and grocery stores, drug stores, convenience stores, gas stations, mass merchandisers and warehouse outlets. Restaurants and fast-food chains are also major purchasing points for CSDs. Vending is another distribution channel for CSDs, making it available to consumers at strategic locations. Increased competition from other non-alcoholic beverages, in particular bottled water, but also beverages such as fruit/vegetable-based drinks, energy drinks, sports drinks and relaxation drinks, has given consumers more beverage choices. Changing consumer preferences and demographics, with a larger segment of older consumers who are increasingly concerned about their own health, and concerns about obesity have resulted in an increased demand for new products. The industry has responded to this challenge by offering consumers of CSD products a greater assortment of diet soft drinks and flavours and also by expanding their line of beverages outside of the CSD segment and into other beverages such as juices and bottled water, as well as functional beverages such as sports and energy drinks. The industry has also reduced prices, cut costs and improved efficiencies to remain competitive in the marketplace. Higher oil prices have resulted in increased packaging costs (PET plastic) and higher transportation costs and distributions costs. Escalating costs for corn have impacted upon ingredient costs (corn sugar) for the CSD industry. The cost of aluminium, which had increased in earlier years, declined in 2008 due to the downturn in the U.S. economy. In response to these input cost fluctuations, the industry's bottling and distribution systems have become highly automated and very efficient. CSD companies enter into contracts with suppliers to stabilize costs in a volatile market.

Concerns about childhood obesity have recently focussed attention on the CSD industry, including suggestions that the overconsumption of sugar-sweetened beverages (which include CSDs) can contribute to childhood obesity Footnote [note 14]. However, the scientific consensus is that obesity is the result of energy imbalance over a period of time and that many factors, such as individual behaviours, environmental factors, and genetics may lead to this imbalance Footnote [note 15]. A recent peer-reviewed scientific consensus statementFootnote [note 16] on weight management noted that "all components of energy balance, including energy intake and expenditure, interact with each other to impact body weight." Footnote [note 17a] The statement continued with a notation that "energy balance itself is very complex and this complexity also strongly refutes the popular belief that the obesity epidemic is a result of a few 'bad foods'." Footnote [note 17b] It is interesting to note that a 2006 Statistics Canada analysis of Canadians' food and beverage intake in 2004 Footnote [note 18] shows that CSDs represent only 2.5%Footnote [note 19] of the total caloric intake of Canadians and 2.8% of calories for adolescents aged 14 to 18 years. The beverage industry supports healthy eating habits and an active lifestyle. In 2004, in advance of any provincial/local school nutrition policies, the Canadian Beverage Association adopted voluntary guidelines for its members on the sale of beverages in elementary schools and expanded the guidance in 2006 to also include middle and secondary (high)schools. These guidelines restrict the sale of beverages to elementary and middle schools to bottled water, lowfat milk, and 100% juices, and restrict the sale of beverages in high schools to a slightly expanded list of offerings beyond those allowed in the lower school levels, but capping such low or calorie free beverages to a maximum of 50% of the beverage offerings. These additional beverage offerings are also restricted in their size (maximum 355 ml containers) and calorie content (maximum 70 calories/250 ml). Many Canadian Beverage Association members also promote physical activity and an active lifestyle through partnerships with organizations such as kaBOOM and ParticipACTION, as well as through a variety of member-led initiatives. Top of Page

Supply Chain Management

Like other food and beverage manufacturers, the CSD industry is using GS1 Canada. GS1 Canada is a member organization of GS1, a global organization with over 100 members with the goal to develop standards and solutions to improve supply chain management. Canada's previous national electronic product registry/catalogue known as ECCnet, developed by the Electronic Council of Canada, has merged with and is now administered by GS1 Canada. The registry facilitates e-commerce by ensuring the integrity of product data using international standards of data exchange. As part of its e-commerce development, food and beverage manufacturers are developing the capability to track and trace their products throughout the food chain to specific batches at manufacturing plants and will eventually be able to trace batches back to their origin.

Environmental Challenges

Since 1979, the CSD industry has reduced the amount of plastic used in its two-litre PET bottles by 31% and reduced the weight of its aluminum cans by 27%. Footnote [note 20] Packaging materials used by the industry, including cardboard, plastics, and aluminium, are either recyclable or re-usable. Bottle deposit laws and other regulations to ensure recycling and re-use of packaging are a significant regulatory concern to the CSD industry. The industry has been actively involved in provincial recycling efforts throughout the country since the mid-1970s and is an active participant in environmental stewardship organizations across Canada. Recycling regulations on containers vary from province to province. In virtually all Canadian provinces and territories, aluminum cans and PET containers used for carbonated soft drinks and other beverages are collected for recycling. In some jurisdictions, e.g. Manitoba, Saskatchewan, Alberta, British Columbia and the Atlantic provinces, consumers pay levies on beverage containers at the point of sale to cover costs of their respective container recovery system. In some provinces/territories, a deposit is charged and a potential refund of 5 to 30 cents provides an incentive to consumers to return the container to a collection center. All packaged beverages (except those consumed 'on-premise', for example at a restaurant or other such away-from-home location) are included in such programs. In other jurisdictions, CSD containers are collected in a Multi-material Collection system (e.g. curbside blue box programs). According to the Canadian Bottled Water Association (CBWA), 97% of the population in Canada has access to recycling facilities.

Opportunities
As a whole, the beverage industry is encountering new opportunities and challenges. Changing consumer demands and preferences require new ways of maintaining current consumers and customers and attracting new ones. Amid ever-increasing competition, beverage companies must intensely court customers, offer high quality products, efficiently distribute them, ensure safety, and keep prices low - all while staying nimble enough to exploit new markets by launching new products.

Consumer Trends Non-Alcoholic Beverages in the United States

January 2011
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INSIDE THIS ISSUE

Executive Summary Market Data Industry Observations o Fortified/Functional o Better-For-You Beverages o Naturally Healthy o Organic Beverages o Hot Beverages o Sports Beverages o Milk Beverages o Soft Drink Beverages

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EXECUTIVE SUMMARY

2009 marked the second year of unprecedented declines in the overall beverage market, signaling that the economy and decreased consumer spending continues to have a significant impact on beverage purchases. The overall United States (U.S.) liquid refreshment beverage market shrank by 3.1 percent in volume in 2009. The economic downturn in the U.S. has refocused consumer behavior on value, leading them to choose private label products and discount store venues. In addition, U.S. consumers are seeking

reduced calorie, reduced sugar, and functional value-adds in the beverages they consume. As a result, numerous new beverage products are entering the market. Enhanced water, fortified/functional, and performance enhancing beverages are diversifying the beverage sector like never before. Enhanced and functional trends are leading the juice and juice drink category, as more manufacturers are recognizing and responding to the health and wellness trend by creating innovative, enhanced functional beverage products. In 2009, juices containing superfruits led consumer trends, and are expected to do so again in 2010. Consumer knowledge is maturing and many consumers now perceive a juice containing superfruits to be good for them. Superfruit juices can be pricey, but this has not deterred U.S. consumers. As the economy rebounds, consumers will be more willing to pay a premium when they believe there is a functional benefit. Traditional and new wave caffeine beverages are popular with several demographics. New tea and coffee formulations, as well as energy drinks, account for a large share of sales in the beverage sector. Value propositions, combined with health benefits, have helped sustain the tea industry through the recession. Coffee customization has been driving sales in this sub-sector. Ready to drink (RTD) coffee beverage sales have experienced double digit growth, and that trend is expected to continue. Iced coffee drinks have become so popular that even the McDonald's chain now offers its own version of the productMcCaf Frapps. The company announced that April sales grew 4% in 2009, and they are partially attributing these sales to beverages, which includes their Frapp. Many caffeine-based drinks have flooded the market in the past year, and have been a consumer hit. Sport drink sales are forecasted to grow by 1% in 2010, with an annual growth, between 20102013, of 0.25%. The two biggest players in this category experienced either negative or no growth for the 52-week period ending February 21, 2010. Sport drinks have become quite mature in the U.S. market, and consumers increasingly prefer fortified/functional bottled waters and teas. "Vanilla was among the best selling flavors in 2009 and the trend is expected to continue."
DID YOU KNOW?

U.S. parents are increasingly concerned about the nutrition and sugar content of the products consumed by their children. Goat's milk was the fasted-growing drinking milk sub-sector in 2009, with 6.1% value growth.
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MARKET DATA Non-Alcoholic BeveragesUnited States Market SalesUS $millions 2005 Fresh Coffee Instant Coffee Ready-To-Drink (RTD) Coffee Black Tea Green Tea Fruit/Herbal Tea Other Tea Flavoured Powder Drinks Organic Beverages Organic Hot Drinks Organic Soft Drinks Better-for-you Beverages 5,651.4 659.2 776.3 706.8 235.7 581.4 18.4 378.6 669.6 233.6 436 2006 6,021.1 625.6 947.3 723.9 246.6 594.7 32.3 353.4 717.7 264.2 453.5 2007 6,460.4 608.4 1,154.7 739.3 256.2 604.2 52.4 362.2 760.7 297.2 463.5 2008 6,986.7 619.5 1,153 753.3 265.4 615.1 68.6 368.7 775.2 316 459.2 2009 7,599 638.9 1,085.8 767.8 275.8 627.8 96.4 376 769.1 329.7 439.4

13,785.7 14,284 758.2 1,463.1

14,411.4 14,486.3 14,810 742.1 1,197.1 741.9 1,042.8 756.9 902.6

Better-for-you Reduced Caffeine Hot Drinks 779.1 Better-for-you Reduced Caffeine Soft Drinks 1,508.4 Fortified/Functional Beverages Fortified/Functional Hot Drinks Fortified/Functional Soft Drinks Naturally Healthy beverages Naturally Healthy Soft Drinks Naturally Healthy Bottled Water

15,175.2 17,781.7 20,258.4 21,348.2, 22,154.3 195.4 189.9 187.8 185.5 185.1

14,979.8 17,591.8 20,070.6 21,162.7 21,969.2 16,332.9 17,052.4 18,276.6 19,060.6 19,079.2 15,729.4 16,420.2 17,616.1 18,373.1 18,348.8 7,7274 8,051.9 8,538.6 8,870.6 8,634

Naturally Healthy Fruit/Vegetable Juice Naturally Healthy RTD tea Drinking milk products Soy beverages Health and Wellness Beverages Source: Euromonitor International Top of Page

7,921.1 484.5

7,769.9 523.6

8,406.8 572

8,763.5 625.3

8,915.8 671.6

28,687.71 28,380.63 31,649.06 33,109.95 29,161.07 854.1 907.8 975.3 1,040.3 1,093.3

45,963.4 49,835.8 53,707.2 55,670.3 56,812.6

INDUSTRY OBSERVATIONS

Consumer expenditures on non-alcoholic beverages in the U.S. amounted to US $81.6 billion in 2009, up from US$80.4 billion in 2008. The compound annual growth rate (CAGR) from 2004 to 2009 was 4.4%. The combined total sales of mineral water, soft drinks and fruit and vegetable juice in the U.S. for 2009, equaled US$71.4 billion, up from US$70 billion in 2008. Canada is the fifth-largest exporter of non-alcoholic beverages (HS code 20020) into the U.S., at a value of CD$11,543,508 in 2009. This figure represents 4% of market share. Health and wellness beverages in the U.S. drove growth in the beverage sector in 2009 by more than US$3 billion in sales, over the 2008 figure of US$55.6 billion. The U.S. consumer is concerned and knowledgeable about how the things they consume impact their health and as a result, these consumers want their favourite beverages to be available in safe, non-plastic (bisphenol-free) containers. When it comes to flavours, cranberry is still a favourite amongst U.S. beverage consumers. In 2009, more than 130 new beverages containing cranberry or cranberry flavouring were launched in the U.S. However, vanilla was among the best selling flavors in 2009 and this trend is expected to continue. In 2009, the leading claim in the U.S. for new berverage launches was that a product was upscale. However, for the three months ending May of 2010, the leading claims were natural and single serving. Of the top 10 claims, no artificial colour has newly appeared, with 9% of the new drinks launched making this claim.

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Fortified Functional Beverages Market Data

Fortified/functional (FF) beverage sales in the U.S. reached US$22.1 billion in sales for 2009. This is a growth of 3.8% from 2008. While total retail sales have grown steadily since 2005, actual volume growth has been steadily falling. This is attributed to an increase in per unit pricing. Fortified/functional bottled water and fortified/functional energy drinks were the fastestgrowing FF beverage subsector in 2009.

Consumer Trends

Functional/fortified drink products, targeting specific consumer demographics, are enjoying success, with manufacturers introducing new sub-brands for these niche markets. Consumers became more interested in fortified/functional, over better-for-you (BFY) beverages. The most popular sub-category is energy drinks, targeted to young consumers. Popular formulations for these beverages include vitamin and mineral fortifications, antioxidants or high polyphenol content, green tea, caffeine or berries. Gatorade Co Ltd led in this sector with a 27% market share in 2009. Products that are fortified/functional, but also lower in sugar and calories, will be well-positioned to grow.n Refrigerated juice and juice drinks earned more than US$4.4 billion in sales for the 52 weeks ending November 1, 2009. That number is down by 1.3% from the previous year. The orange juice segment wass down 4.1%, with refrigerated orange juice leading the sub-sector, with more than US$2.6 billion in sales. Functional juice beverages, for adults and children, are being increasingly sought by the U.S. consumer. Reduced and no-sugar juice and juice drink products, are also gaining in popularity. Expect to see more and more products on the shelves with zero-calorie sweeteners like stevia, agave syrup, or agave nectar.

Retail Trends

Refrigerated juice and juice drinks were purchased mainly through supermarkets, drugstores and mass merchandise outlets (excluding Wal-Mart). The top five fortified/functional beverage brands are, in order of popularity: Gatorade, Glaceau, Red Bull, Monster and SoBe. Unit prices rose slightly in 2009 among fortified/functional beverages, due to the cost of enhancements and functional additives. Prices seem to be holding steady, as private label products are increasingly entering this sector. It is predicted that, as the economy rebounds, consumers will be willing to pay a premium for fortified/functional beverages.

Canadian Performance

Canada is the sixth-largest exporter of unfermented, unspirited fruit and vegetable juice beverages (HS code 200980) into the U.S., with a value of CAD$19.3 million in 2009. This figure represents 6.5% of market share.

Competition

The Gatorade Company Ltd, led the fortified/functional beverages sector, with a 27% market share in 2009, while Energy Brands Inc and Monster Beverage saw the biggest share increases in 2009. Coca-Cola Company and Red Bull North America Inc. round out the remaining top five most popular manufacturers. PepsiCo has acquired 34% of market share in the top 10 products list, while the Coca-Cola Company captured 17%, in 2009.

United States Top 10 Fortified/functional Beverages - Brand Market Shares - Retail Sales % breakdown Brand Gatorade Glacau Red Bull Monster SoBe Powerade Propel Rockstar Minute Maid Tropicana Company name (GBO) PepsiCo Inc Coca-Cola Co, The Red Bull GmbH Hansen Natural Corp PepsiCo Inc Coca-Cola Co, The PepsiCo Inc Rockstar Inc Coca-Cola Co, The PepsiCo Inc 2005 36.6 7.1 2.3 7 6.2 3 1.6 4.7 3.5 2006 32.9 7.1 3.9 6.6 5.4 5 2.2 4 2.9 2007 29.7 7.9 7.5 4.6 6 5.2 5.6 2.7 3.5 2.6 2008 25.4 8.9 7.8 5.7 5.9 4.5 4.5 2.9 3.3 2.4 2009 22.8 9.7 7.8 6.7 4.9 4.1 4.1 3.2 3.2 2.2

Source: Euromonitor International Top of Page

Better-for-you Beverages (BFY) Market Data

For 2009, the BFY beverage sector registered US$14.8 billion in sales, a growth of 2.2% over 2008 figures.

In the U.S. better-for-you (BFY) beverage sector, reduced sugar juice drinks experienced the strongest growth, at 15%, garnering US$128 million in sales for 2009. Overall, the BFY reduced sugar carbonates comprised over 75% of total sales of the BFY beverages sector. Sales of BFY beverages are forecasted to increase by 3.8% in constant value terms between 2009 and 2014, to reach US$15.3 billion in 2014.

Consumer Trends

Reduced sugar, no-sugar, and juice drink products are gaining in popularity. Expect to see more products with zero-calorie sweeteners like stevia, agave syrup, or agave nectar. American consumers are turning to "no calorie" or "low calorie" carbonated drinks. As a result, these consumers are responding positively to reduced sugar and fat content claims displayed on packaging, and are shying away from high calorie, high sugar content. Further, sales of reduced sugar cola carbonates grew faster than reduced sugar non-cola carbonates.

Retail Trends

Unit prices, across nearly all BFY beverage categories increased in 2009, due in part to increases in the cost of raw materials and production. The most popular BFY beverage product is Diet Coke, with a 29% share in 2009. Additionally, another Coca-Cola product (Coke Zero), rounds out the top three products, enabling them to capture over 34% of total BFY beverage market sales. Diet Pepsi, from Pepsi Co., is the secondmost popular BFY beverage, with 16.4% of sales in 2009.

Competition

The Coca-Cola Company accounted for nearly 35% of sales in the BFY beverages category in 2009.

United States Top 10 Better-for-you Beverage - Brand Market Shares - Retail Sales - % breakdown Brand Diet Coke Diet Pepsi Coca-Cola Zero Arizona Lipton Snapple Company name (GBO) Coca-Cola Co, The PepsiCo Inc Coca-Cola Co, The Ferolito, Vultaggio & Sons Unilever Group Cadbury Plc 2005 32.2 19.5 1.1 1.5 1.3 2006 31 19.1 1.9 1.6 1.3 2007 30.5 18 3 2 1.6 2008 29.2 16.9 4.6 2 1.8 1.4 2009 29 16.4 5.4 2.2 1.8 1.4

Starbucks Fruit2O Maxwell House Folgers

Starbucks Corp Sunny Delight Beverages Co Kraft Foods Inc Procter & Gamble Co, The

1.3 1 1.2

1.2 0.9 1.1

1.2 0.9 0.8 1

1.2 0.9 0.9 0.8

1.1 0.9 0.9 0.8

Source: Euromonitor International Top of Page

Naturally Healthy Beverages Market Data

Naturally healthy (NH) beverages in the U.S. reached US$19.08 billion in sales in 2009, up from US$19.06 billion in 2008. NH soft drinks is the biggest performer in this sector, with US$18.3 billion in sales. NH other hot drinks experienced the highest growth in 2009, increasing 46% to reach US$9.8 million in 2009. The NH beverage sector is expected to grow by 3.8% between 2009 and 2014, to reach US $19.8 billion in constant value terms in 2014.

Consumer Trends

U.S. consumer knowledge of naturally healthy products is growing and has helped drive growth in certain categories, namely superfruit juice, tea and RTD tea. Bottled water sales declined by 2.7% in 2009 after years of consecutive growth. This decline is due to the growing backlash surrounding the harmful environmental impact of plastic bottles. The economy has also forced consumers to cut spending, with many opting for tap water in reusable bottles over purchasing bottled water. Many Americans are being drawn to tea for its natural health benefits and are increasingly seeking out tea products, such as white and red tea.

Retail Trends

Unit prices of NH soft drinks were steady in 2009, except for superfruit juice, such as pomegranate and acai, and RTD tea, which increased slightly. Superfruit juices are available in the produce sections of many traditional grocery outlets. The top five NH beverage brands in 2009, were Tropicana, Poland Spring, Simply, POM Wonderful and Minute Maid. Heavy saturation of the market, recession-wary consumer spending, and private label growth are having a negative impact on the NH beverage market.

Canadian Performance

Exports of mineral and aerated waters to the U.S. equaled sales of CAD$13 million in 2009, down from CAD$19.8 million in 2008. Exports of various forms of fruit juice from Canada to the U.S. equaled CAD$56 million in value in 2009. Vegetable juice exports to the U.S. in 2009 equaled CAD$1 million in value.

Competition

Nestl Waters North America led NH beverages, with a 13% market share in 2009. Coca-Cola Co. was the second-leading manufacturer with a value share of almost 13%.

United States Top 10 Naturally Healthy Beverages - Brand Market Shares Retail Sales % breakdown Brand Tropicana Poland Spring Simply Minute Maid Arrowhead Deer Park Crystal Geyser Dannon Ocean Spray V8 Company name (GBO) PepsiCo Inc Nestl SA Coca-Cola Co, The Coca-Cola Co, The Nestl SA Nestl SA Otsuka Pharmaceutical Co Ltd Coca-Cola Co, The Ocean Spray Cranberries Inc Campbell Soup Co 2005 8.8 4.6 1.3 3.2 2.6 2.1 2.1 3.9 1.4 1.4 2006 8 5.3 1.6 2.8 2.8 2.4 1.9 3.7 1.3 1.3 2007 7.7 5.4 2.5 2.9 2.8 2.5 2.3 2.5 1.4 1.4 2008 7.3 5 3.1 2.7 2.3 2.2 2.1 2.1 1.8 1.6 2009 7 4.7 3.8 2.6 2.2 2.1 2.1 2.1 2 1.9

Source: Euromonitor International Top of Page

Organic Beverages Market Data

In 2009, U.S. organic beverage sector sales reached US$769 million, a drop from US$775.2 in 2008. Organic beverage sales in the U.S. are forecast to grow to US$855 million in 2014 in constant value terms, reflecting a CAGR of 2.1% over the period 2009 to 2014. Organic green tea experienced the highest growth, with 6% in current value terms in 2009.

Consumer Trends

Many U.S. consumers were not able to justify spending extra money on high-priced organic beverages in 2009, as they were forced to tighten their food and drink spending. Those U.S. consumers who are still purchasing organic beverages see them as a superior product and accept the premium prices.

Retail Trends

The bulk of the organic beverages sector in the U.S. is comprised of smaller, niche companies. Unit prices of organic beverages continued to increase in 2009 because organic ingredients are more expensive. Kraft Foods Inc. has an expansive distribution network and is able to leverage its strong resources to enhance its organic presence in the U.S. However, it is forecast that growth in the organic beverages sector will come from smaller niche companies, such as Honest Tea and Hansens, as they are in a position to provide greater promotion of their brands. The top five organic beverage brands are Starbucks, Celestial Seasonings, Welch's, Ocean Spray and Tropicana. Many companies have discontinued their lines of organic fruit juices due to little success in the sector.

Competition

Starbucks led organic beverage sales in 2009, with an 11% market share. Hain Celestial Group Inc's Celestial Seasonings teas secured second place in the U.S. organic beverage market with 4.7% of sales. Private label organic beverage sales captured almost 15% of sales in 2009, while others in the sector accounted for almost 69% of sales in that same year.

United States Organic Beverages - Brand Market Shares - Retail Sales - % breakdown Brand Starbucks Company name (GBO) Starbucks Corp 2005 2006 2007 2008 2009 8.3 4.7 9.5 4.7 10.8 10.9 11.2 4.6 0.4 4.6 0.4 4.7 0.4

Celestial Seasonings Hain Celestial Group Inc, The Welch's

National Grape Co-operative Association Inc -

Ocean Spray Tropicana Florida's Natural Private label Others

Ocean Spray Cranberries Inc PepsiCo Inc Florida's Natural Growers Private Label Others

11.7 11.3 11.1 4 5 6.2 3.7 -

15.3 15.5 15.3 14.9 14.8 60 53.9 48 65.3 68.9

Source: Euromonitor International Top of Page

Hot Beverages Market Data

Hot drink sales in the U.S., in 2009, reached US$10.4 billion. This represents growth of 7.3% over 2008. Since 2005, this sector has been growing on average 6% per year. Within this sector, coffee sales reached US$8.2 billion, tea sales equaled US$1.8 billion and other hot beverage sales were US$376 million in 2009. The value growth of hot drinks surpassed volume growth during 2009 due to higher unit prices for coffee and tea.

Consumer Trends

U.S. hot beverage consumers desire portable and convenient ways to enjoy hot drinks. Fair trade, single source, organic and rainforest alliance brands were all very popular with the U.S. consumer in 2009. U.S. coffee drinkers are showing a renewed interest in instant coffee, based on its convenience, portability and lower price point. A number of products are being launched, in the U.S., that carry an ethical label. This is in response to consumers' increased awareness of the working and living conditions of individuals who reside in developing countries. In 2009, a greater number of U.S. consumers of hot drinks, such as chocolate and malt-based powder drinks, prepared them at home. This trend, however, mostly affected the coffee sector.

Retail Trends

Supermarket/hypermarket outlets continue to dominate distribution in the hot drinks market. Fresh coffee beans, often considered to be of higher quality, became more widely available in mass distribution outlets, such as Dunkin' Donuts and Starbucks. Grocery stores are driving decreased pricing in this sector. Consumers are favouring supermarkets/hypermarkets to make

their coffee purchases, as opposed to smaller grocers. This is due primarily, to the increased availability of popular brands such as Dunkin' Donuts and Star-bucks in supermarkets/hypermarkets, in combination with heightened price sensitivity, and the increasing desire for one-stop shopping. Vending in coffee has slowly been declining, as consumers prefer to enjoy a cup of coffee at a specialty shop. Growth in specialist coffee shop outlets slowed in the past couple of years, with companies such as Starbucks closing over 600 stores in 2009. This trend of downsizing among specialty shops in the U.S. is expected to continue. Hot tea is gaining in popularity, particularly the white tea variety, because of its flavour and purported health benefits. The average unit price of tea beverages in the U.S. rose by 2% in 2009, due to increased demand for premium brands and the jump in global tea prices. Some teas, like white and roobios, were only sold through specialty and health food stores, but this is changing, as they are increasingly available in supermarkets and hypermarkets. Away-fromhome tea consumption is growing, as more restaurants are serving specialty and premium teas. Foodservice outlets are also introducing tea lattes to their menu offerings. Tea specialist outlets, like Argo Tea, are growing in popularity. While loose leaf teas are increasingly found in supermarkets/hypermarkets, they are more likely to be purchased in specialty tea shops, or from producers, directly over the Internet. Unilever is one of the largest consumer packaged goods companies in the world, and has greater distribution and bargaining power with retailers, which is why its teas can be found in most supermarkets/hypermarkets, discounters and convenience stores. Sustainable packaging has become a concern for both consumers and manufacturers, causing packages to be redesigned, and spurring the introduction of biodegradable and 100% recyclable cartons. Teas, like white, roobios and oolong carry higher average unit prices. The top five tea brands are Lipton, Celestial Seasonings, Bigelow, Twinings, and Traditional Medicinals. Average unit pricing in the other hot beverages sector increased by 2% in 2009. These increases were due to rises in commodity prices of cocoa and sugar. Ovaltine led in the malt-based hot drinks category, however, it is not widely available throughout the U.S. Retail outlets, such as Ghiradelli and Hershey's, remained popular sources for malt and chocolate-based powder drinks, however, these are not widely available throughout the U.S.

Canadian Performance

Canada is the top exporter of black tea, fermented and partly fermented, in packages not exceeding 3 kg (HS code 090230) into the U.S. with CAD$23,227,470 in 2009. This represents 25% of market share. The U.S. imported green tea totalling CAD$92 million in sales for 2009. Of that, Canada was the third top supplier, behind China and Japan, with sales to the U.S., equaling CAD$10 million. Canada is the top exporter of roasted coffee (including decaffeinated) with CAD$192 million in market sales for 2009, an increase in sales of CAD$60 million over 2008.

Competition

Major companies own the leading brands within the hot drink sector. Kraft Food led coffee retail sales in 2009, with a value share of 18%, followed closely by JM Smucker, with a share of 17%.

Unilever led sales of tea in the U.S., in 2009, with a 22% market share and was followed by Hain Celestial, with 17%, and RC Bigelow, with 16%. Folgers brand of coffee showed respectable sales in 2009, capturing 13% market share. In the other hot beverages market, Nestl led sales in 2009, with 23% of market share, followed by ConAgra Foods, with 13%.

United States Top 10 Hot Drink Beverages - Brand Market Shares - Retail Sales % breakdown Brand Folgers Maxwell House Starbucks Eight O'Clock Lipton Celestial Seasonings Bigelow Starbucks Dunkin' Donuts Company name (GBO) JM Smucker Co, The Kraft Foods Inc Kraft Foods Inc Eight O'Clock Coffee Co Unilever United States Inc 2006 2007 2008 2009 5.6 4.3 2.9 3.8 5.3 4.4 3.4 3.9 3.1 2.7 2.7 1.4 10 6.1 4.6 3.5 3.8 3.1 2.8 2.8 2.1 1.5 10.3 6.3 4.7 3.7 3.7 2.9 2.8 2.8 2.4 1.4

Hain Celestial Group Inc, The 3.1 RC Bigelow Inc Starbucks Corp JM Smucker Co, The 2.7 2.6 1.5

General Foods International Coffee Kraft Foods Inc Source: Euromonitor International Top of Page

Sports Beverages Market Data

Sports drinks and energy drinks in the U.S. are predicted to grow by 2% in total volume between 2008 to 2013, reaching 6.7 billion litres. Protein powder sales captured 40% of the sports nutrition market in 2009, while protein readyto-drink products accounted for 6% of sales.

Consumer Trends

For energy drinks and shots, consumers are looking for greater functionality, including alertness, improved mood, balanced energy, hydration and antioxidant capacity. These consumers are also interested in mental acuity, increased concentration ability, and physical stamina. When it comes to sports drinks, U.S. consumers are looking for products that give them sustained energy for longer periods of time. In addition, consumers want these drinks to be multi-purpose, providing pre, post and overall support when it comes to their workout regime. L-taruine, creatine, protein, amino acids and vitamin B are just a few of the fortified/functional additives manufacturers are putting in their sports drinks. Sports drinks have become quite mature in the U.S. market and consumers increasingly prefer fortified/functional bottled waters and teas. Ready-to-drink sports nutrition beverages have gained acceptance among U.S. consumers, in part due to the growing popularity of the Muscle Milk RTD nutritional beverage.

Retail Trends

Fifty-nine per cent of sports nutrition products in the U.S., are bought through health food stores and direct selling. The Muscle Milk brand was the number one sports drink in the U.S. for 2009. The company that makes Muscle Milk is targeting women, positioning the product as a daily convenient nutritional beverage, rather than a physique bulking supplement. Certain manufacturers have targeted non-specialist retailers, such as convenience stores, parapharmacies/drugstores and supermarkets/hypermarkets to drive product sales. These mass retail channels are appealing due to their potential to capture casual athletes who currently use these products infrequently or not at all. Whey protein is one of the most widely distributed sports beverage products, and is available in channels ranging from health food shops to cash and carry/warehouse clubs.

Competition

The top protein RTD beverages sold in the U.S. in 2009 were: Muscle Milk (Cytosport Inc.), EAS (Abbott Laboratories Inc.), and MET-Rx (Rexall Sundown Inc.). The top protein powder products are Optimum Nutrition (Optimum Nutrition Inc.), EAS (Abbott Laboratories Inc.) and GNC (General Nutrition Centres Inc.).

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Milk Beverages Market Data

Drinking milk sales in the U.S. fell in 2009 by US$3.9 billion. This 12% dip is attributed to a combination of lower pricing, and high feed prices. In 2009, an oversupply of milk occurred in the U.S., due to the weakened global economy reducing the worldwide demand for milk.

Goats' milk was the fasted-growing milk sub-sector in 2009, with 6.1% value growth. Next in the sector was soy milk, with a sales growth of 5.1% in 2009. Private label products dominated in this sector. Milk sales in the U.S.are forecast to be flat between 2009 and 2014.

Consumer Trends

U.S. parents are increasingly concerned about the nutrition and sugar content of the products consumed by their children. As a result, the Ovaltine brand, with its healthy image, led the maltbased hot drink sector in growth in 2009. When it comes to the U.S. milk consumer, chilled milk dominates. This could be due in part due to the consumer's perception that chilled products are "fresh" products. As more and more Americans become lactose intolerant, traditional milk sales are declining. However, this has provided an area of growth for soy milk products. Soy milk sales are continuing to grow at mid-single-digit rates.

Retail Trends

Private labels dominate drinking milk products. U.S. schools are removing carbonated beverages from their vending machines and other beverages are taking their place, including single-serving flavoured milk drinks. Dairy producers have begun to introduce shelf-stable varieties of flavoured milk drinks.

Canadian Performance

Canada is the top exporter of milk (HS code 040120) into the U.S., with a value of CAD$809,296 in 2009. This figure represents 95% of export market share. Within the milk sector, Canada is the United State's top import source for buttermilk, with value sales for 2009 reaching US$12 million.

Competition

Associated Milk Producers Inc., a private U.S. cooperative, transforms 6 billion pounds of milk into various dairy products each year. This organization boasts McDonalds as one of its retail customers, while they also supply milk to food manufacturers. The Land 'O' Lakes cooperative produced 12.7 billion pounds of milk in 2009, with sales reaching US$10.4 billion. The organization boasts income growth of 30.9% in that same year. Dairy Farmers of America had sales equaling US$11.7 billion in 2008 and US$8 billion in 2009. This organization claims to be the largest dairy cooperative in the world, producing 62 billion pounds of milk a year. They are a major supplier to Dean Foods. Foremost Farms had US$1.6 billion in sales in 2008, and produced 5 billion pounds of milk.

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Soft Drink Beverages (includes: carbonated drinks, RTD tea and coffee, and cold malt drinks) Market Data

Carbonated soft drink (CSD) sales grew 2.6% in 2009, totaling US$28.8 billion. However, volume remained flat for the year ending January 23, 2010. The CSD market was estimated to be nearly US$40 billion in value in 2009. Soft drinks have been hit by the recession, as consumers cut back on discretionary purchases. Interestingly, branded CSD's lost sales to private labels, a trend that is expected to continue in the short term. Citrus and super-fruit flavours continue to dominate in this sector. Ready-to-drink (RTD) tea sales showed strong growth in 2009. Private label tea sales grew by 53.5%, although it holds only 3% market share. One of the most popular forms of RTD tea was the iced tea variety. Loose-leaf and bag tea sales grew 4.4% for the year ending April 18, 2010. While RTD coffee sales declined, the sector still out-performed RTD tea, confirming that the U.S. is a nation of coffee drinkers. Because RTD coffee is seen as an expensive treat, expect to see a further decline in sales due to the faltering economy.

Consumer Trends

Young consumers are the primary demographic for RTD coffee. Java Monster helped sustain sales in this sector, with the introduction of new flavours, and better value packaging that is attracting new consumers. Java Monster is predicted to continue to do well in this sector for the short term, as it has a loyal consumer base. U.S. RTD tea consumers are favouring the antioxidant properties of tea. Black lemon tea was the most popular RTD tea flavour in the U.S. in 2009, however, consumers are moving to green, herbal and white teas. Often these teas are combined with fruit flavours to improve their taste.

Retail Trends

While retail outlets, such as Ghiradelli and Hershey's remain popular sources for malt and chocolate-based powder drinks, they continued to be sold mainly through supermarkets/hypermarkets in 2009. With the economic downturn, consumers are increasingly favouring mass-market channels over smaller grocery stores, due to the fact that they typically offer lower prices, a larger selection, and one-stop shopping. Vending of these beverages is not significant, and is not expected to increase in popularity in the future. The top five other hot drink beverage brands are Swiss Miss, Nestl, Carnation, Ovaltine and Hershey's.

Competition

The dominating players in the U.S. CSD sector are Coca-Cola Co, with 31% of market share, followed by Pepsi Co Inc, with 22% of market share. Private label soft drinks have yielded flat year-on-year growth since 2004, capturing 9.9% of sales in 2009. In the U.S. RTD tea sector, sales of Lipton and Arizona brand teas captured almost 62% of the market. The Dr. Pepper Snapple Group and the Cadbury Schweppes Plc company have dropped three of their RTD tea products since 2008. Interestingly there are only four major players in this

sector. Private label RTD tea products accounted for 8.4% of market share, less than the 12.9% market share won by other players. In 2009, Starbucks Corp dominated the RTD coffee sector, owning 76% of the market, led by their Frappuccino product, followed by their DoubleShot and iced coffee offerings. Altogether, Starbucks Corp products occupy first, third and fourth place in the top five. Hansen Natural Corps Java Monster drink rounds out the top five in second place with 11.9% of market share in 2009. Both Campbell Soups Co (Godivva Belgian Blends), and Wolfgang Puck Worldwide Inc (Wolfgang Puck) dropped their RTD coffee products in 2008.

U.S. Brand Shares Ready-to-drink Tea (by Global Brand Name) - Off-trade Volume % breakdown Brand Lipton Arizona Snapple Nestea Mistic Snapple Mistic Private label Others Company name (GBO) Unilever Group Ferolito, Vultaggio & Sons Dr Pepper Snapple Group Inc Nestl SA Dr Pepper Snapple Group Inc Cadbury Schweppes Plc Cadbury Schweppes Plc Private Label Others 2005 30.8 25 0 13.5 0 16.2 0.8 6.4 7.2 2006 33.3 23.9 0 7.6 0 12.2 0.6 6.3 16.1 2007 32.1 21.9 0 6.1 0 11.3 0.5 6 22.1 2008 33.7 24.5 10.6 6.3 0.5 0 0 7 17.3 2009 35.5 26.4 10.6 6.2 0 0 0 8.4 12.9

Source: Euromonitor International U.S. Brand Shares Ready-to-drink Coffee (by Global Brand Name) - Off-trade Volume - % breakdown Brand Frappuccino Java Monster DoubleShot Starbucks Iced Coffee Company name (GBO) Starbucks Corp Hansen Natural Corp Starbucks Corp Starbucks Corp 2005 2006 2007 2008 2009 83.9 82.8 71.2 67.5 67.4 0 11 0 0 8.4 0.3 6.6 9.1 4 8 7.9 3.2 11.9 7.3 1.5

Bolthouse Farms Godiva Belgian Cinnabon Kahla Private label Others

Bolthouse Farms lker Gida Sanayi ve Ticaret AS Focus Brands Inc Pernod Ricard Groupe Private Label Others

0 0 0 0.5 0 2.1

1.2 0 0 0.4 0.1 4.4

1.6 0 0.4 0.3 0.3 3.2

1.4 1.7 0.4 0.2 0.5 9.2

1.4 0.4 0.3 0.1 0.6 9.2

Source: Euromonitor International United States Top 10 Soft Drink Beverages - Brand Market Shares - Retail Sales - % breakdown Brand Coca-Cola Pepsi Diet Coke Mountain Dew Diet Pepsi Dr Pepper Sprite Diet Mountain Dew Diet Dr Pepper Coca-Cola Zero Company name (GBO) Coca-Cola Co, The PepsiCo Inc Coca-Cola Co, The PepsiCo Inc PepsiCo Inc Dr Pepper Snapple Group Inc Coca-Cola Co, The PepsiCo Inc Dr Pepper Snapple Group Inc Coca-Cola Co, The 2005 2006 2007 2008 2009 14.9 14.8 14.8 14.3 14.1 13.6 13.3 13.1 12.6 12.3 11.4 11.1 11 6.6 8.1 4.5 2.2 0.4 6.8 8 4.5 2.3 0.7 7.1 7.6 4.5 2.5 1.1 10.7 10.4 6.9 7.3 5.2 4.5 2.6 2.3 1.5 7.2 7.1 5.5 4.4 2.7 2.2 2

Source: Euromonitor International

The Government of Canada has prepared this report based on primary and secondary sources of information. Although every effort has been made to ensure that the information is accurate,

Agriculture and Agri-Food Canada assumes no liability for any actions taken based on the information contained herein. Consumer Trends: Non-Alcoholic Beverages in the United States Her Majesty the Queen in Right of Canada, 2011 ISSN 1920-6615 Market Indicator Report AAFC No. 11294E For additional copies of this publication or to request an alternate format, please contact: Agriculture and Agri-Food Canada 1341 Baseline Road, Tower 5, 4th floor Ottawa, Ontario Canada K1A 0C5