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Is the soda fountain fizzing out?

The carbonated drink market is changing as specialty drinks gain ground

February 3, 2009

In 2007, the U.S. refreshment beverage market grew primarily because of the introduction of newer beverage categories.

In recent years, those categories have seen "significant — often astronomical — growth rates," according to Beverage Marketing Corp., a New York-based beverage-industry research and consulting firm.

While carbonated soft drinks remain the most popular category on a volume basis, the newer drink categories are changing the face of the market, according to the firm.

"In recent years, we've seen carbonated soft drinks actually begin to decline in volume, and we've seen products such as sports drinks, energy drinks and enhanced waters grow dramatically over the last four to five years," said John Sicher, editor and publisher of Beverage Digest.

The bottled specialty drink has found a comfortable home in the fast-casual space because, over the past decade, consumers have sought more variety in their beverages, said Sicher.

But the operations themselves have something to do with it as well.

"I think a lot of fast casual restaurants are looking for ways to distinguish themselves from quick-service restaurants, and one way to do that is to offer a higher-end, distinct beverage," said Gary Hemphill, managing director of Beverage Marketing Corp.

Such is the case with Dallas-based Snappy Salads. Founder and president Chris Dahlander said his goal is to create a cult following as he expands his two-unit enterprise, so he's added Boylan all-natural sodas to his drink lineup to help reinforce his brand. Snappy Salads' drink menu already includes the Venga line of high-performance beverages, which, like many specialty drinks, are not cheap.

"We sell them for $3.50 each, but they appeal to my guests, who are typically healthconscious," Dahlander said.

When it comes to specialty drinks, price is relative, said Jones Soda CEO Steve Jones.

"I think with Coke and Pepsi driving down the price of beverages to commodity-level prices, the only way in which anyone is going to get any kind of gross margin is if you get a higher price point. It's only a higher price point compared to ridiculously low canned prices," said Jones, whose background includes 17 years with Coca-Cola.

Higher prices can translate into a perception of higher quality, experts say.

"Most of the new beverage companies are trying to lure people away from their dissatisfaction with the heavy, sugary, highly sweetened soft drinks with products that are healthier, more organic, natural," Jones said.

According to industry experts, health and wellness concerns are a big driver of the specialty beverage trend. Health-conscious consumers demand more alternatives to high-calorie sodas, even if the drinks offer only a perceived health benefit.

Beverage boom

"You're not going to see fountain drinks go away. In mainstream carbonated soft drinks, fountain accounts for about a quarter of the business. — Gary Hemphill, Managing director, Beverage Marketing Corp.

Bottled and canned specialty drinks have made their way to the checkout counter at fast casuals, but don't count out their carbonated counterparts just yet. With fat profit margins and new flavors on the horizon, experts say the soda fountain is far from running dry.

For more than a century, soda fountains have ruled at restaurants, and, according to Hemphill, it makes sense for restaurants to offer a combination of fountain and bottled drinks to meet all their customers' needs.

"You're not going to see fountain drinks go away. In mainstream carbonated soft drinks, fountain accounts for about a quarter of the business," he said.

At Schlotzsky's sandwich chain, drink sales have shown double-digit increases this year.

President Kelly Roddy said Schlotzsky's started a big push in the past year or so to offer more drinks like Snapple, Nantucket Nectars and Fuze.

But the chain continues to hold on strong to its traditional fountain offerings, which Roddy says are highly profitable.

"We see an opportunity to really grow our drink category in general," Roddy said.

Future of the fountain

While bottled beverages are gaining popularity, restaurants are choosing to add them to the mix rather than phase out soft drinks.

Carbonated soft drinks continue to account for about half of non-alcoholic foodservice drink sales by volume, proving that the soda fountain is here to stay.

*Data excludes flavored and enhanced water.

Source: Beverage Marketing Corp.

"The fountain beverage is just entrenched in our society. I don't see them going anywhere — not quickly," said Snappy Salads' Dahlander.

Snappy Salads makes about a 90-percent profit on the soda syrup alone, with the syrup costing about a penny an ounce, he said. And at Schlotzsky's, sodas account for 90 percent of the chain's drink sales, Roddy said.

"They've done a nice job of continuing to improve their machines and their offerings," Roddy said of the big-name beverage companies.

"They want to help us with our drink solutions as well, so we're working with them (on) what's the next big drink for Schlotzsky's." Not only will fountain drinks continue to flow, but they also could enjoy a resurgence, ironically thanks in part to the popularity of specialty drinks.

"I think we'll see new fountain equipment, which will be able to dispense a much greater variety of beverages," Sicher said. "The limitation of most fountain equipment is that you can only sell six to nine different products, depending on the equipment." Coke is testing a prototype of a new piece of fountain equipment that can dispense more than 100 different beverage varieties, he added.

Illustrating Sicher's point, Schlotzsky's is working with its vendor to enhance drink selections in 2009 and 2010, although Roddy is keeping the specifics under wraps.

"We want something unique to us. We're not sure what that is yet," he said. "I still think fountain drinks will be king, and if the customer demands it, the fountain drink companies will change what they do to continue to sell products."