The $38 billion-plus beverage industry is in a period of unprecedented innovation. An explosion of new ingredients, in new combinations like functional waters, energy and nutritional drinks for the mainstream consumer, are the new innovations hitting the market. Many of these have just recently been launched, so the impact on the beverage market and consumers will be closely watched. However, consumers will enjoy these new innovative times, while marketers will experience many challenges in 2002 as the competition for the consumer will pose a real challenge for marketing budgets which cannot compete.

Industry Trends Driving the Need for More Innovations
Beverage category growth increased $8.5 billion in the last five years and is trending at nearly +6% growth in the latest 52 weeks. In 2001, beverages grew +5% overall growth with nearly all segments growing (see Exhibit A). Four segments moved up in the rankings:

• Wine is now the number three segment.
• Bottled water bypassed liquor.
• Ready-to-drink (RTD) coffee and tea bypassed canned juice.
• Wine coolers bypassed non-fruit drinks.

Consumers are drinking more beverages and expanding their horizons beyond traditional carbonated soft drinks (CSDs). That hasn't been good news for CSDs; they have lost three dollar share points of the beverage category over the last five years. Water, wine and isotonics are making up the difference. Most concerning, consumers have shifted two annual purchases from CSDs to water, RTD coffees and other new beverages. Regaining these beverage drinkers is one reason why the CSD mega brands are launching a flavors offensive. Already, Mountain Dew Code Red has set the pace, and this summer Pepsi Blue, Dr Pepper Red Fusion,Vanilla Coke, Aquafina Essentials, Snap 20, Arizona Water Aid+, SoBe Adrenaline Rush, and many more will be launched.

Retailers are still supporting new beverage introductions in all segments with a net increase of 29 new SKUs on-shelf. They are, however, shifting merchandising focus. Last year, they held their level of CSD merchandising support flat, but devoted more display space to nearly all other beverage categories, with aseptic juices, isotonics, bottled water and yogurt drinks reaping the most rewards.

Leading Consumer Trends
While general market trends are making their impact on the beverage industry (see Exhibit B), the driving beverage trends are convenience and a balanced health mantra. With "on the go" still on the rise, beverages are becoming even more convenient with Coke "Fridge Packs", child portion and lunch sizes, resealable sports packages, cap top rings for easier carrying, and more portable concentrates. Both the aging population and the desire for balanced health is opening doors for products like fortified waters such as Quaker's Propel, milk substitutes and soy milk such as White Wave Silk, energy and revitalization drinks such as Red Bull, and nutritional/weight management products such as Ultra SlimFast.

The Battle Field
Competition will be intense, despite the growth prospects, as there are already numerous more beverage SKUs on store shelves than there were a year ago. Key implications of the current competitive situation include:

• Beverage category marketing investment will have a record year, but as a result, many brands' launch marketing plans will lose in the "share of voice" battle.
• Fringe beverages will be displaced at retail outlets to make room for new products. Retail display and space will likely be at a premium.
• There will be a race to enter the market early. Historically, brands that are second and third to market experience 25% to 35% lower sales rates due to more limited distribution access.
• Unless the beverage company has a unique product that will benefit from first in market advantage, however, some marketers may want to hold their own launches and focus investment to protect their existing franchises or change launches to more grassroots/guerrilla tactics.There's an added plus to learn from the mistakes of first movers and exploit their disadvantages later.

At the same time, seven years of IRI "New Product Pacesetters" data indicate that 53% of new consumer packaged goods (CPG) products fail and only 20% exceed $7.5 million sales in their first year, not enough to cover the cost of a national launch. Careful research and planning are needed to overcome the daunting odds of launching a successful new product in a crowded field. Manufacturers can also improve their odds by being first to market and smart with competitive marketing strategy; by being truly innovative in terms of taste, variety and convenience with existing brand extensions; and by supporting and defending the new brand beyond the one-year launch.