COVID-19 has changed everything. While I’m not usually one to over-dramatize events, and I do think the signals of a “new normal” have generally been overplayed (humans are creatures of habit, after all, and I expect and hope a few years from now we’ll be happy to settle back into our old routines), there’s no denying that this pandemic will have a lasting impact on many areas of our lives for years to come.
How will beverage deals and soft drink negotiations change as a result of the coronavirus? I possess no crystal ball, though we do have the benefit of observing first-hand how the beverage companies (and our clients) have responded during the initial six months of the crisis. While it’s always dangerous to make predictions, here are eight ways we predict beverage deals will change in the near-term and perhaps long-term.
1. Dispensing Equipment Will Go Touchless
In the early days of the pandemic, much less was publicly known about how the virus was spread. Fear of transmission led many restaurants to radically alter its beverage service. City and county health officials placed new health regulations on foodservice operators – in some cases even causing them to unplug their fountain machines. The preventive measures taken included serving only pre-packaged sealable drinks, staffing what had traditionally been self-serve soft drink stations, providing new glassware with every refill or foregoing free refills altogether.
Beverage companies and equipment manufacturers have been forced to react. Coca-Cola worked to quickly develop and deploy an update to its Freestyle platform, allowing users to scan a QR code on the screen to call up an interactive interface on the user’s cell phone. The technology is currently being rolled out to select locations, and we expect Pepsi’s Spire and SodaStream Professional lines to have similar rollouts soon. Both companies have been working with equipment manufacturers to develop technology to retro-fit traditional dispensing machines with touchless sensors, with early costs ranging between $15-$45 per valve. There have been a number of independent companies offering their own touchless solutions, as well.
It’s hard to imagine touchless equipment not being the minimum standard in the years to come. Beverage companies have a vested interest in ensuring the dispensers that serve their product to be operational, perceived as sanitary, and both easy and quick to use. Look for beverage companies to provide touchless dispensing equipment – at no cost to their customer – in future proposals.
2. Smaller (or Shuffled) Account Teams
It’s no secret that many of the industries that serve beverages off-premise have been highly impacted by the pandemic. Movie theaters are closed, universities moved online, and nearly 100,000 restaurants have shut their doors, with 40% of all restaurants indicating they won’t be able to stay in business.
While some beverage companies have other lines of business (snacks, at-home coffee, etc.) to help lessen the impact of these closures, all will feel the pinch. Coca-Cola has already announced a restructuring that result in 4,000 terminated positions.
Account teams will be challenged to do more with less and to cut costs where they can. We recommend service level guarantees, backed by financial commitments, to ensure service levels don’t deteriorate in your next partnership.
3. Packaged Products will Become a Larger Focus of Negotiations
While delivery services have been gaining in popularity for years, the concept has now gone mainstream. Serving beverages in a delivery environment has historically been a challenge with for a variety of reasons:
- How do you transport fountain beverages?
- Where do you store bottled beverages?
- What’s to keep your customer from sourcing their beverage from their fridge?
- Does your distributor carry the products you need?
- How does the parent beverage company account for bottler territories for customers with national footprints?
- How do you protect your margin when bottled products cost more per serving than fountain drinks?
Beverage companies that come to the table with solutions for these problems will have a key advantage in the negotiations. No longer will bottles and cans become an after-thought to the partnership and be relegated to a separate appendix. Customers will be scrutinizing their packaged product costs and trying to determine what is a fair price for their inventory.
4. New Opportunities with E-Commerce
Beverage companies have signaled a new focus on selling products through internet platforms – both directly to consumers and through established internet marketplaces. In the midst of the pandemic, PepsiCo launched pantryshop.com and snacks.com, while Coca-Cola has signaled the channel as a key strategic priority. Coca-Cola’s CEO, James Quincey, said during a post-earnings call: “We’ll also embrace some seismic consumer behavior shifts that are taking place, especially in e-commerce. We believe the accelerating expansion of the channel is sustainable, and we want to continue to be well-positioned for long-term growth.”
We anticipate the focus on e-commerce to find its way into beverage partnership negotiations. Expect the beverage companies to offer resources, strategies and commitments to help their customers sell more beverages through their digital platforms (delivery & take-out), and there may be an opportunity to collaborate on unique and proprietary menu items that could be sold via online platforms.
5. New Products and Categories = Opportunity for Investment
The industry was already introducing new products at a dizzying pace before COVID-19, but consumer trends in the midst of the virus has highlighted a few areas where we think we’ll see a special focus on innovation.
While the “functional” beverage trend has been a focus for a few years, consumer’s attention to health and immunity in light of the virus has propelled that trend. Expect to see products with added health benefit or products infused with vitamins, minerals or supplements taking the limelight.
In addition, we expect both companies to continue to move into the alcoholic space, as signaled by Coca-Cola’s announcement of extending the Topo Chico line into the hard seltzer category. As alcohol purchases dramatically increased during the pandemic, we believe beverage companies will see the space as another way to both capture a piece of a growing market and insulate themselves from the risk of on-premise interruptions.
Customers that are able to provide a platform for the beverage companies to launch these new products and lines could receive the benefit of marketing dollars and brand exposure.
6. Contract Terms Will Change
“Standard” contract terms are often battle scars from a situation gone awry in the past, and COVID-19 has certainly provided the beverage companies with plenty of battle scars. You can expect to see a myriad of requested edits in your new contract, including pandemic and epidemic language being added the “force majeure” clause, indemnification from liabilities arising from illnesses and related product shortages, exclusivity requirements for delivery, virtual kitchens and off-shoot brands, and strict guidance on how acquisitions are to be handled (with consolidation looming on the horizon).
A more challenging contract element to be negotiated will be any request for a fixed-date deal term and significant up-front cash. Beverage companies prefer volume-based terms because it guarantees them purchases and eliminates risk in their financial model. In a situation where their customers need to shut down or dramatically alter their operations, a volume-commitment serves the beverage companies quite well. Unfortunately, many organizations are realizing their beverage partnership has been dramatically elongated as their volumes have plummeted during the crisis.
Beverage companies will be hesitant to enter into agreements without a volume-commitment or with significant funds that are advanced at the beginning of the term and which is not specifically tied to volume. At minimum, we suggest you scrutinize the volume levels closely, understand exactly what charges would be incurred should you need to exit the contract (and agree to these in advance), and make sure packaged products and new products introduced in the future are included in the commitment. If you can avoid a volume commitment, it can provide you with much more certainty in situations like we’ve faced in 2020.
7. Shifts in Beverage Company Marketing Strategies
Beverage companies have already signaled dramatic changes to their marketing strategies and budgets – from pausing spending altogether to dramatically shifting which advertising channels receive priority. With stadiums, theaters and classrooms sitting empty, traditional beverage investment channels – channels where beverage companies invest heavily in order to increase brand exposure and therefore brand preference at the grocery and convenience store – are being questioned.
Industries where beverage companies were hesitant or lukewarm to invest will now be prime targets to build brands. Industries where beverage companies have historically invested will see beverage companies want flexibility to pause or dial down committed dollars depending on the extent to which guests return after the virus has been contained. Beverage customers which can offer beverage companies an off-premise retail promotion, have a strong digital presence, or provide a connection to health and wellness will stand to benefit.
8. Customer Allegiances Challenged
COVID-19 has presented the most challenging business environment of our lifetime. In a time when many organizations are struggling to keep their doors open, business leaders are looking for suppliers that truly partner with them to solve their problems. Crises like this are what can solidify relationships for generations – or conversely, break what was once seen as an iron-clad alliance.
We have seen beverage companies taking divergent paths to approaching their customers’ problems. Some have offered creative solutions and extraordinarily generous contract flexibility. Others have, in the eyes of their customers, proved to be inflexible and rigid in their enforcement of contract terms negotiated years ago and in a different era. To quote one client this week that has traditionally been fiercely loyal to one brand: “A number of our business partners have stepped up. [Our beverage partner] has taken a giant step backwards during this crisis.”
As companies re-open and emerge into a changed landscape, will they be more open to partnering with a new beverage supplier? Will the new beverage landscape change which factors customers prioritize in a beverage partner? We expect to see some headlines around the industry that would have been surprising before the pandemic.
Final Point: Build Flexibility & Collaboration Into Your Partnership
The beverage industry is constantly changing, and we expect the pace of change to only increase in the years to come. COVID-19 has been the most significant and far-reaching business disruption of our lifetime. Whether the changes outlined above happen or not is yet to be seen, but one thing is certain: the beverage industry will change.
When it comes time to re-thinking your beverage partnership (or imagining it for the first time), make sure you build a program that has the flexibility to withstand whatever changes are to come in the future, and with a supplier you feel confident will view the agreement as a true, collaborative partnership – solving problems that arise together.
Photo: Dustin Chambers / Bloomberg via Getty Images