Exploring the challenges and opportunities for drink brands and manufacturers
The cost-of-living crisis is impacting households and businesses across the UK.
For the UK drink industry, already contending with the impacts of the pandemic, it has posed some significant challenges.
Food and drinks prices have been hardest hit in recent months, as a range of domestic and global factors have pushed up the prices of energy, fuel, and raw ingredients and materials.
While inflation overall has hovered at around 10% in recent months, price inflation for food and non-alcoholic drinks rose by 19.2% in the year to February 2023, according to the Office for National Statistics*.
This has been the result of a range of factors. The war in Ukraine and poor weather in vital vegetable-growing regions have impacted markets globally, while Brexit and labour shortages have further exacerbated things in the UK. Domestically, drinks producers have also faced CO2 shortages, as a knock-on effect from energy price increases impacting production sectors.
These factors have created packaging shortages and pushed up the costs of ingredients, impacting items like sugar and coffee.
The cost-of-living crisis has dealt a second blow to the UK drink industry, following the pandemic and associated lockdowns.
As producers, retailers and on-trade venues were working hard to earn back losses, consumers have been forced to cut back on spending. Shoppers and revellers are either cutting back altogether or trading down on purchases.
Alcoholic drinks like white spirits and beers have been hit hard, as largely discretionary products, while even typically affordable products like juices and carbonated soft drinks (CSDs) have also suffered. And for categories like coffee, the blows have been both financially- and environmentally-related.
Nevertheless, there are still opportunities for the UK drinks industry.
Capitalising on sustainability and wellness trends will help to maintain interest, allowing drinks brands to differentiate in areas where consumers remain willing to pay a premium. Additionally, creating new flavours and offering larger pack sizes are key opportunities, workable for all drinks categories.
Reformulating recipes can also help with cost engineering, either replacing more costly or scarce ingredients, or adding more marketable ingredients to justify price increases.
And there are a range of category-specific opportunities to help the UK drink industry to navigate the cost-of-living crisis too:
Opportunities for carbonated soft drinks from the cost of living crisis
For consumers conscious about their finances and wellbeing, carbonated soft drinks (CSDs) can be both budget-friendly and alcohol-free treats. Amongst drinkers of CSDs, 41% see them as a low-cost way to boost their mood**.
Creating new flavours is a tried and tested route to new opportunities for this category. Brands could now draw inspiration from the juices, flavoured waters and even beers adding extra health benefits to drinks. Innovating with ingredients offering natural highs or long-lasting wellbeing benefits can help to create new recipes and renewed interest.
Shifting to larger formats – offering better value for money through bigger pack sizes in retail or post-mix in on-trade – will also support CSDs to maintain steady sales.
Opportunities for juices & cordials
Juices have felt the squeeze from slowed discretional spending. However, as people seek out value options the squash and cordial category was up by £38m in 2022 compared to pre-pandemic levels***.
Squash can create affordable and tasty drinks at home, while premium cordials offer alcohol-free alternatives for out-of-home drinking. This trading down bodes well for own-label brands.
For the best value, offering larger formats will appeal, with added bonuses if these can be coupled with introducing sustainable packaging or production processes.
Other opportunities for juices and cordials lie in highlighting health and functional benefits of ingredients in juices or how cordials can incentivise drinking the recommended 2l of water each day.
Brands are also broadening usage beyond breakfast, positioning juices as mixers for cocktails or even as stand-alone mocktails.
Opportunities for coffee
While coffee will always be a buoyant category, it faces varying challenges in the current climate – consumers have concerns around sustainability and wellbeing as well as their finances.
To maintain its position, premiumisation, functionality and sustainability offer opportunities.
Innovating through functionality offers an opportunity. Adding ingredients that complement caffeine’s boosts, such as new nootropics to boost cognition, will allow for higher price points to boost value sales.
Investing in indulgent flavours, through premium, flavoured or craft coffees, will also pay off as consumers see these as affordable luxuries. However, trading down to own-label coffees is also on the rise, with these offerings enjoying volume and value growth in 2022****.
Considering sustainability remains key for coffee too, both through the sourcing of ingredients and sales techniques for products.
Opportunities for spirits from the cost of living crisis
Spirits are predicted to be particularly impacted by current challenges, as alcohol duty rates also influence the category.
Focussing on shifts towards at-home drinking occasions and the ongoing interest in gift-giving of smaller, premium or limited-edition bottles could help spirits, both white and dark, to win out.
And alongside smaller formats, RTD spirits can offer opportunities to maintain custom and offer drinkers value-for-money. Developing RTDs will appeal to drinkers cutting down on drinking out-of-home, as well as offer on-trade a more cost effective and low-waste way to meet demand. These can even attract new drinkers, offering an affordable and easy way to try new drinks like dark spirits.
Using unique ingredients or flavours – whether through provenance or production techniques – and incorporating sustainability will also support the spirits category.
Opportunities for beer
Like all alcoholic drinks, beer is vulnerable to cutbacks in consumer spending. But it’s a resilient category still, particularly given 59% of beer drinkers see it as an affordable treat*****.
Focussing on NoLo beers that offer both lower alcohol content and, typically, lower prices can help to maintain the category’s wider perception as enjoyable and good value, while also appealing to those moderating their alcohol intake.
Diversifying beer’s positioning to be viewed as something to be enjoyed at-home as much as in venues is another opportunity; particularly as more and more venues are forced to close. Doing this through meal pairing or dish-matching recommendations can encourage trading up too.
To explore reformulating recipes or developing new drinks to meet changing consumer needs and cost implications, get in touch today. We are experts in the development and production of flavours for drinks across all categories.
*Office for National Statistics – Cost of living insights, Food 2023