Unquenchable thirst

The fortified & functional beverages market is seeing a clear shift as new players look to create niche categories

Soumik Kar and Vishal Koul

Condoms and coffee, deodorants and drinks. The connection isn’t apparent immediately but the makers of KamaSutra were looking beyond the obvious. In July 2011, JK Ansell joined hands with Café Coffee Day to promote its deodorants range. The deal was simple. CCD would create a special beverage, KS Mojo, aimed at youngsters in the 18-22 age group, a key component of the brand’s target audience.

It worked even better than the company anticipated and the runaway success of the cold mocha prompted the company to look at the category a little more keenly. “It was clear the KS brand had huge potential and we could certainly look at entering new categories. After all, we had started with condoms and already moved into deodorants in 2008,” says Ranju K Mohan, director and business head, JK Ansell. In December 2012, accordingly, KamaSutra launched a new brand extension: KS Energy Drink in two flavours, priced at ₹95 a can.

It’s not only condom manufacturers. There appears to be a raging thirst among entrepreneurs of all types to jump into the beverages market in India. Corporate executives, scions of automotive businesses, contract manufacturers… everybody wants a gulp of this market. And what excites them is not the part of the market dominated by the cola giants or milk marketers.

Rather, they are salivating over a relatively new segment called fortified and functional (FF) soft drinks. Simply put, these are non-alcoholic drinks meant to serve a certain function — provide energy, refreshment etc. — or have a little extra added by way of vitamins or nutrients. “The big opportunity here is the ability to create new segments,” agrees Mohan. “Functional drinks will continue to be created for various kinds of users.”

Of course, it’s a drop in the ocean compared with carbonated soft drinks or CSDs (₹10,000 crore), but it’s growing, driven by changing aspirations and rising disposable incomes. According to Euromonitor, the FF soft drinks market in 2007 was valued at ₹391 crore; just five years later, it had grown nearly 2.5 times to ₹937 crore. And in the next two years, it will grow 15% to touch ₹1,080 crore by 2015. (see: All charged up

All charged up

The fortified functional soft drinks market has trebled since 2007

Which is why in the past five years alone, several first-time players have entered the market with a variety of drinks to titillate everybody’s tastebuds — from energy and sports drinks to ethnic Indian beverages, kiddie treats, mixers and fusion flavours. “As things stand, we will see companies within the functional drinks space doubling their turnover over the next three to four years easily. The base is low and there is a lot of experimentation by consumers. Each of the categories within functional drinks can grow by at least 30%,” predicts Ankur Bisen, vice-president, retail and consumer products, Technopak. What are the players doing to ensure that comes to fruition? 

Standing out

It is past noon on an overcast day in suburban Mumbai. Vinod Gaikwad has reached the city after an eight-hour drive from beyond Pune. Over the next two weeks, he will be travelling across India to meet retailers to spread the word about Notty, a kids’ drink, and Lounge Myx, a non-alcoholic mixer. Gaikwad is general manager of sales and marketing of the Pune-based Greenways Foods & Beverages, part of the Pushpam Group, which launched both these brands over the past year. 

Pushpam Group isn’t really a newcomer to the beverages business; group company Pushpam Foods & Beverages is the contract manufacturer for drinks such as KS Energy, XXX, Restless and Cloud 9. But this is its maiden foray into branded beverages. So, how’s it going? It’s early days yet and the base is small, says Gaikwad. Still, in the past 18 months since its launch, Notty has sold over 120,000 units, while the far-newer Lounge Myx has sold nearly 48,000 units. “The idea right now is to increase visibility,” he explains, counting on the drinks’ unique positioning to help achieve that. “There were very obvious opportunities in both these segments. With Lounge Myx, the consumer can fix a cocktail at home, while Notty has vitamins to boost immunity.”

With no direct competition in either segment, pricing isn’t an issue. At ₹75 for a 250-ml can, the mixer is positioned as a premium product (although it’s still much cheaper than imported mixers, which retail at over ₹200 for a 300-ml can in upmarket stores). (see: A distinct  flavour) But where Notty costs ₹35 for a 250-ml can, a ₹20 tetrapak version is to be launched shortly. “It will be impossible to increase penetration otherwise. My drink needs to be a substitute for junk food,” he says firmly. From 20 cities currently, by December, the juice will be available in 27 cities, helping it increase the number of outlets from 15,000 to 59,000. 

A distinct  flavour

New entrants are creating niche categories within the fortified and functional drinks market

Lounge Myx and Notty are currently at the soft launch stage, and efforts are on to promote both. So far, marketing for Notty has been restricted to images of hit cartoon character Chhota Bheem adorning the cans, which are replicated in posters and danglers at retail outlets. Now, the company is planning celebrity endorsements for both the brands and go the mass media route by end-December. 

A brand ambassador is likely to make a big dent in Notty’s budget for the year. Typically, manufacturing costs are negligible in the beverages business. “The big expenditure goes into promotion, where events and celebrities are used extensively,” confirms Manajit Ghoshal, group CEO, Viiking Ventures, which sells the XXX energy drink brand. XXX was launched in August 2013 with three variants.

The company has signed on porn star Sunny Leone as brand ambassador; so far, her involvement has been restricted to point-of-sale branding and B2B event sponsorships, but a full marketing campaign complete with TVCs is planned for December-January. “This is a high-end category and the opportunity is immense. Per capita consumption of energy drinks is barely 5 ml, compared with, say, Canada, where it is seven cans a year,” he adds. Given that margins can be as high as 70% (although 15% is the norm), investing in brand-building can be a profitable activity. But not everybody is spending big bucks on marketing. 

A question of taste
Rahul Sangoi was near completing his MBA in Australia when a routine visit to the supermarket changed the course of his life. “I was struck by the sheer number of options in the drinks segment — energy drinks, sports drinks, colas, vitamin water and flavoured water,” he recalls. He wondered why India didn’t have a similar spread on offer. Returning to India, Sangoi worked in the family business of distributing and retailing automotive products in Pune for a few years before deciding to act upon his insight.

With brothers Rajiv and Rohan, he formed Silver Ice Beverages in 2007 and spent the next two years on product development. In 2009, the brothers launched Rio, a carbonated beverage in three flavours — wild berry, blueberry peach and mango passion. “We wanted to launch a fusion drink that was a concoction of tropical fruits. As it turned out, we were the first to enter the category,” says Sangoi. 

So far, the brothers have invested close to ₹7.5 crore in the company, mostly sourced from family. Of this, ₹6.5 crore went in setting up a manufacturing plant at Hadapsar, near Pune, which can churn out 1 million bottles and cans a month. It is currently working at 70% capacity utilisation, but Sangoi says the project has already broken even, without revealing current sales figures. A planned capacity expansion in FY15 will up total capacity by 60%. “It is important to have one manufacturing facility. We will adopt the franchisee route once we start getting volumes from other states,” he adds.

Rio went against the prevailing trend for cans and launched its drink in glass bottles to establish a premium look-and-feel for the product. “Our research indicated that status-conscious consumers preferred bottles,” says Sangoi. Accordingly, the price was also set much higher than regular carbonated soft drinks (CSD) — ₹25 for 250 ml, against ₹12 for 200 ml of a cola or orange drink. 

Rio is available at 13,000 outlets across six states (three more planned for this year): all kirana stores and canteens; the firm has consciously decided to stay away from modern trade, since its youthful customers don’t really shop at these stores. In 2011, it launched the drink in cans (330 ml for ₹30) and sales currently are evenly split between the two options. 

Sangoi accepts that the company can’t match the financial muscle of the big CSD players, which is why its marketing isn’t about big-budget advertising. Instead, the company focuses on below-the-line promotions, putting up posters at stores and visiting college canteens for feedback. In fact, after students at a Pune college vetoed the proposed passion fruit flavour, the company went with the suggestion of one student — he had just returned from a holiday in the US and tried acai berry there. “The lesson for us — know your audience and you will get the best feedback,” says Sangoi. 

That’s also why Rio — named for the ultimate party destination, Rio de Janeiro — is going desi, having realised that while Indian consumers are willing to experiment, they are more open and accepting of traditional, familiar flavours. That’s an insight shared by other drink manufacturers as well. 

India on the rocks

Later this month, Rio will launch two flavours chosen to appeal to the Indian palate — kala khatta and guava. With this, the firm will also deepen its penetration in the six states where it is already available, reaching out to customers in the wider, 10-60 age group in tier 2 and tier 3 cities. My Rio, as the new drink is to be called, will be available in cans, making for easier transportation and logistics.

Like Rio, the Gurgaon-based Hector Beverages, too, has launched a line catering to Indian tastes. Paper Boat was soft-launched early this year in 10 cities with flavours such as jaljeera and aamras, priced at ₹25 for 250 ml. “The idea was to revive Indian beverages. We were convinced about the ability to create a new category — an affordable, Indian option,” says Suhas Misra, co-founder and director, Hector Beverages. Later this month, the firm will launch more flavours such as kokum, kala khatta and aam panna

But Paper Boat isn’t Hector’s original product. The company, launched by three former Coca-Cola India executives, made its foray into the functional drinks segment in late 2009 by launching Frissia, a protein drink powder. Available at health clubs and gyms, the product found itself pitted against established players in the health drinks market such as Godrej Sofit. It was soon phased out and in March 2011, Hector launched energy drink Tzinga.

“Tzinga was meant to reach the value-conscious Indian consumer,” explains Neeraj Kakkar, CEO, Hector Beverages. That meant it had to be competitively priced, so the company set up its own manufacturing plant, at Manesar, which can churn out 80 bottles a minute. Set up with an investment of ₹12 crore, the plant currently operates at full capacity in the March-May peak season and at 60% the rest of the year.

More than captive manufacturing, though, what has worked in Tzinga’s favour is its use of doy packs — sealed plastic-and-foil bags that are designed to stand upright. Not only are they cheaper than cans, they also save space since they can lie flat as well. (Incidentally, Paper Boat drinks are also sold in doy packs.) “If Tzinga was offered in a can, it would cost ₹50 instead of ₹25,” says Misra.

A higher price would be an obstacle in reaching out to Tzinga’s target customer group: students. It’s certainly popular among those burning the midnight oil: Hector claims its biggest account is IIT Bombay, where 35% of sales happen during exams. It is not just Mumbai: the company has been consciously reaching out to students pan-India, although about half its sales happen in south India. The brand is available across 40,000 outlets, including college canteens, BPOs, IT companies and — unlike many new players — modern trade. Also unlike other players, Tzinga advertises — starting March 2013, the brand took spots on channels such as EPL soccer, National Geographic, Discovery and MTV; the FY14 ad budget is ₹2.4 crore. It’s also looking at regional channels such as Zonet, which is targeted at the northeast.

How has Hector been able to afford advertising and modern trade margins — given their lack of bargaining power, smaller brands pay higher trade margins (around 25%) compared with the big beverage companies (15-20%, on average)? Two words: private equity. In 2011, the company attracted funding of ₹6 crore from NR Narayana Murthy’s Catamaran Venture Fund, Footprint Ventures and some angel investors. And in May 2013, Sequoia Capital invested ₹27 crore, while another ₹17 crore came from existing investors.

On a high

While Red Bull is the caffeinated

energy drinks market leader,

PepsiCo rules in sports drinks

“We liked their approach to the beverages category, of introducing innovative segments such as Indian ethnic drinks. Tzinga, too, is an affordable energy drink and can grow in this nascent market,” says VT Bharadwaj, managing director, Sequoia Capital. “Historically, too, India has had a specialty juice culture, such as sugarcane juice and coconut water. Now, the big opportunity in India is that functional beverages can address a host of segments simultaneously, such as energy, sports, vitamins and flavoured water.”

It is this potential that has brought ₹1,500-crore Parle Agro back to the CSD market, two decades after its owner Prakash Chauhan, along with brother Ramesh, sold the Thums Up, Limca and Gold Spot brands to Coca-Cola. But not just any CSD — this time Parle Agro has launched a coffee-flavoured fizzy drink, Café Cuba.

The trigger for the launch, says Nadia Chauhan Kurup, the company’s joint managing director and chief marketing officer, is the limited flavour options currently available. “Primarily, there is just cola, lemon and orange. This new category will lead to not just market share for Parle Agro but growth in the carbonated beverage market.” Priced at ₹20 for a 250-ml can and ₹15 for a PET bottle, the drink is targeted at urban markets. It is already available in 10,000 outlets across the top cities, and by February 2014, will be available at 800,000 outlets nation-wide. While Parle Agro has the clout to carve a niche for itself, there are also several challenges facing new players in the FF soft drinks market. 

The aftertaste

With a slew of new brands in the market, albeit in different categories, standing out in the crowd won’t be easy. In energy drinks especially, the market has been defined by Red Bull (see: On a high) and breaking its stranglehold, despite the premium price and positioning, will be a challenge, especially since traditional advertising is beyond the budget for many players. Then, the absence of these brands from modern trade outlets may cost them dearly. “Brand building in FMCG is a big challenge since it depends greatly on distribution, which itself is a complex process,” says Bisen of Technopak.

Clearly, although functional beverages are tasty and serve a healthy purpose too, breaking habits and creating new ones in the beverages market is going to be an uphill task. But, like the others, Hector’s Kakkar is up to the challenge. “This is an early phase for the category, but the opportunity is just too big to ignore,” he sums up.