Along with the growing obesity problem, consumers’ awareness of healthier and sugar-free continues to rise.
From the experience of developed countries, sugar-free is a trend in the development of the beverage industry:
- Japan: the proportion of sugar-free in the soft drink market increased from 8% in 1988 to 49% (all including bottled water).
- Australia: during the 20 years from 1997-2018, the proportion of sugar-free sales in all-important beverage categories increased significantly.
- UK: during the period from 2011-2019, the proportion of carbonated drinks was included. The share of sugar-free in major categories has increased.
In addition, due to the nationwide tax on soft drink sugar in the UK in recent years, the sugar content of soft drinks has rapidly decreased by 28.1% between March 2016 and March 2020.
01.
Sugar-free windfall has arrived.
Presently, sugar-free soft drinks in China are emerging, and the sugar-free ratio is still low (excluding bottled water). There is still a big gap compared with developed countries. Based on the product attributes and the experience of sugar-free development of soft drinks in Australia, we believe that carbonic acid and tea are the two main categories for sugar-free development of beverages. Compared with other types, the development of sugar-free carbonated drinks and tea can bring new development opportunities.
Sources: ITOCHU, MDPI, British Soft Drinks Association, CIMB Research.
Note:
1) Australia and the UK are sales share, Japan is production share.
2) The sugar-free share in the UK includes the low-sugar ratio, and the UK diluted drinks are “dilutables”, including pumpkin and sugar water (Squashes &; Syrups) and other drinks.
The domestic sugar-free trend is rising, and companies have laid out a sugar-free track. Considering the international movement of sugar-free, major beverage companies have laid out this track early. Still, the market’s early products were not sought after due to their early launch and bitter taste. With the continuous education of consumers and the improvement of consumers’ health and weight loss awareness, sugar-free domestic beverages gradually emerged. Beverage companies have steadily increased the layout of sugar-free tea and sugar-free carbonate track, including traditional beverage companies, such as Nongfu Mountain Spring, Unity, Master Kong, etc., and new entrants, such as Yuanqi Forest, Xi Tea, Yili, Qingdao Beer, etc.
Chart: Major sugar-free products launch time 2
Source: Companies’ official websites, Baidu images, CICC Research
The wind has arrived, and sugar-free beverages have significantly picked up speed in recent years. Although the Coke Zero/Pepsi Zero series entered China as early as 2008 /2009, the sales share of sugar-free cola-based carbonated beverages was relatively stable from 2009-2017 and only started to rise significantly in 2018. In terms of sugar-free tea, under the continuous efforts of Nongfu Quan to educate consumers in the field of sugar-free tea, sales of its sugar-free tea product Oriental Leaf have been growing at a relatively high rate since 2015 maintaining double-digit growth in the past five years.
Figure: Percentage of sales volume (value) of sugar-free cola-based carbonated beverages in China (2005-2019) -3
Source: Euromonitor, Centrica Research
Source: Euromonitor, Centrica Research 4
Chart: Oriental Leaf Retail Sales and YoY (2011-2019)
02.
Development opportunities for sugar-free carbonated beverages
There is still more room for growth for sugar-free carbonated beverages in China. Compared with the share of sales of sugar-free cola-based carbonated drinks in other countries/regions (US/Japan/Western Europe/UK average 46.8%), the percentage is still low in China in 2019, only 3.4%. In addition, over the past 15 years, the sales volume share of sugar-free cola-based carbonated beverages in other countries/regions has continued to increase. The development trend of sugar-free is apparent. Comparing the sugar-free movement in the UK, Australia and Japan, we expect that sugar-free will bring further development opportunities for carbonated beverages in China.
Figure: Share of sales volume of sugar-free cola-based carbonated beverages by country/region in 2019 – 5
Source: Euromonitor, Centrica Research
Chart: Historical sales volume of sugar-free cola-based carbonated beverages by country/region -6
Source: Euromonitor, Centrica Research
Sugar-free has become a key growth driver for carbonated beverage companies. For example, Coca-Cola/PepsiCo retail sales have both achieved positive growth in the past few years. Pepsi’s revenue growth rate is more evident on the reporting side, with double-digit growth in 2018/2019 and high single-digit growth (8%) despite the impact of the 1H20 epidemic. Sugar-free products are considered one of the primary growth drivers. According to China Food, its sugar-free products have achieved double-digit growth in the past few years, outpacing the trend under the impact of the 1H20 epidemic by 40-50% year-on-year. Considering that the per capita consumption of carbonated beverages in China is still much smaller than that of other developed countries, we believe that carbonated beverages are expected to usher in a new growth point due to the smooth progress of sugar-free products.
Chart: Coca-Cola retail sales and year-on-year – 7
Source: Euromonitor, CICC Research
Chart: Pepsi Retail Sales and YoY 8
Source: Euromonitor, CIMB Research
03.
Growth opportunities for unsweetened tea
Sugar-free tea beverages are booming. Sugar-free tea beverage sales have seen strong growth since 2017, driven by the continued rise in consumer preference for sugar-free products. Sugar-free tea beverages accounted for 5.2% of the overall tea beverage market in 2019, compared to 1.5% in 2014. sugar-free tea beverage retail sales grew at a CAGR of 32.6% from 2014-2019, significantly higher than the growth rate of sugar-containing The growth rate of tea beverages is considerably higher (3%).
Figure: China tea beverage market consumption upgrade trend 9
Source: Frost & Sullivan, CIMB Research
There is still more room to improve the penetration rate of sugar-free tea. According to the MDPI paper, the share of sugar-free tea sales in Australia in 2018 was 44.4%; according to the Japan Soft Drinks Association and our calculations, we believe that the share of sugar-free tea in Japan is even higher at 83%. In contrast, China’s unsweetened tea sales share in 2019 was 5.2%. Considering the higher ASP of unsweetened tea, the sales share is expected to be even lower. Compared with Japan and Australia, we believe that there is ample room for future growth of sugar-free tea in China, but whether it can be raised to Japan or Australia depends on developing health awareness and a further increase in per capita income level.
Chart: Share of sugar-free tea in China vs. other countries (2019) 10
Source: MDPI, Japan Soft Drink Association, CIMB Research.
Note
1) Australia and Japan are sales volume/production shares, with 2018 data for Australia.
2) Japan data are our calculations based on unsweetened tea accounting for 25% of soft drinks in 2012 and tea drinks accounting for 30% of soft drinks in 2018
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