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'Wriggle room' for trendy coconut water despite rising nut prices – Mintel

By Ben Bouckley+

08-Nov-2013

90% of the world's coconut needs are met by Asia-Pacific, but the majority of the trees are ageing, planted after WW2
90% of the world's coconut needs are met by Asia-Pacific, but the majority of the trees are ageing, planted after WW2

Mintel analyst Jonny Forsyth believes that trendy coconut water brands – Vita Coco, Zico, O.N.E etc. – have quite a lot of cost management ‘wriggle room’ due to their high margins, despite fears of a global coconut shortage.

The UN Food and Agriculture Organization (FAO) warned on October 30 that the world faces a potential shortage of coconuts and by-products due to ageing trees in Asia Pacific, which fulfils 90% of global needs.

Clearly, any shortage could push prices up and squeeze the cost base of coconut water brands; 15 countries from Asia and the Pacific met in Bangkok at the end of last month to co-ordinate a solution to the problem.

But Forsyth, who is global drinks analyst at Mintel, doesn’t think this will hurt the major brands – these include Vita Coco (Madonna is an investor, Rihanna fronted an advertising campaign) Zico and O.N.E – at least in the short term.

“They’re making really high margins and buy the coconuts for virtually nothing, and the farmers aren’t paid very much at all,” Forsyth told BeverageDaily.com.

“It’s expensive in terms of distribution – shipping coconuts from The Philippines or wherever. But I think these brands still have quite a lot of wriggle room,” he added.

‘I do think taste is an issue’

Nonetheless, Forsyth said he wondered whether a consolidation wave might sweep the sector if coconut price increases persisted, since many smaller brands were still active in the category, in order to win economies of scale.

“At the moment though, many brands are simply looking for new sources of supply. Take O.N.E, which stopped sourcing coconuts from Brazil and now buys them from Thailand instead,” he added.

Forsyth still sees massive potential in coconut water. In May 2013 Mintel said that new product introductions were up 540% from 2008-2012, with North America (35% of new launches), Europe (34%) and Asia Pacific 14% all prominent.

But Mintel’s analyst said he thought coconut water had much greater mainstream appeal – provided consumers were educated about the drink’s natural benefits – although he identified taste as a one barrier.

“I do think taste is an issue, because some people, frankly, think coconut water is disgusting. But that’s not necessarily a problem as blends can simply be made a bit more palatable,” Forsyth said.

“The advantage it does have – and consumers are quick to grasp this without much marketing – is that it’s a natural low-calorie source of vitamins and electrolytes, so it has huge potential. But that’s not to say there isn’t a risk.”

Risk of springing Glacéau Vitaminwater trap?

Citing the backlash against Coke’s Glacéau Vitamin brand in the US, Forsyth warned that coconut water brands risked falling foul of similar allegations, in some quarters, that it had pushed labeling and marketing claims too far.

“People don’t doubt coconut water’s core benefits, but there’s still a question mark in respect to whether these brands – after processing stages – stand the scrutiny of rigorous testing and science,” Forsyth said.

“At such a high price point for the drinks this all needs to be pretty water tight,” he added.

Coke’s Glacéau and Glacéau Zero brands were the “darling of the soft drinks industry” six months ago, but had since suffered significant sales falls, Forsyth said.

“It’s hard to put your finger on precisely why, but it seems like it’s just the drip, drip effect of lawsuits and also big discounting,” he said, where the latter had undercut brand equity.

Major markets for coconut water include Brazil, US, UK and Germany, Forsyth said.

In Europe the beverage was more of a lifestyle proposition, he added, while in the US it fitted into a much more advanced sports drinks category as a low calorie, natural offering.

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