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Beverage InView September 2010 News and observations from Q3 2010© 2010 by M/A/R/C® ResearchAll rights reserved. No part of this paper may be reproduced in any form of printing or by any other means, electronic ormechanical, including, but not limited to, photocopying, audiovisual recording and transmission, and portrayal orduplication in any information storage and retrieval system, without permission in writing from M/A/R/C Research.

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General Industry News A recent study found that over 90% of Americans are worried about the long-term environmental effects of their packaged beverage purchases and consumption. (PR Newswire, 8/9/10) A new restaurant industry report states that over 20% of general consumers said they would consider trying a new beverage if their waitperson recommended it, but that number rose to 30% among “heavy beverage users.” The report also states that: 86% of consumers purchased a beverage away from home in the past 30 days. Consumers drink roughly seven different types of drinks per month, on average. The number of consumers who visited a fast-food restaurant in the past month but only bought a beverage is up to 36% from 24% in the same survey from 2008. (Business Wire, 8/11/10) Cott Corporation, the largest private-label soft drink manufacturer in North America, announced that it will purchase Cliffstar Corp., the largest private-label juice maker, in a deal worth $500 million. (Beverage World, 8/15/10) The most frequently cited claims on new non-alcoholic beverages launched in the U.S. for the year ending March 31, 2010, were (in order of frequency): kosher, environmentally-friendly packaging, no additives/preservatives, all natural, low/no/reduced calorie, organic, low/no/reduced allergen, low/no/reduced sugar, premium, and vitamin/mineral fortified. (Beverage Spectrum, 9/2010) The most popular sub-categories of new non-alcoholic beverages launched in the U.S. for the year ending March 31, 2010, were: coffee, juice, beverage mixes, fruit/flavored still drinks, carbonated soft drinks, beverage concentrates, energy drinks, and malt/other hot beverages. (Beverage Spectrum, 9/2010) The most popular flavors for new beverages launched in the United States for the year ending July 31 were (in order): orange, grape, chocolate, vanilla, lemon, berry, cola, fruit/punch, and lemon/lime. (Beverage Industry, 9/1/10) When surveyed about what beverages they would pack in their children’s lunches, 20% of American shoppers said they were probably going to pack bottled water more often than they did last year and 16% said they would likely pack juice more often. Fourteen percent said that they were likely to pack soft drinks less often this year compared to last year. (Beverage Industry, 9/10/10) ©2010 by M/A/R/C® Research ©2009 by M/A/R/C® Research Page 22  2Q09 Page  3Q10

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 The city government for Boston has called together a group of health, education and housing leaders with the task of developing a policy that would reduce the consumption of sugary beverages such as soft drinks and juice cocktails in city-owned buildings. (Associated Press State & Local Wire, 9/20/10) The mayor of San Francisco changed his mind about introducing legislation that would charge retailers a fee on the sale of sugary beverages. He told reporters that he still wanted to find a way to cut back on the amount of sugary beverages sold in the city and would introduce a new plan in a few weeks. (Associated Press State & Local Wire, 9/23/10) Restaurant sales data shows that almost half of the 15 beverage categories tracked showed growth in the second quarter of 2010, after two straight years of declining servings. The beverage categories seeing the most growth were (in order): specialty coffee, frozen soft drinks, iced tea, bottled water, non- carbonated soft drinks, milk and traditional coffee. (Nation’s Restaurant News, 9/20/10) ©2010 by M/A/R/C® Research ©2009 by M/A/R/C® Research Page 33  2Q09 Page  3Q10

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Carbonated Soft Drinks Safeway rebranded its private-label carbonated soft drink line to “Refreshe,” which is also the brand of its private-label bottled water. (Supermarket News, 7/21/10) Coca-Cola announced a contest in which it would give away one million points in its My Coke Rewards Program during August and September. Daily instant win awards would be given out to 70,000 My Coke Rewards members, with one member per day winning a 1,000 point shopping spree and one grand prize winner per week winning 10,000 points. (Business Wire, 8/4/10) Sales of carbonated beverages at supermarkets, drug stores and mass merchants dropped 1.3% to $13.6 billion for the year ending June 13, 2010. (Supermarket News, 8/16/10)Milk A new report from the USDA and the U.S. Department of Health & Human Services’ joint Dietary Guidelines Advisory Committee recommends that most Americans should consume three or more servings of low-fat or fat-free milk or dairy products each day. Currently, Americans only get 52% of the recommended amounts of dairy products per day. (Dairy Foods, 8/1/10) A recent study (funded by the Milk Processor Education Program) found that when schools stopped offering chocolate or other flavored milk as a beverage option, overall consumption of milk by students dropped 35% on average. (Dairy Foods, 9/1/10) ©2010 by M/A/R/C® Research ©2009 by M/A/R/C® Research Page 44  2Q09 Page  3Q10

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Beer/Wine/Liquor Many cities and counties are repealing alcohol sales bans. In the past eight years, 14 states have overturned bans on selling alcohol on Sundays and multiple cities and counties across the United States have had voter referendums to allow beer and wine to be sold in grocery stores. Reasons for the switch from “dry” to “wet” include the recession – which has made local governments desperate for new sources of tax revenue – and the growth of high-end grocery stores and warehouse club stores that won’t open stores where they can’t sell beer and wine. (USA Today, 7/1/10) Restaurant chain P.F. Chang’s introduced its own handcrafted wine called “Vineyard 518.” The chain created the syrah blend and sauvignon blanc with the help of Wattle Creek Winery. The wines are delivered to each restaurant location in 10-liter containers that are recyclable and able to keep the wine fresh for almost four weeks after opening. (Cheers, 7/1/10) Smirnoff Vodka launched two new flavors: Mango and Peach. In addition to the new flavors, the brand has redesigned its packaging to better “align with the individualism of the brand.” (PR Newswire, 7/8/10) Senator Charles Schumer of New York wrote a letter to the Federal Trade Commission asking that it investigate the sales and marketing of alcoholic energy drinks like Four Loko because they appear to be marketed to underage drinkers. In his letter, Sen. Schumer noted that the cans are designed to look like regular, non-alcoholic energy drinks and only disclose their alcoholic content in very small print. Large brewers like Anheuser-Busch and MillerCoors stopped selling caffeinated alcoholic beverages in 2008 after receiving pressure from state and federal regulators. The FDA had sent letters out to over 24 manufacturers in 2009 to notify them that the FDA had never approved adding caffeine to alcoholic beverages and that it was going to start studying the combination to determine if it was safe. (Associated Press State and Local Wire, 7/11/10) Starbucks is testing a new Starbucks-branded store format that offers beer and wine in addition to its normal coffee drinks. The beer and wine sales are an attempt to draw more afternoon and evening store traffic. The company has been testing beer and wine sales at two non-Starbucks branded locations in Seattle. (Nation’s Restaurant News, 7/12/10) Chambord Liqueur introduced its first-ever line extension with Chambord Flavored Vodka. The brand also updated its packaging for the first time in nearly 30 years so that the brand name is more apparent and easily read, plus the neck and cap have been redesigned to make pouring easier and cleaner. (Business Wire, 7/14/10) ©2010 by M/A/R/C® Research ©2009 by M/A/R/C® Research Page 55  2Q09 Page  3Q10

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 Industry research shows that alcohol manufacturers are benefitting from the economic downturn as more consumers are drinking at home instead of in bars or restaurants. The off- premise alcoholic beverage market has grown over 20% since 2004. At-home drinkers aren’t spending as much on their beverages though, with 28% saying that they’ve traded down to cheaper brands in the last year to save money. (PR Newswire, 7/15/10) A survey of U.S. consumers who eat dinner at home found that 29% preferred Merlot for their red wine and 28% preferred Chardonnay for their white wine when having wine with their meals at home. (PR Newswire, 7/20/10) Sales of spirits rose 1.4% in 2009, with lower-priced spirits seeing a 5.5% increase in sales and super- premium spirits seeing a 5.1% decline as consumers traded down. The spirits category also saw a 2.2% increase in off-premise sales. Value-priced vodka saw its volume jump 10.7%, rum’s volume grew 1.2%, tequila was up 5.2% and Irish whiskey grew 10.2%. (Beverage Industry, 8/1/10) Wine sales in the United States rose 2% in volume during 2009, but dropped 4% in value as consumers continued to trade down. (Beverage Industry, 8/1/10) Alcoholic beverage makers are having a difficult time using social media to connect with consumers. The marketers have required visitors to their websites to provide age verification before they can fully enter the site, but that is more difficult to control with Twitter, which doesn’t require users to enter a birth date. The FTC is going to publish a report in early 2011 that reveals how many times its researchers have found alcohol-brand related fan pages featuring photos of drunk frat boys or messages/tweets about binge drinking. (Adweek, 8/9/10) A new study released by the Center for Alcohol Marketing and Youth found that child/teen exposure to alcohol advertising in magazines dropped by 48% from 2001 to 2008. In magazines with under-21 readership levels over 30%, there is now virtually no alcohol advertising. (PR Newswire, 8/12/10) The Brewers Association reported that sales of beer produced by small and independent craft brewers rose 12% in the first half of 2010 in terms of dollar sales and 9% in volume. This compares to a decline of 2.7% in volume sales for the beer industry in general. (Business Wire, 8/2/10) Sales of beer, ale and alcoholic cider at supermarkets, drug stores and mass merchants rose slightly at 1.3% to reach $9.4 billion for the year ending June 13, 2010. (Supermarket News, 8/16/10) Dollar General announced that it would start selling beer and wine in some of its stores located in the southeastern part of the country. (Associated Press State & Local Wire, 8/19/10) ©2010 by M/A/R/C® Research ©2009 by M/A/R/C® Research Page 66  2Q09 Page  3Q10

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 MillerCoors launched a small independent craft/import beer company called Tenth and Blake Beer Co. The new company will manage beer brands such as Blue Moon, Leinenkugel’s, Colorado Native, Peroni Nastro Azzurro, PilsnerUrquell and Grolsch. (Beverage Industry, 9/1/10) Industry data shows that the total volume of beer sold in the U.S. during 2009 fell 2.1% from 2008. Domestic beer sales volume dropped 1.4%, while import beers saw their sales volume decline 6.9%. (Beverage Dynamics, 9/2010) Sears is working with Illinois state and local liquor commissions to try to get permission for customers of its MyGofer online shopping service to order alcoholic beverages. MyGofer recently started a home delivery service for products ranging from electronics to groceries, but most items are picked up at participating Kmart and Sears stores. Currently, any online orders that include alcoholic beverages can only be picked up at Kmart stores that have a liquor license. Sears hopes to work through any legal issues so that MyGofer can better compete with Peapod and other online grocery retailers. (Crain’s Chicago Business, 9/20/10) Anheuser-Busch is turning to free samples in hopes of boosting sales of Budweiser. The company will hand out 500,000 samples in trendy bars and restaurants through October and host the “Budweiser National Happy Hour” on September 29. The company is also going to partner with Facebook to offer people turning age 22 or older a free Budweiser on their birthday. (USA Today, 9/22/10) The website TastingRoom.com announced that it is expanding its sales to consumers in Alaska, Nevada, New Mexico, Wyoming, Virginia, Missouri, Nebraska, Louisiana, North Dakota, New Hampshire, the District of Columbia, New York, Illinois, and Florida. The company had previously limited its unique wine sampling service to consumers in California. TastingRoom.com sells six-pack wine sampling kits featuring 50mL bottles of wines from over 13 California wineries. (Marketwire, 9/14/10) ©2010 by M/A/R/C® Research ©2009 by M/A/R/C® Research Page 77  2Q09 Page  3Q10

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Coffee/Tea Sales of coffee at supermarkets, drug stores and mass merchants rose 3.2% to $3.7 billion for the year ending June 13, 2010. The single cup coffee segment saw the largest increase, up 102% from the same period in 2009, while sales of coffee additives/flavorings dropped 14.1%. (Supermarket News, 8/16/10) Sales of refrigerated teas and coffees at supermarkets, drug stores and mass merchants rose 7.2% to $353.4 million for the year ending June 13, 2010. The refrigerated tea segment saw the largest increase, up 6.6% from the same period in 2009. (Supermarket News, 8/16/10) Retailers scurried to find new sources for kombucha tea after various agencies began questioning the alcoholic content of the tea. Many healthy living enthusiasts like the tea, claiming that it enhances their immune systems and help detox their bodies. The tea’s natural fermentation process continues even after bottling, however, so that a bottle close to the end of its sell-by date can have up to 3% alcohol even though the product is marketed as non-alcoholic. (Supermarket News, 8/2/10) Starbucks announced that sales of its new VIA instant coffee reached the $100 million mark globally after just 10 months on the market. (Business Wire, 8/3/10) Private-label canned/bottled teas saw their sales soar 32.3% for the year ending July 11, 2010. Private- label refrigerated teas have a 19.5% market share within their category. (Beverage Industry 9/10/10) A survey of American workers found that those who say they need coffee the most in order to be productive at work are (in order): nurses, doctors, hotel employees, designers/architects, financial/ insurance sales representatives, food preparers, engineers, teachers, marketing/PR professionals, scientists, machine operators and government workers. Overall, almost one-third of workers said they are less productive if they aren’t able to drink coffee while at work. (PR Newswire, 9/27/10) A different survey found that almost 60% of coffee drinkers said they drink two to three cups of coffee per day, with 90% of coffee drinkers having it in the morning and 72% drinking it at work. Thirty percent of coffee drinkers said that they would rather not have to talk with their boss before having a cup of coffee in the morning. (PR Newswire, 9/29/10) ©2010 by M/A/R/C® Research ©2009 by M/A/R/C® Research Page 88  2Q09 Page  3Q10

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Functional Beverages (Sports/Energy/Nutritional Drinks) The functional beverage category saw sales drop in 2009 due to the economic recession, a drop in discretionary income and low levels of consumer confidence, and future sales trends for the category do not look good. An industry research firm projects that sales will only rise between 1.2% and 1.6% for the five years between 2010 and 2014. The functional beverage segment is also suffering from an increasing level of distrust by consumers as the FDA starts to investigate the truthfulness of claims by beverage makers. (Nutraceuticals World, 7/1/10) The latest trend in functional beverages is coconut water. Both Coca-Cola and PepsiCo have started looking into coconut water beverages as some people are referring to it as “nature’s sports drink.” (Nutraceuticals World, 7/1/10) Relaxation drink manufacturers are running into problems with the use of melatonin in their drinks, as the FDA has not given its approval for its use in foods or beverages. One company ended up changing the product labels to say the drink was a dietary supplement just so that it could continue including melatonin. (Beverage Industry, 7/9/10) The relaxation drink category is small – with just 33 SKUs launched in 2010, 32 in 2009 and 21 in 2008 – but it is seeing some momentum with brands like “drank” selling 7 million cans from the spring of 2008 to fall of 2009. Industry experts feel that the category will face tough competition from other, better- known relaxation drinks like milk, hot chocolate and alcohol. Plus, many relaxation drinks are being targeted to urban youth, but the people actually buying it are older adults looking for a way to fall asleep. (Convenience Store News, 7/5/10) A new functional beverage claim is “heart healthy,” with the number of beverages claiming heart health benefits rising 36% from 2008 to 2009 globally. The most popular additives in the U.S. are vitamin E and magnesium, followed by omega-3 fatty acids, grape seed extract, phytosterols, soy protein, niacin, flaxseed, DHA (docosahexaenoic acid), and coenzyme Q10. Most (34.8%) new “heart healthy” drinks are dairy products, followed by tea (33.9%) and dairy alternatives (25.9%). (Beverage Industry, 8/1/10) PepsiCo is seeing increased sales for its Gatorade line. Its sales volumes were up 10% during the second quarter of 2010 and up 3% across the first half of the year, compared to a 13% decline in sales for 2009. After some industry experts said that the brand had strayed away from its core athlete audience, PepsiCo launched a new series of products aimed at athletes to drink before and after their workouts, plus the new G Series Pro aimed at “serious” athletes. (Wall Street Journal, 7/14/10) ©2010 by M/A/R/C® Research ©2009 by M/A/R/C® Research Page 99  2Q09 Page  3Q10

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 Energy drink manufacturers have hit a plateau in their quest for market penetration. According to a new industry report, almost three-quarters of Americans said they do not drink energy drinks or energy shots and among those, 69% said they have no interest in ever drinking them. These non-users said they don’t drink the energy beverages/shots because of high price (48%), high amounts of caffeine (43%) and the basic idea that energy drinks/shots “just aren’t good for you” (43%). (PR Newswire, 8/11/10) PepsiCo has created a “Mission Control” room at its Gatorade headquarters in Chicago where a team of employees watches for references to Gatorade on social media sites like Facebook and Twitter. (Wall Street Journal, 9/13/10) Coca-Cola lost its attempt to dismiss a lawsuit brought by the Center for Science in the Public Interest against the health benefit claims for Coca-Cola’s Vitaminwater brand. The federal judge hearing the case decided that both the Vitaminwater beverage names and statements on the labels “have the potential to reinforce a consumer’s mistaken belief that the product is comprised only of vitamins and water.” (Beverage World, 8/15/10) ©2010 by M/A/R/C® Research ©2009 by M/A/R/C® Research Page 10  3Q10 Page 10  2Q09

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Fruit Juice/Drinks Juice sales in the U.S. have been flat recently, mostly due to rising orange juice prices, which caused consumers to either stop buying juice at all or switch to lower-priced juice drinks. (Beverage Industry, 7/9/10) The latest campaign for a line extension to V-8 Fusion fruit and vegetable juice drink is solely through Facebook. Facebook members who “friend” the V-8 V-Fusion page can enter in their mailing address and receive a free sample of the new V-8 V-Fusion + Tea drink. During the first two weeks of the campaign, V-8 gave away 1,000 samples a week. The number of samples still available was posted on the Facebook page, so viewers could see how many were left. A few people left complaints on the site after the samples for the week ran out, but more people posted messages saying they were going to come back the next week and try to get a sample then. (Promo, 7/22/10) A recent survey found that over 20% of consumers who don’t drink fruit juice drinks do not because of the high-fructose corn syrup in the drinks. Over 30% of juice drinkers specifically look for juice products that do not have HFCS as an ingredient. Even natural sugar content is worrisome for consumers, with mothers sometimes diluting 100% natural juice with water. Industry experts think that “watered down” juice products may be a growth segment, positioned as enhanced water. (Drug Store News, 7/19/10) Sales of bottled juice at supermarkets, drug stores and mass merchants dropped 3.1% to $3.8 billion for the year ending June 13, 2010. The bottled lemonade segment saw the largest increase, up 7.9% from the same period in 2009, while sales of specialty juices dropped 10.1%. (Supermarket News, 8/16/10) Sales of refrigerated juices at supermarkets, drug stores and mass merchants dropped 0.4% to $4.3 billion for the year ending June 13, 2010. The refrigerated lemonade segment saw the largest increase, up 22.3% from the same period in 2009, while sales of specialty refrigerated juices like cranberry juice dropped 42.7%. (Supermarket News, 8/16/10) Minute Maid redesigned its packaging for the larger 89-ounce and 128-ounce jugs, switching to a clear PET bottle. The new bottle is more ergonomic, with a larger handle and lower center of gravity, plus the juice can be seen through the clear plastic. (Food & Beverage Packaging, 8/1/10) The Federal Trade Commission filed complaints against the makers of POM Wonderful Pomegranate Juice, arguing that the company is making “false and deceptive claims” about pomegranate juice’s disease prevention and treatment properties. The FTC complaint also requests that any future health claims about pomegranate-based products must be approved by the FDA. (Associated Press State & Local Wire, 9/27/10) ©2010 by M/A/R/C® Research ©2009 by M/A/R/C® Research Page 11  3Q10 Page 11  2Q09

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Bottled Water (Plain and Enhanced) Sales of enhanced water dropped almost 7% in 2009, with one possible reason being the increase in cheap powdered mix products that allow consumers to “doctor” a plain bottle of water themselves. (Nutraceuticals World, 7/1/10) A recent survey found that over 70 cities had considered reducing the amount of bottled water they purchase for use at city facilities or stopping the purchases altogether as a way to save money and be more environmentally friendly. Another 44 cities already have bottled water bans or have been encouraging city government workers to use tap water instead. (Atlanta Journal-Constitution, 7/24/10) Sales of bottled water at supermarkets, drug stores and mass merchants dropped 2.8% to $4.8 billion for the year ending June 13, 2010. The sparkling mineral water segment saw the largest increase, up 6.1% from the same period in 2009, while sales of jug/bulk still water dropped 5.6%. (Supermarket News, 8/16/10) ©2010 by M/A/R/C® Research ©2009 by M/A/R/C® Research Page 12  3Q10 Page 12  2Q09

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