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Why Ready-to-Drink Tea Offers Compelling Growth Prospects

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Impressive demand

The growing demand for ready-to-drink tea and coffee reflects the need for on-the-go, healthier beverage options. These growth categories in the noncarbonated or still beverage space are helping soda giants Coca-Cola (KO), PepsiCo (PEP), and Dr Pepper Snapple (DPS) offset weakness in carbonated soft drink volumes to an extent. According to Beverage Marketing Corporation, the ready-to-drink coffee category posted the highest volume growth of 10.7% in 2014. The ready-to-drink tea category recorded 3.7% growth in 2014. In contrast, carbonated soft drink volumes fell 1% in 2014.

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Ready-to-drink tea

According to the Tea Association of the U.S.A., Americans consumed over 3.6 billion gallons of tea in 2015. About 85% of all tea consumed was black tea, 14% was green tea, and a very small percentage was oolong, white, or dark tea variants. According to the International Tea Committee, the United States is the world’s third-largest tea importer, trailing Russia and Pakistan.

The ready-to-drink tea category has grown more than 15-fold over the past ten years. It’s estimated to have generated sales of over $5.6 billion in 2015 (Source: Tea Association of the U.S.A.).

The Tea Association estimates that the overall US tea market has grown 4%–5% in 2015. Beverage Marketing Corporation expects total retail tea sales to grow at a compound annual growth rate of 5%–6% over the next five years. The ready-to-drink tea category is considered the key growth driver of the tea industry, representing over half the tea market in sales and growing about 4%–6%. Within the ready-to-drink tea space, more premium teas are growing 5%–7% while generic, low-priced teas are recording little or no growth.

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In fiscal 2015, Coca-Cola reported 4% growth in its ready-to-drink tea category. Coca-Cola’s ready-to-drink tea brand portfolio includes Honest tea, Gold Peak, and Fuze Tea. Coca-Cola constitutes 2.4% of the iShares Russell Top 200 Growth ETF (IWY). Arizona is the leading tea brand in the US ready-to-drink tea market. PepsiCo has partnered with Unilever to market Lipton ready-to-drink iced teas, including the popular Pure Leaf brand. Dr Pepper Snapple’s Snapple tea brand is also popular in the US ready-to-drink tea space. Nestea is another well-known brand in the category.

Arizona is the leading tea brand in the US ready-to-drink tea market. PepsiCo has a partnership with Unilever (UL) to market Lipton ready-to-drink iced teas, including the popular Pure Leaf brand. Dr Pepper Snapple’s Snapple tea brand is also popular in the US ready-to-drink tea space. Nestea is another well-known brand.

We’ll discuss the ready-to-drink coffee category in the next part of this series.

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