Beverage Innovation: More Healthy Gulps
I’ve been intrigued by recent big acquisitions of non-alcoholic beverage brands, along with new brands emerging. This post is a follow up to my series on analyzing the aisles of grocery stores.
My first post focuses on the ice cream market: new healthy alternatives, the response of conglomerates, and my predictions for future innovation.
This second post in the series focuses on non-alcoholic beverages: acquisitions in the space, growth opportunities for 4 verticals (water, coffee, tea, and smoothies), and specific expansion strategies.
Here are highlights of some of the biggest acquisitions by price:
In 2007, Coca Cola acquired Glaceau, the maker of Vitaminwater, for $4.1 billion! Glaceau was founded 11 years earlier, and Vitaminwater launched 7 years earlier.
Last year, Dr Pepper Snapple Group acquired Bai Brands, which had launched 8 years prior. The $1.7 billion price was 4x net sales, and 21.5x Ebitda ($79 million)!
Blue Bottle was founded in 2002. Last year, Nestlé acquired a 68% stake in the company for up to $500 million, valuing the company at over $700 million.
To have a better understanding of key players in the non-alcoholic beverage & food space, here’s a list of some of the biggest conglomerates by market cap:
And here’s a list of market caps for alcohol companies for a comparison:
Google searches of “sparkling water” have been steadily increasing since 2012.
Sales of sparkling water in the U.S. are expected to double from 2015 to 2021.
Here’s the marketshare breakdown by brand:
The above data is based on annual sales data ending in August 2017, amounting to about $483 million.
Of the above brands, LaCroix has particularly developed a cult-like following. They skyrocketed 3.5x in 5 years: from $65 million in sales in 2010 to $226 million in 2015. During that time, shares of parent company National Beverage Corp skyrocketed 300% to $57 a share.
I’ve identified a 7 part strategy to LaCroix’s success.
People are consciously trying to eat healthier. In 1988, the average person drank less than 4 gallons of bottled water per year, and by 2015 people increased their bottled water consumption by almost 10x.
Additionally, traditional soda sales have decreased over 25% over the past 20 years. Consumers are more conscious about nutritional facts, and are opting for healthier options.
2. Branding and Packaging
While LaCroix was founded in 1981, it was acquired in 2002 by the National Beverage Corporation. Re-branding was one of the first tasks post acquisition.
Most water companies focus on a clean image with transparent bottles and plain typography. Instead of following the norm, LaCroix was marketed as an alternative to soda.
The new LaCroix cans have a retro style that resemble water cups many Americans grew up drinking from.
3. Consumer targeting
National Beverage Corp wanted to deeply infiltrate a market segment. At the time, men were increasingly consuming energy drinks. Not wanting to go head-to-head with Red Bull and Monster, they focused on marketing La Croix to women.
But when LaCroix reached the shelves of grocery stores, men became attracted to the product as well.
4. Harnessing the new distribution channels
Most millennials aren’t fans of traditional advertising. Their preferred medium is social media.
LaCroix paid popular bloggers and fitness icons to profess their love of the drink, and post photos drinking the sparkling water on social media.
5. New flavors
10 years ago LaCroix had 6 different flavors. Now there are 21 flavors.
6. Retail Strategy
Retail locations make massive in-store displays. Additionally, the color blocks really make the product stand out.
Another tactic LaCroix uses is creating a sense of scarcity. Only a selection of random flavors are available at each retail location, so many customers purchase their favorite flavors in bulk.
As with many DTC brands, press is a huge opportunity for growth.
- New York Times Magazine love letter
- BuzzFeed’s “21 Things Everyone Obsessed With LaCroix Knows To Be True.”
A unique aspect for growth for LaCroix is Hollywood.
Beginning in 2014, LA writers started to get hooked on the drink.
- Joe Mande, Parks and Rec writer, so consistently promoted LaCroix in 2013 and 2014, that he begged to be made the official spokesperson. The brand decided no and sent him a cease-and-desist.
- The CW’s Vampire Diaries tweeted:
- Stephen Falk, creator of FX comedy You’re the Worst, has discussed in interviews the negative impact of having traditional sugary sodas throughout the day, so he instead opts for LaCroix:
“ I even bought a little fridge on Amazon and put it in the writers’ room, and then our PA would stock it every day with LaCroix. I love a good actual diet soda, but LaCroix is a nice fake thing to get you through the day.” (Interview)
LaCroix’s growth strategy has helped it become the 4th largest soda maker in North America.
The global market for coconut water in 2016 was $2.2 billion, and it is expected to reach $8.3 billion by 2023.
There is excitement for coconut water because consumers are drinking less carbonated soft drinks, and instead are looking for healthier alternatives.
Coconut water meets the theme of wellness, as it is filled with components for hydration: electrolytes, calcium, magnesium, sodium, phosphorous, and reportedly more potassium than a banana.
More companies have been trying to capitalize on the market trend. The number of coconut water brands increased by over 5x in 5 years (ending in 2012).
Coconut water is a unique business opportunity because it can be had at home or on the go, as it’s also classified as a “grab-and-go” beverage. It can be sold at a yoga studio, at a natural foods store, and at a major supermarket chain.
Other new beverage options include Pom Wonderful (a pure pomegranate drink), but has a limited scale because of its intense flavor. Another newly popular beverage is soy milk, which has developed into a $1 billion category. But this category is limited to home.
The category leader in the space is Vita Coco. It launched in 2004, and 8 years later owned 60% of the U.S. coconut water industry.
Here are select sales metrics:
Celebrity endorsements have positively impacted Vita Coco’s growth. Rihanna is an official spokesperson for the brand, and celebrity investors include: Demi Moore, Matthew McConaughey and Madonna. Apparently, after Madonna’s $1.5 million investment, Vita Coco sales spiked 168%.
Besides loving the product, these celebrities likely invested with the goal of making a similar ROI as another celebrity. Rapper 50 Cent reportedly made up to $100 million after taxes when Coca-Cola acquired Vitamin Water maker Glaceau in 2007 for $4.1 billion. (It is unclear whether 50 Cent invested capital, or took a 10% stake for being the spokesperson.)
Last May it was rumored that PepsiCo bid less than $1 billion to acquire All Market, the parent company of Vita Coco. But there has been no public follow up to the potential deal.
The second largest coconut water brand in the U.S. is Zico. In 2007 they had $100,000 in sales, and reached $87 million by 2013. Coca-Cola acquired a minority stake in 2009, a majority stake in 2012, and acquired the rest of the company in late 2013.
The founders of Zico decided to focus their marketing on targeted groups. First, they focused on marketing to people who practice yoga, and particularly bikram or hot yoga, where people tend to sweat a lot. They found that this group of people tends to be health conscious, and doesn’t like the artificial color additives of most sport drinks.
Second, they targeted endurance athletes who are conscious of hydration, nutrition, and love trying new food/drinks to give them a competitive edge.
Basketball player Kevin Garnett (previously of the Minnesota Timberwolves, Boston Celtics, and the Brooklyn Nets) signed an endorsement deal with Zico. Also, reportedly several NFL teams purchase Zico for players.
Third, they marketed to non-athlete celebrities. One aspect of positioning is that coconut water is apparently an effective remedy for a hangover.
The market value of instant coffee was just over $28 billion in 2016, and it is expected to increase by about 50% to $42.5 billion by 2025.
Demand is driven by consumers in several areas:
- Fast growing economies (such as China, India, and the Middle East)
- Regions with low coffee consumption
- Regions that typically drink tea, as the younger population is shifting to coffee
The demand for instant coffee in the U.S. has slower growth compared to other nations, because Americans place a high value on quality — and no brand universally satisfies the high bar.
But now there’s Sudden Coffee. The brand uses specialty grade coffee beans from Equator Coffee, and brews coffee with a new method (instead of brewing at a high temperature, which turns the coffee to pulp). Sudden Coffee freeze dries in small batches to preserve the aromatic molecules, and packages the coffee in single serve tubs with a 6 month shelf life (vs. the several weeks shelf life for large jars).
Instant coffee especially has a big market opportunity on a global scale. For example, in the Middle East, coffee is preferred over alcohol in social settings.
Google searches of “cold brew” have steadily increased over the past decade, with particular big spikes the past 5 summers. Every year, searches of “cold brew” begin to increase in March, reach a peak in July, and November — February are at an annual low.
Retail sales of cold brew coffee grew 460% from 2015 to 2017. The vertical is expected to have $38.1 million in sales in the U.S. this year.
On a global level, the market was valued at $321 million in 2017, and is expected to grow over 27% to $1.37 billion by 2023.
Last year Nestlé USA acquired Chameleon Cold-Brew coffee. It was founded 7 years prior, and became the #1 organic cold brew in the U.S. While the acquisition price is undisclosed, here are some public stats:
- > $16 million sales for concentrate and Ready To Drink (RTD) sales within supermarket, drug, club and convenience channels for the year ending in September 2017.
- 4 million bottles sold in 2016
Nestlé’s announcement of acquiring Chameleon Cold-Brew was 2 months after announcing their majority stake in Blue Bottle.
Maybe the new coffee is cold, but overall coffee is hot.
Ready-to-drink tea accounted for 67% of the tea market in 2016, according to Statista. Specifically in 2015, the market share reached $5.56 billion.
The market for iced tea reached 37 billion liters in 2017, which is a 40% increase from 2011. Over the next 4 years it is predicted to grow an additional 22% to over 45 billion liters.
Specifically in dollars — market sales in the U.S. were about $200 million in 1990. By 2014 the value increased to $5.3 billion in the U.S., and $50 billion globally.
The increase in consumption of iced tea is attributed to several factors:
- A healthier alternative to carbonated sugary soda, since consumers are caring more about eating healthy.
- New flavors.
- Increased urbanization globally, and rising disposable income levels.
Here’s a breakdown of the top ready-to-drink tea brands in the U.S. based on annual sales data ending in April 2017.
Lipton, with brands ranked 2nd, 4th, 5th, and 7th in highest sales volume, is owned by Unilever, who initially purchased part of the company in 1938, and purchased the remainder of the company in 1972.
The Coca-Cola Company owns two brands on this top 10 list: Gold Peak (3rd) and Honest Tea (10th). In 2008, Coke acquired a 40% stake in Honest Tea for $43 million, and purchased the remainder of the company in 2011 for an undisclosed amount.
Bubble Tea, also referred to as Boba, is a Taiwanese milk tea drink with tapioca balls and fruit jelly.
The global bubble tea market was valued at $2 billion in 2016, and is estimated to increase to $3.2 billion by 2023.
The leading bubble tea company in the Bay Area is Boba Guys, which operates 6 tea shops in San Francisco, 1 in South Bay, and 3 in NYC. It booked almost $3 million in revenue in 2016, up 1,887% from 2013.
Globally, one of the biggest boba companies is ChaTime. It has over 1,000 stores in 30 countries.
Matcha Green Tea
Google searches of “matcha tea” have been steadily increasing over the past decade.
The global matcha market is predicted to increase from $3 billion in 2016 to $5.3 billion in 2023.
The increase is attributed to matcha belonging to the wellness category. The amino acid levels in matcha are 5x higher than typical black or green tea.
Another huge benefit is the high level of antioxidants:
- 6x antioxidants in goji berries
- 7x antioxidants in dark chocolate
- 17x antioxidants than blueberries
- 60x the antioxidants in spinach
Smoothies & Juice
Google searches of “acai bowl” have been increasing over the past 6 years. Annual peaks are June — August, and lows are in November and December. This is in line with the idea that acai bowls are traditionally consumed in hot weather (though personally I’m happy having one in whatever weather!).
The global market for acai berries was estimated to be $696 million in 2016, and is expected to grow 12.6% to $2.29 billion in 2026 — when over 1 million tones of acai berry are expected to be consumed.
The special berry is growing in popularity because of the health benefits: high in antioxidants, fiber, and overall, it’s a superfood.
Sambazon, founded in 2000, is the brand leader in the category. In 2007 they had a 3-year sales growth of 1,119.4%, and were added to Inc. Magazine’s List of America’s 500 Fast-Growing Private Companies.
Orange Juice is the most popular of the juices, accounting for about $4 billion of the $10 billion juice market this year.
But the consumption volume of OJ is decreasing.
The decline is attributed to:
- Many people skip breakfast. (OJ was historically a breakfast staple.)
- More people are having smoothies instead of juice. OJ is seen as an extremely sugary option, and people are trying to substitute away from sugary beverages.
It’s also interesting to note that orange production in the U.S. began declining about 50 years before U.S. OJ consumption began declining.
In the 1960s, Florida was the world’s largest orange producer. Unfortunately, citrus greening disease spread throughout the state. The oranges became unpalatable, and many trees died.
As U.S. orange production declined, Brazil became the #1 producer in the 80s. But production in Brazil is declining now too. The country produced 400 million boxes of oranges in 2014, and 242 million boxes in 2017.
Orange juice demand is driven by the U.S. and EU, not Brazil. The average Brazilian drinks 15 liters a year, compared to 22 liters for the average Americans or European. So decreased OJ consumption in the U.S. meant an over supply in Brazil.
Instead of farming oranges, Brazilian farmers are switching to farming lemons and guava for domestic markets.
Decreased supply results in increased cost. It is predicted that one box of oranges will cost $11.92 by 2022, up from $7.96 in 2012.
In summary, these are the non-alcoholic beverage niches in which I expect further innovation and M&A activity:
• Water (sparkling, coconut water)
• Coffee (instant, cold brew)
• Tea (iced, bubble tea, matcha)
• Smoothies & Juices (acai is up, OJ is down)
Expect conglomerates to continue announcing big acquisitions. They aren’t innovating internally fast enough, and are forced to acquire companies in order to keep their marketshare.
Here’s an interesting breakdown by CircleUp of R&D spend for tech companies vs. consumer companies.
Several food & beverage conglomerates have formed incubator programs to tap into early stage innovation. That’s great, but more should also be investing in early stage startups.
I’m excited to see future innovation in the space.
P.S. Check out my other articles:
Analyzing 15 start-up referral codes + landing pages
P.P.S. Before you go…
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