Big or Small an Exciting Year

Beverage wise, this last year ranks as one of the most exciting I’ve seen. The major companies explored provocative ways of shifting their business models with the times, even as smaller brands picked up traction in highermargin segments of the business. Major Coke and Pepsi bottlers, as well as Anheuser-Busch distributors, continued to put their core suppliers on notice that they expect more in the way of innovation. That degree of ferment has to be healthy for the industry in the long run. Here are a handful of themes distilled from a year of covering this fascinating business:

INNOVATION STILL SEEMS TO BE THE PROVINCE OF THE SMALLER GUYS.

Sure, every major beverage corporation has put a priority on stepping up innovation, and several have gone to ingenious lengths organizationally to try to get there. Nevertheless, when I take a stroll down the store aisle, almost everything truly exciting seems to have emerged out of a garage, metaphorically speaking. No question, the big guys are bringing lots of new products to market, and the onrush may be having a salutary effect in attuning their production and distribution systems towards handling a more diverse portfolio. But most of these products seem to be line extensions or by-the-numbers concepts (“Let’s see, coffee and canned energy drinks are booming and we do sodas, so let’s create Coke Blak”). There are exceptions, but too few, and, in some cases, such as trying to convince consumers that 7Up is now “natural” or that Bud Select somehow is a breakthrough in brewing, too contrived: the companies seem to harbor hope that brilliant marketing can mask a lack of genuine innovation. Indeed, megabottler Coca- Coca Consolidated took a slap at the qualitynot- quantity issue when it recently attributed its weak quarterly results to a “decline in significant innovation.” Its core supplier is Coca-Cola: enough said.

BIG GUYS, NEEDING INNOVATION, WILL PAY A LOT FOR THE SMALLER GUYS WHO HAVE IT.

The valuations paid for some smaller brands in the past few months have struck veteran beverage watchers as rich, even outlandish. Not just Tata’s stake in Vitaminwater marketer Glaceau (at an enterprise value of roughly $3 billion) but also Anheuser-Busch’s $82 million purchase of declining Rolling Rock and Pepsi’s $75 million purchase of still-tiny Izze. But these guys are far from crazy. The trend reflects their awareness that, though there may be few entry barriers to duplicating the formulations of some of these products, it is not so easy to successfully knock them off after all. (Witness Pepsi’s humiliating effort with SoBe LifeWater.) Once these brands have achieved first-mover advantage, consumers’ perception of their authenticity makes them hard to dethrone. Better to ungrudgingly pay the premium and hope you can keep the magic going once you incorporate the brand into your own system. And yeah, good luck on that one.

IF YOU’VE GOT INNOVATION, LAUNCH IT IN A BIG CHAIN.

For decades, the mantra was that innovative brands are built up and down the street, generating the consumer intrigue that might finally, along with a $40,000 slotting check, make the chains take notice. Can it be that that notion is being turned on its head? I think it often. I’ll walk into a dingy New York deli and spy a premium beverage in the cooler – one of those açai drinks or some highfalutin coconut water. “Did somebody from that company actually call on you?” I’ll ask the manager. No, I’d be told, the manager had spotted it in Whole Foods and approached the company. Certainly, the aura-conferring status of Whole Foods can no longer be denied. I’m a bit more dubious about the degree of cachet that accrues from landing on the shelves of Target Stores, but a national or super-regional presence that comes of cracking chains like those seems to lend credibility to a new brand, and opens doors up and down the street. Sure, some of this theory is mere rationalization by marketers who can’t land a decent DSD distributor; also, a heavy reliance on fickle chain buyers carries its own dangers. But as retail consolidation concentrates power into a handful of mega-chains, there’s no question they have become a route to instant awareness and recognition. Crack the chains, and the up-anddown- the-street guys – and the distributors who service them – may follow.

Longtime beverage-watcher Gerry Khermouch is executive editor of Beverage Business Insights, a twice-weekly e-newsletter covering the nonalcoholic beverage sector.