A Knack for Picking the Winner

Picking a winning investment in the widening beverage industry can be a lot like playing the slots: a substantial payout seems within reach, but more often the gamble doesn’t pay out. TSG Consumer Partners has a knack for surmounting those odds to pick winner after winner.

In 2006, the San Francisco-based firm collected $677 million by selling a 30 percent stake in glaceau, makers of vitaminwater and smartwater, to Tata Tea, Ltd. The sale recouped more than 17 times its initial $40 million investment. Last year, it invested in CytoSport, maker of athletic performance drinks Muscle Milk, Cytomax and Mighty Milk. In March, it added to its portfolio MonAvie, which produces acai berry products. Both are unique offerings that TSG says have the potential to be just as profitable and industry changing.

“Innovation is 100 percent of the reason to invest in a company,” says Charles “Chuck” H. Esserman, managing director and CEO of TSG Consumer Partners. “It’s the growth engine for the beverage industry.” Unfortunately, he says, it’s also increasingly tough to find as more and more manufacturers fall back on mimicking what more successful products have done.

Esserman co-founded TSG (then known as the Shansby Group) in 1987, developing it into the first U.S.-based consumer focused equity fund. He currently supervises all its potential and current investments.

We talked to Esserman about the firm’s hunt for true innovation in the beverage industry, and why celebrity spokesmen aren’t enough to vault a product to success:

BevNET Innovation: TSG has invested in a wide range of industries, but some of your biggest successes have been beverages. What’s so appealing about this sector?
Charles Esserman: Obviously, the beverage market is fairly large. It’s mostly been about marketing as opposed to real product innovation, which creates a great opportunity for companies who have developed those real innovations. Beverages also have a great distribution system, so you can achieve critical mass quickly if you have truly innovative products.

What do you mean by more marketing than innovation?
Historically, that’s been the case – that companies have been more focused on how they can market a standard product, rather than developing a new, innovative product with tangible consumer benefits. But innovation is the growth engine for the beverage industry, I’d say. So if you take a product that’s been around and try to market it in a different way, that’s very different than what we do – which is to align ourselves with companies that have created innovative products with real consumer benefits. With respect to vitaminwater, there are advantages to their product versus carbonated beverages. With Muscle Milk, obviously the protein supplements create lean muscle mass as well as aid in muscle repair. Cytomax has 80% less sugar than other performance drinks, and its Alpha-L-PolyLactate has been proven to enhance endurance. And with MonaVie, the products they produce have a very high level of antioxidants as well as ingredients like glucosamine that provide health benefits.

How have those previous and current beverage investments shaped your view of the market, and what you look for?
Products that have real innovation and consumer benefits are few and far between, not only in the beverage industry, but also across other segments of the consumer products industry. We’re focused on finding those traits.

TSG is known for accurate trend spotting. What’s overplayed at this point?
What’s overrated is trying to sell a product based upon its celebrity appeal, or lifestyle, as opposed to its benefits.But celebrity has played a part in the success of vitaminwater and smartwater, with Jennifer Aniston as a spokeswoman and having celebrities photographed with the product. How is that different?
There’s a lot of value in celebrities in terms of marketing products, but you can’t just sell a product based upon that hype. You need to sell a product based upon the real consumer benefits. When you can marry that together with a great marketing campaign that includes people that consumers know and trust, you’ve got the best of both worlds. The hype and the fad is not associating the product with a celebrity; it is creating demand for a product based solely on that connection instead of the product’s consumers benefits.

When you’re considering an investment, what do you look for in the company itself?
Real consumer benefits, breakthrough technologies and committed, principled and talented management, I’d say are the main three. We do focus on companies with growth potential; we’re not interested in companies that have peaked.

How does your approach differ from than that of other investors?
We spend a lot of time thinking about the segments and categories we want to invest in, and then we approach companies directly as opposed to waiting around for an auction process. We really partner with the companies we invest in and work hard to be great partners.

In what ways do you like to see your capital used?
Obviously, R&D and product development, sales and distribution and marketing investment to effectively portray the benefits associated with the products we are getting behind.

You’ve said you see similar opportunities for Muscle Milk as there was for vitaminwater. Where do you see parallels between the two products?
Muscle Milk addresses serious athletes with a very serious product. It has achieved the same kind of exponential growth that vitaminwater did. vitaminwater is a sensation, as well. I think that both companies have extremely talented management groups and they’re both terrific brands. But the growth that Muscle Milk has achieved, together with Cytomax, is really no different than the growth we saw with vitaminwater.

Where is there room for beverage manufacturers to be creative in a crowded market sector?
It comes back to developing an innovative product with real consumer benefits, like a highly functional beverage or one that contributes to better health. Obviously, we’re also very committed to creating the very best products that can be made. Quality contributes to innovation. For us, the focus is not on price point, but on creating the very best product that can be made.