Drinks Are On The Menu

Food and drink are the elemental dining combination, of course, and the chief source of energy to that end has long been wine or beer. Until recently, in fact, San Pellegrino and other high-end waters were considered the only classy options for high-end, non-drinking diners. But in the past few years, gourmet sodas and sparkers have started to make appearances on white tablecloths throughout the country, and they’ve been joined by teas and other infusions. And while the beverage companies targeting this upscale niche might seem unique, strategically, they’re actually following in the well-established footprints laid down by an industry giant. No, not Rothschild; it’s Coca-Cola.

Putting the drinks to the food is one of the more elemental marketing imperatives of the beverage industry, and for a long time Coke has followed that formula perfectly, pairing its flagship beverages with the McDonald’s menu, among others. The Coca-Cola Company actually came out of food service, born when Dr. John Pemberton started selling Coke as a fountain drink 123 years ago. Even now that it’s a long way from the drugstore fountain, however, Coke offers a few lessons about on-premise sales that remain remarkably relevant, even to those small beverage companies seeking to make their names in high-end restaurants.

To suggest that Coke achieved industry dominance by pairing fountain soda with lunch is a gross oversimplification, but still, a look at its example can show how on premise sales can play a role in building the brand.

Jim Dinkins, a Vice President of Marketing for the Foodservice and On-Premise Division at Coke, sees restaurants as just one of many places that the company likes its products to appear.

“We like our brands to be available wherever our customers go,” said Dinkins. “We want to be associated with unique consumer experiences.”

Associating Coca Cola products with life’s better moments – like a good meal — is smart marketing. Dinkins attributed 50 percent of the company’s sales to immediate consumption, which encompasses on-premise consumption. For a company with nearly $8.3 billion in North American sales in 2008, $4.1 billion makes on-premise sales not just a tool in brand imaging but also a revenue-generating workhorse.

Bill O’Brien, a Senior Vice President and General Manager of On-Premise at Coke, defined on-premise sales as packages under a liter in size intended for immediate on-site consumption. This expansive definition embraces the broad range of areas that Coke appears in, from sports arenas to chain restaurants, schools and amusement parks.

But while Coke’s size means that its on-premise strategy is one that deals in national accounts and chain-wide deals, its strategy can also be relevant for niche brands. For example, on-premise sales for Coke are profitable because they have a higher rate of return for both suppliers and retailers – and that’s something that some small beverage companies find, in pursuing regional restaurant accounts, can be profitable on its own.

BEYOND COKE

Pat Galvin, founder of Vignette: Wine Country Soda, said that on-premise restaurant and winery sales have been enough to support his California-based company through its first three years. Vignette makes a premium soda out of grape varietals, which Galvin said appeals to non-drinkers who want to participate in the wine country or fine dining experience.

“Restaurants, wineries and wine bars have been really good for us,” Galvin said. “On-premise sales helps expose our brand and allows us to expand over time. Once we have recognition we will look at more aggressive growth. But right now, in a down economy, it’s good to be small.”

As companies grow, however, the higher return on-premise may not make up for all the work required to maintain what are typically low-volume sales rates. Coke’s immediate consumption business, though profitable, requires greater resources that might not always be sustainable for smaller companies. According to O’Brien, the cost to serve is higher with immediate consumption, with “a million points of service, coolers and distribution points.” Nevertheless, he said, “Immediate consumption is where the customer (the retailer) and Coke make the highest return.”

Steve Hersh, founder of Gus, Grown Up Soda, a New York-based maker of premium soda, found that on-premise restaurant sales demand too many resources to make sense financially. That is why restaurants were not an intentional part of his original brand strategy; they fell in his lap after Thomas Keller, the world-renowned chef and owner of Per Se in New York City and The French Laundry in the Napa Valley, brought Gus into his restaurants as an option for non-drinkers who wanted beverage pairings other than water with their exquisite meals.

It’s high profile, sure, but Hersh nevertheless describes restaurants as vanity accounts that are too low-volume to produce much revenue.

“If we just focused on that we wouldn’t go anywhere,” he said.

But the restaurant accounts do bridge a gap for Gus, between the low-volume on-premise platform and the high volume off-premise platform. Exposure on the right menu has led to sales through the grocery and convenience channels.

“When Per Se brought us in, it made us realize that this could work,” he said. “We are in 30 restaurants in New York City, which gives me consumer credibility.”

Dinkins, like Hersh, sees brand building as a benefit to on-premise sales that extends beyond immediate revenue generation. They are great for trial opportunities, he said, particularly if they’re part of the dining experience.

“Consumers are willing to spend a dollar on a new drink but not willing to buy a whole case,” he said.

CONTEXT COUNTS

Sharelle Klaus, founder and CEO of Seattle-based Dry Soda, based her marketing strategy on the idea that consumers would embrace her refined soda if they were introduced to it in the right context; she launched exclusively into restaurants.

“I created Dry to pair well with food,” she said. “It is a more sophisticated brand that appeals to food-centric people.”

From bottle design to building her distribution, Klaus’ initial approach centered on establishing Dry as a premium beverage and building consumer credibility through a fine dining presence. She said that she spent a lot of time keeping ever-changing restaurant staff up-to-date on her product and used a PR firm to set a firm footprint in the Seattle area. After the first year of staying strictly restaurant based, Dry went to retail stores; Klaus says the success of her strategy was confirmed in regional sales growth; 100 percent growth in areas where it had a heavy restaurant presence and a 70 percent increase in outlying areas.

Klaus found that there are unique advantages to brand building in a restaurant.

“In a retail environment it’s hard to tell what it is.” Klaus said. “In a restaurant it’s all explained to you. It’s an opportunity for people to sample in the right context.”

Klaus is currently busy in Austin pursuing the strategy that brought her success in Seattle. She hopes that she will be able to build the Dry Soda brand by setting footprints in sequential regions around the US.

Klaus’ strategy falls right in line with O’Brien’s, who uses on-premise venues to develop new Coca-Cola brands. Coke may want eventually to cross platforms and have both an on and off-premise presence, but initially for some developing brands, on-premise can be a good place to start. O’Brien sees the soda fountain as an excellent place for product improvement. He also pointed to vitaminwater as an example of a successful brand that spent years getting “tweaked” in immediate consumption in many bodegas and delis before getting launched into the grocery channel.

O’Brien said, “There were many opportunities for vitaminwater to die. We learned a lot in that phase.”

The Republic of Tea, a premium tea company based in the Bay Area, proved with bottled tea that the bridge between platforms goes both ways. It started out 17 years ago with a line of premium dry teas. Meredith Post, the Minister of Enlightenment —otherwise known as Director of Communications— said that it used the success of the dry teas in specialty stores to cross platforms to on-premise sales. Eleven years ago it developed a line of bottled teas designed to appear next to wine, and offered it exclusively to restaurants and hotels.

“If you have a strong brand and consumers buy it in a Whole Foods, then when they see it on a menu they are likely to order it,” said Post.

Then, the Republic of Tea used the success of its on-premise sales to cross back over to a retail platform, launching a 12 oz. plastic “grab-and-go” bottled tea through the grocery channel.

But transitions can be tricky. Often what works on the fountain or in a restaurant does not work in a cooler. Dry, for example, is redesigning its sleek and elegant bottle because, though it looks refined on a white tablecloth, it disappears into the crowd in a beverage cooler.

Whereas Klaus started Dry with on-premise sales and now needs to tweak the product for retail sales, Bruce Burke, chief marketing officer for the natural health drink Adina, said his company’s early focus on retail means that now, on-premise has become a challenge to the company.

Burke views the strength of Adina in its packaging and ingredients, a bright bottle that leaps out of the retail environment with loud lifestyle claims.

“Consumers have got to see it,” said Burke. “They have got to look at it, pick it up and read the label and what’s in it to initiate the sale.”

This makes restaurants a weak point for Adina, but one that can’t be ignored. For a company that, as Burke said, “wants to explode to ubiquity” it needs an on-premise presence to give the impression of the product’s pervasiveness in the marketplace. Burke sees delis and restaurants as an appropriate place for the product, but the challenge lies in how to present it in an appropriate way.

And there’s always this problem, as well – if people aren’t going to restaurants, as has been the case during the recent economic downturn, they’re not going to try an on-premise product.

During the launch of Coke Zero, the massive resources of the product’s parent company helped it achieve instant ubiquity. But that growth was slowed somewhat by a recession-induced “softness” in on-premise channels – a softness to which Coke attributed a full three percent decline in unit case volume in sparkling beverages in 2008. In other words, even a company as big as Coke – or as small as Gus – can get hammered if the diners stay home.