Iced Tea Dreams: Perpetually Brewing

READY-TO-DRINK ICED TEA HAS become ubiquitous, but the segment remains a paradox. It was one of the last segments to see its growth subside under pressure from the ongoing recession, but it’s also one that experts are quick to pronounce played out. No less perceptive an observer than John Bello, the creator of SoBe and in recent years a beverage scout for private equity shop Sherbrooke Capital, has declared that tea is off his radar – he just doesn’t see any future winners.

A scan of all the marvelous tea brands that so far haven’t ignited might suggest there’s something to what he says: they include white tea pioneer Inko’s, multiplatform player Steaz, not to mention a flock of RTD entries from loose-tea stalwarts ranging from big Republic of Tea to smaller Harney & Son, Numi and Adagio. These are all quality products, but it’s hard to see any of them breaking out in a truly big way. With so many brands mired in that transitional trough between niche status and ubiquity, why would anyone else want to venture into the breach? Maybe big companies looking to fill a portfolio gap (see: Anheuser-Busch’s Paradise Key line) but certainly not entrepreneurs. And yet, they march in. As I said, it can seem paradoxical. Still, there are brands, positions, and unexplored segments that could make for future hits.

It’s also easy to see why iced tea has been such a fertile platform in the past: it’s an obvious way station for consumers leaving CSDs, it carries many health connotations (especially for its green and white varieties) and it’s relatively cheap to produce, even in its more premium and subtle variants.

And yet – as Bello points out – there’s the problem of a profitable exit: who’s the buyer going to be? Some of more intriguing RTD entries already have been subsumed into Coke (Honest Tea, Fuze), Pepsi (Tazo) or Nestle (Sweet Leaf, Trade Winds), which may clear the way for new entrants to move into the independent distribution channel, but that also seems to constrain prospects of a profitable exit.

Still, here are some approaches that maybe shouldn’t be ruled out:

Reasonable premiumization. That’s a phrase that Beverage Marketing Corp.’s Brian Sudano tossed out at a recent conference as a trend likely to capture consumers who’re ready to dig out from the ruins of the recession but aren’t going back to their wild-and-crazy spending days. It’s the bet New Leaf Tea is making as it aggressively builds a DSD network behind its good quality but affordably priced line.

Varietals. Tea can be produced in a wide array of styles and, as with craft beer, it’s possible for new entrants to ride on differentiation. That was the tack Numi took when it based its RTD line on complex, smoky puerh teas. They’re great teas but their price is high and, as the example of Inko’s shows with white teas, it’s not a very defensible position once bigger companies spot the promise and rush in.

Unsweetened Asian varieties. Ito En, with its Teas’ Tea and then Oi Ocha lines, has built a sizable business that’s transcended the Asian niche, suggesting there is a general market for unsugared varieties. But it’s still a small and modestly growing market.

Fresh-brewed tea. Because of the difficulties of scaling up production and the distribution dilemmas that a refrigerated product poses, it’s hard to see this on its face as a promising avenue for mass acceptance. But if you taste a brand like Seattle’s Cha Dao, there is an unmistakable quality difference in it. No less mainstream a company than Coca-Consolidated (via its BYB Brands incubator unit) made an investment in Cha Dao. So who knows?

Kombucha. Hey – remember, this is tea, albeit a fermented variety that seems to comprise its own unique category. It’s becoming more accessible, although how mainstream the beverage can become remains very much an open question.

Just plain quirky. It’s always risky to underestimate the power of a quirky combination of elements. Long after the novelty had worn off, and it had been fumbled by big companies, Snapple showed how far quirkiness can take you. Rob’s Really Good, from the creator of Pirates Booty snacks, is another example: look at the brand’s attributes, and there would be nothing that stands out as particularly fresh, aside, perhaps, from intriguing flavor combos like chocolate tea (already familiar from the loose-tea realm). But it’s been remarkable to witness the degree of interest that’s been stoked in the trade by this new brand. So who knows?

Maybe players in one or more of these categories will break out. Oddly, I find myself least enthused by the sub-segment that seems to be drawing the greatest activity lately: value tea, particularly prepriced canned teas. Taking a leaf from the ever-growing AriZona brand, companies like Monster (with its Peace Tea devised for the Coke bottling system), Dr Pepper Snapple (with Snapple) and others have offered low-priced teas that can lure consumers who want large quantities at low prices. It’s hard to see how anyone makes much money off these but Peace seems off to a brisk start and, once more, history has shown that beverage winners can emerge from odd places. As the slogan for the lottery used to put it, hey, you never know.

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