Browsing the beverage aisles at your local grocery store, it may seem that bottled water is a flooded market, to say the least. But although there’s water, water, everywhere, Dallas-based private equity firm HM Capital Partners LLC still sees plenty of opportunity for imaginative investors to drink deep. In December, the firm purchased Advanced H20, which produces private-label bottled water, from LaSalle Capital Group LP for an undisclosed amount.
“Consumers are really starting to embrace private label as product that is as good and as convenient as their branded counterparts, but that delivers superior value,” says Andrew Rosen, a partner at HM Capital. “We think consumers are ready to embrace beverage innovation in that format.”
Rosen, who has worked with HM Capital since 1993, currently heads its food and financial services divisions. He has served as the director to former investments International Home Foods, Premier Food International and Pinnacle Foods and his current directorial positions are on the financial services side of his specialty.
We talked to Rosen about finding innovative products in a crowded market, and the backlash against bottled water:
BevNET Innovation: What potential do you see for innovation in bottled water?
Andrew Rosen: One of the broader trends that we’re seeing in the beverage industry is greater functionality into the products that people consume. People really want to have products that provide specific benefits for them. In bottled water it’s adding flavors, it’s changing mineral content. It’s the ability to take a bottle of water and move it in a direction that’s more functional, creating energy elements, fortifying it with calcium or protein. It’s a bit of blurring the line between what’s a nutraceutical and what’s a food.
Advanced has Crayola Color Coolerz as a brand that we’re providing for children, with vitamins and flavors in the colored water, but no sugar or calories. It’s not only a great business opportunity; it’s also a social imperative. The rates of diabetes, of obesity in this country continue to explode. We’ve got to change people’s eating habits within this country, drive them away from sugar-based beverages and put them into healthier alternatives. You can really see how schools are changing what they’re willing to offer in the vending machines. This trend is just going to continue and continue.
Which trends are on the way out?
The faux juice products with a more sugary base have been in decline, and I think they’re going to continue to decline. Several companies have had some mixed success with fruit-flavored waters. I don’t think that’s actually overplayed – it should be a growth engine – but the category has been mismanaged. The trends are evolving to more subtle flavors.
How does this fit with innovation in the broader beverage market?
Innovation is critical. The growth of the industry requires new products. Consumer trends are not stagnant. They evolve, and you have to continually introduce products that meet those changing needs. What’s nice about the beverage category is it’s an early adopter of new technologies and trends appearing in the broader market. A good example is this interest in how we can take vitamins and other things that we normally consume to keep our bodies healthy, and put them in products that we would drink on a daily basis. We hear that people don’t consume enough protein, and Kellogg’s response is to come out with protein water. Coke’s acquisition of VitaminWater speaks volumes for their strategic direction, where they’re trying to drive their company. Their Plus products, where they’re actually adding vitamins into cola, is another interesting statement of how innovation is driving where the market’s going.
There’s been some backlash against bottled water in the mainstream press. What kind of effect will this have on the market?
There is a movement afoot by specific environmental groups targeting plastic bottles and particularly bottled water plastic bottles. Some of the arguments that are being made I find to be nonsensical,but having said that, like any packaged food or beverage product, we have to be focused on how we can use reusable materials,how we can best look at recycling. As a country we have an issue with just how much we consume and how much we throw away. I think that as technology advances you’re going to start seeing a lot more recycled plastic come back into food packaging. That offers great incentive for innovative packaging that meets these consumers’ needs. What do you look for in a product line when you’re considering the beverage company’s investment potential?
Opportunities that meet the needs of consumers are where we began and end. We look at how consumers’ tastes and trends evolve, but in particular what we’re focused on is what consumers are focused on: health and wellness, convenience and value. The ability for new product development is important, too. That’s what is driving the market these days. You can’t meet the current needs of consumers with legacy products. How about the company itself? We’re not venture capitalists in the sense of investing in startups. We only invest in mature companies that are established and have substantial scale. What we’re really trying to do is take established businesses, make them bigger, and have them capitalize on these opportunities that we see.
Once you invest, in what ways do you like to see your capital used?
Our goals are twofold. First, we want to see that capital green-light some opportunities, whether it be expanding our core business into new geographies, or adding capacity within our existing geography to meet demand. With Advanced, we’d like it be used to capitalize on some of these new opportunities for bringing greater functionality to bottled water. Second, we look at companies to acquire and consolidate. We’ve had a lot of success in our firm’s history, particularly in the food and beverage industry, in consolidating businesses. In this case, one plus one really equals three because you can do a much better job of serving your customers if you have a national footprint and you pick up other product line capabilities that you can now serve to your audience. We see a lot of opportunities that can come through acquisition so that’s going to be a core strategy of ours with Advanced.
You’ve said Advanced made such a good investment because the bottled water market is entering a transformative stage. How so?
One of the things that we’ve been very focused on in the past several years is the growth in private label products. As it relates to bottled water, what we’ve seen is the tremendous growth of this industry segment. There’s a supply and demand imbalance right now for private labeled water. You can’t get private label bottled water at every retailer because there’s just not enough supply. As the industry gets larger, you’re going to start seeing some consolidation. Right now it’s a lot of independents, of which we are one. As market segments mature, those mom-n-pop companies start to rationalize how they can best serve the retailer and the end consumer. If I as a company can consolidate and have a national footprint, I can serve you out of multiple locations, I can serve you in multiple product categories. That ability to serve consistently is how you best win in the food and beverage industry.