The War On Four

It didn’t start as a chase, but it ended as one. When Beverage Spectrum started looking for Chris Hunter on the floor of NACS in Atlanta, it was to interview the Phusion Projects co-founder on a story on the phenomenal growth of the company’s Four Loko, an “energy malternative” that had, in the past year, snowballed into a major brand, giving retailers and distributors a fantastic new source of profits.

Indeed, the justification for the story was in the numbers: in the last year, Four Loko’s top three flavors have sold an aggregate of $97 million, according to Information Resources Inc., making them the #3, #5 and #18 SKUs overall in the “progressive adult beverage” category. It’s an impressive set of sales numbers that is way too low – because IRI doesn’t count sales from liquor stores, which is the home channel for the brand. The growth for those SKUs is phenomenal: with sales more than tripling in the past year, Phusion Projects is the fastest-growing beer and malt beverage company in the country.

So that’s an interesting story – but after missing connections with ownership at the Phusion Projects booth, the story shifted. What had been a “the floor’s too frenzied for us and for you, we’ll catch up later” became, over the next two weeks, a search for answers about what quickly became one of the most condemned products in America. Hunter didn’t just become hard for us to reach, he became interview number one for reporters from across the country. The reason? A spate of mid-October stories about emergency room visits, apparently the result of college students partying with Four Loko in Pennsylvania and Washington, one that led to both the Pennsylvania Liquor Control Board and the Malt Beverage Distributors Association of Pennsylvania calling for an end to sales of the product. Meanwhile, as of this publication going to print, Washington, Michigan, and Utah have enacted outright bans on energy drinks that contain alcohol. Shortly before we uploaded the issue, Phusion Projects gave up some ground on its own, announcing it would stop distribution of Four Loko in New York State.

What had been an underground, social-media fueled sales phenomenon bubbled up into plain sight, and just like that, Hunter and Phusion Projects went from a much-imitated toast of the town in Chicago – during the National Beer Wholesalers’ Convention there last month a dozen brands were on hand trying to imitate Four Loko’s high-octane mix of caffeine and booze – to the makers of a product that had been banned on college campuses across the country. As public attention focused on the product’s jumbo size, booze content and candy-like flavors, it was pilloried by the news media and by late night comedians like Bill Maher. The company had suddenly become the subject of regulatory scrutiny and all-around finger-wagging of the sort not seen since the introduction of Cisco in the early 1990s.

Which seems to have bewildered Hunter, who told us, once we finally caught up with him, “Caffeine and alcohol being mixed is nothing new and novel.”

But  the negative publicity has hurt, even with sales on the rise, and the damage had the potential to curtail the company’s future. With its sales snowballing, Phusion Projects had been speaking with potential investors – but with the possibility looming that the company could be be regulated out of existence, they passed.

Of course, no more significant a drink than Red Bull itself was partially built on the backs of millions of vodka shots. But the amount of negative publicity currently aimed at Four Loko has created the image that it’s an edgy project for young drinkers who are just plain aiming to get wasted. And that’s not just the result of the news of the hospitalizations and the realization, but also the tone of much of the social media surrounding and promoting the brand (not planted by Phusion Projects, they insist). With the brand’s massive sales momentum, it has been termed a craze – but one with scarier consequences than silly bands.

“It’s one of those brands where you can stack it up and walk away,” said one Massachusetts-based distributor.

But after October, it’s likely that few retailers or distributors will turn their backs on the brand again.

WORMWOOD

Phusion Projects, started by a trio of 25-ish Ohio State alumni, Hunter, Jaisen Freeman and Jeff Wright, was actually part of the first wave of “energy malternatives.” That wave began in 2005 with the launch of Anheuser Busch’s Spykes, Tilt and Be Miller’s Sparks, and, later,  Rockstar 21, three big-company products that attempted to take advantage of the maturation of the energy drink category and the popularity of the ubiquitous Red Bull and Vodka order and move it into a new source of revenue. Along with the big companies, there were many smaller ones, like Liquid Charge.

The original Four (not yet Loko) contained 6 percent alcohol, caffeine and another surprise ingredient, wormwood oil, to provide a point of difference. At the time, wormwood was considered an exotic ingredient because it was identified with absinthe, at the time a spirit that was still banned domestically.

By the winter of 2007, however, those products were pulled from shelves or defanged of caffeine – the reason? FDA scrutiny and a push by state Attorneys General to go after the big beer companies for selling products that too closely resembled energy drinks. Spykes and Tilt were caffeine-free by the beginning of 2009.

The original washout of energy malternatives didn’t sink Phusion Projects – in fact, several independent brands, some of which have reappeared as Four Loko has become more successful, pressed on while the big companies retreated. But Phusion itself nearly sank because of the decline in interest in the category. By the end of 2007, the company almost went bankrupt.

But in mid-2008, a heavy-duty solution came into focus, and the original Four was relaunched, and jacked up as well, as a 10 percent alcohol, 16 oz. caffeinated drink called Four MaXed. Wormwood remained. Gaining traction, Phusion launched wormwood-free, booze-heavier Four Loko, a more heavily sugared product in a 23.5 oz. can that bore a closer resemblance to a tall energy drink than previous iterations.

“We like to keep an eye on trends in the beverage industry in general,” Hunter told Beverage Spectrum. “We noticed 24 oz. cans were the fastest growing out there. We took from that [observation] that it’s what consumers want.”

Indeed, 24 ounces has been a major boon for many beverage companies, and not just alcoholic ones. Both AriZona Beverages and Monster Energy have gotten major traction from that can size in recent years – and that gave Four Loko an edge. The cans create their own billboard.

And by ratcheting up the alcohol content – at 12 percent ABV one can contains as much alcohol as a 6-pack of some kinds of regular beer – and the caffeine, as well as creating increasingly sweet flavor profiles while keeping prices low (under $3 in most cases) has made Four Loko a buzz that younger consumers are increasingly turning to.

The new line flew, increasing in sales by nearly 2000 percent in 2009. In May, 2010, it was lauded by beer industry experts as one of the few bright spots in an industry that had grown stagnant except for the craft category.

“The key for our success is in-store marketing,” Hunter said. “We try to make sure that everyone knows our product is there.” According to Hunter, the beverage has risen to notoriety due to this tactic combined with word-of-mouth marketing, and the fact that, in Hunter’s view, Four Loko transcends socio-economic, gender and race boundaries. He goes as far as to point out there is “no company sponsored Facebook page or Youtube channel.” Instead, it’s a product “intended, marketed and for of-age consumers,” he said. Just with flavors and styles that appeal to the young.

SOCIAL ISSUES

But if Phusion isn’t pushing the product online – and there is evidence to the contrary, according to a recent investigation by the magazine Fast Company – it is also a product whose popularity with a wired, youthful generation resulted in the creation of significant word of mouth and online social marketing phenomena: indeed, whether Phusion intended it to or not, with more than 1 million hits on some Youtube videos devoted to Four Loko, the product has gone viral.

Even the Harvard Crimson – the student paper at Harvard University – recently noted that “the Four Loko craze… has swept through college campuses across the nation.”

But for some, the craze appears to have turned dangerous: his fall, the beverage has been associated with out-of-control college parties and underage drinking. Ramapo College in New Jersey banned all alcoholic caffeinated beverages – name-checking Four Loko as its example in the policy – after it was reported that 23 students were sent to hospital for alcohol intoxication. Nine more students from Central Washington University were hospitalized a few weeks later. Many of the students were underage, and the police report also mentioned Four Loko, among other drinks and illegal drugs at the scene.

Phusion released an official statement in response to the incidents, stating that the company was “upset” that the beverage was “abused or consumed illegally by underage drinkers.” But Hunter insists that Four Loko was “unfairly” singled out.

“While our product is mentioned only twice in the 44-page police report, hard liquor, vodka, rum or other alcohol is mentioned at least 19 times; beer is mentioned at least 3 times; and illegal drugs or roofies are mentioned at least 14 times,” according to a statement from the company.

Other marketers have come to Phusion’s defense: Don Duebler of Atomic Brands, which makes Mad Ballr, said he was “pretty astounded” to see that news reports were placing the blame on Four Loko. He called the media attention a “witch hunt” for the Phusion team.

Hunter noted that the case is “getting publicized but the facts are in the police report.” He added, “we consider it unfair to target our product when there’s all these examples of other things being there.”

Whether it’s unjust or not, the Phusion team has a PR crisis on their hands.

Nevertheless, the company is moving forward, releasing a lemon-lime flavor and trying to circulate information on college campuses about what the product contains and what it can do – which, sadly, is considered by some fans to be the draw.

And that’s why there are others who would just plain like to see it gone. One such opponent is Bruce Goldberger, the Professor and Director of Toxicology and Director at the University of Florida’s William R. Maples Center for Forensic Medicine.

“My issue with the product is that it contains a large amount of alcohol in addition to a large amount of caffeine,” he said. “It’s unlike anything else we know.”

Goldberger has co-authored a study that evaluated how college-age drinkers were affected by alcohol mixed with caffeine. The team found that bar patrons who selected such drinks were three times more likely to be intoxicated than drinkers who consumed alcohol only. As a result, Goldberger takes the stance that caffeinated alcoholic beverages should not be exempt from regulation. “We believe that there’s no place in the market for an alcoholic energy drink, but I also believe that the FDA needs to do a better job in regulating the amount of caffeine that’s included in a product,” he said. “I don’t know what the tipping point is going to be for them [the FDA] to ban the product.”

ROAD SHOW

While creating an online, underground, on-campus craze might have helped Four Loko grow its sales, it has now become something of a hindrance as the company plans to move on.

In late 2009, with a few stories about Four Loko already circulating in the media, and a growing number of other studies indicating the potentially harmful effects of mixing caffeine and alcohol already on the books, the FDA launched yet another probe into the energy malternative category, sending letters to about 30 different manufacturers. And last summer, Sen. Charles Schumer (D-NY) sent a letter to the FDA encouraging it to speed up that investigation. While the investigation of the Sparks and Tilt wave had stalled when the major manufacturers pulled caffeine from their products, at this point, the upstarts – like Four Loko and Joose, the number two brand in the category – had started to gather a bit of unwanted attention of their own.

And that bad publicity came at a bad time for Phusion Projects, which, buoyed by its sales momentum, had begun to shop for investors. Multiple investors have passed on the deal, largely because of the potential for regulatory action by the FDA. Another company known for helping grow brands in large retail accounts also passed on the opportunity to take on Phusion Projects as a client due to the potential for regulatory problems.

To Hunter, it’s a case of unnecessary persecution, and that Four Loko tries to point out its alcohol content in as prominent a manner as possible. Recently, it has also circulated a flyer on responsible drinking to college presidents.

“I think we do go above and beyond what other companies in the alcohol industry do – that’s something we were doing before this press,” he said. “I think it seems there’s a different standard.”

“Caffeine and alcohol being mixed is nothing new and novel,” he added. “I can’t point this out enough. As far as the FDA goes, I can’t speculate on what they will and won’t do… we’ve provided all the info that the FDA has requested and now it’s up to them.”

Right now, however, things are up to more than the FDA, as issues with potential investors indicate. With the negative publicity weighing on the brand – but the word of mouth making Four Loko even more interesting to those who have not yet tried it – Phusion Projects seems to be at a precarious point.

And that’s a big change from where it was just a month ago. Just think about the evolution of this story itself.

In our attempts to reach out to Four Loko in early October, we’d been looking at a simple story of a brand on the rise, one that had succeeded in taking Four, a fairly mainstream product that had struggled in the marketplace, and turning it into the edgy brand Four Loko – almost following the same arc of success that turned humble Hansen’s Energy Drink into an out of control Monster. A story that, as Hunter himself points out, had taken a small business plan from three friends and turned it into a 90-employee company with nine-figure sales.

But the story turned, in the space of mere days, into one about a brand in completely different circumstances — a tale of a brand under attack in the press, in the political world, and in the court of public opinion. What the narrative will be, following this combination of sales momentum, regulation, negative publicity, and rising consumer demand, we don’t know yet. But right now it’s hard to imagine that this particular part of the story is turning out the way Phusion Projects would have written it. •