Recent news that big soda companies like PepsiCo and the Coca-Cola Co., Inc. are planning to take price increases to compensate for supplier costs has left smaller companies wondering how they should keep up.
BevNET.com spoke with several entrepreneurial beverage firms who face a tough choice: increase pricing or shrink margins. And while many seem to believe that there’s strength in their higher-end retail markets like natural and specialty channels, there’s always the possibility that either they will want to expand – or the bigger fish will decide to spawn in the smaller specialty ponds, as well.
To ensure their own survival, small companies often seek ports where their prices are protected, like the natural foods category, the premium category or the health category. But it doesn’t always keep the boat steady, according to Reed’s Inc. founder Chris Reed. While Reed products are priced high above the big three soda companies, and are safe insofar as Coke, Pepsi and Dr. Pepper haven’t sought to break into premium sodas, they are also pawns in a high stakes game, especially when the economy is bad and commodity prices go up.
“High end sodas are having our asses handed to us,” said Reed. “Just about everyone I compete with, I have the option to acquire or watch disappear.”
Reed says that if the big three got into the premium soda category, it would be detrimental to smaller companies and startups, just like with the other categories they have come to dominate. Coke had already begun to affect Reed’s when they acquired Glaceau and Honest Tea, which put them in the position of competing in the natural foods category, soaking up grab-and-go market share. But that’s only peripheral to his real fear.
“Once the big guys get ahold of [gourmet CSDs], good luck,” Reed said.
Bill Meissner, the CEO of Jones Soda, says that the market is mixed, and while the act of competing for shelf space in supermarkets is very difficult, for gourmet sodas the potential to have declining repeat purchases of major soda brands might actually help more unique brands. Because people are buying less soda, they’re also going for higher end, more premium sodas like Jones. At least, that’s the hope.
“We’re being selected as a treat,” Meissner said. “It’s a giant category, so any little bit of migration away from the big guys is huge.”
After going through a decline, Jones Soda is now attempting a resurgence, and have drastically slimmed down their portfolio. Meissner says one problem was that a deal with big supplier National Beverage had that company selling Jones Soda cans at near Coke or Pepsi prices. When that happened, National Beverage, and consequently Jones Soda, was then competing directly with the big guys.
“They literally were trying to go head to head with Coke and Pepsi,” said Meissner. “That really hurt our glass volume and overall profitability.”
Jones is trying to move out of natural and into convenience, but again it is doing so with a more Jones-centric spin, rolling out 16 oz. “tall” cans for the channel.
Arthur Ebeling, CEO of Warrior Energy Inc., says that pricing affects his company considerably, but that the energy drink market provides a buffer with its inflated prices. Consequently, he says the market is profitable enough for him to coexist alongside companies like Red Bull or Monster.
Despite having the advantage of being all-natural, like Reed’s, Warrior Tea strives to be perceived more as a mainstream than a natural beverage. But like Jones, it’s in the main stream where smaller brands like Warrior Tea meet their stiffest competition.
To compete, Ebeling says Warrior has to distinguish itself .
“You just have to be different,” he said. “If that results in a one percent difference, it’s worth it.”
Competing in water, too, there are the big companies like Nestle, Poland Springs and Dasani. Chris Kinch, the president of OWater, says that to remain competitive, you have to be price and location sensitive.
“You can’t give it away, but at the same time you have to look at sacrificing margin to stay in the arena,” Kinch said. “What you have to do is pick and choose the accounts you’re lining up with.”
OWater, which has recently formed a partnership with Polar Beverages, has pulled out of national markets to focus on deeper saturation of markets that they’re already in.
“Our goal is to be a national brand, but you gotta take it one region at a time,” Kinch said.
Kinch said that startups and smaller brands will never disappear. With as much pressure as the big guys put on the little ones, he said people will always want to try different things, and the beverage industry is a big place.
“There are always going to be consumers looking for something different,” he said.
Among teas, Inko’s occupies a space near other, similar tea companies rather than next to AriZona or Snapple, says Andy Schamisso, founder and president of Inko’s. But he also said that because tea isn’t a particularly expensive commodity, Inko’s can compete with all comers in terms of price point — at least, for a while.
Inko’s has raised their prices for the first time in eight years, and the price increase is due to rising commodity prices. But Inko’s has some buffers that keep its sales afloat, which include being a signature, all-natural product, like Reed’s or Warrior Tea.
“You’re not going to find another line of white teas that’s 56 calories a bottle,” he said. “It creates a buffer for us.”
He said that Inko’s does 10 for 10 sales where it sells at least as well as competitors when priced evenly. The hitch is that Inko’s doesn’t have the budget to do much more with their marketing than a website and Facebook and Twitter promotions.
“If you’re talking marketing, we wave the white flag and scurry back to the natural aisle,” he said.