As the cost of commodities like sugar and petroleum continue to skyrocket, both Coca-Cola and PepsiCo have announced across-the-board price hikes in the coming months. With consumer spending habits still affected by a fragile economy, however, both companies have stated that they would not be able to raise prices high enough to fully cover the rising cost of raw materials.
Nevertheless, the two cola giants are likely to find themselves in an enviable position compared to many entrepreneurial beverage companies struggling to compete in the marketplace despite taking on similar increases in commodity costs, as they lack the brand strength and negotiating clout of Coke and Pepsi.
In the case of sparkling juice maker Fizzy Lizzy, there is good news and bad news. On the one hand, the company uses no added sugar in its beverages and finds itself exempt from a raw material whose cost has risen by over 100 percent in six months. Fruit juice – which comprises 50 to 60 percent of Fizzy Lizzy drinks – is another story.
“In our case, the cost of juice has risen by an average 32 percent this year,” said Fizzy Lizzy CEO Aaron Morill. “You have to make certain margins to be in this business, and there are some costs that we just can’t control. In addition to juice, the cost of fuel, glass and cardboard are all going up. We have to pass these [costs increases] on to our customers.”
Morrill said his company has been forced to raise prices for the first time in two and a half years despite knowing that an increase in pricing could negatively affect sales of future consumption SKUs. He stated that while most consumers will likely have little issue with paying an extra $.10 – $.20 for a single bottle of Fizzy Lizzy, a $1 increase for the price of a 4-pack could cause some to hesitate on a purchase.
Notably, Coca-Cola has also shown similar concern in the pricing of its future consumption products and will compensate by adding new packaging and pricing options including the release of a new 1.25 L sized bottle of cola that will be priced at or near $1.
Morrill said that, while it was not feasible for him to add new packaging sizes – nor maintain pricing, for that matter – he was doing his best to “squeeze” other costs of supply in order to avoid any further price increases.
“We’re trying to do things like get distributors to pick up our product directly from co-packers as opposed to from a warehouse,” He said. “But in the end, we’re a brand that offers a premium product, and, really, we’ve been underpriced given the quality of our beverages, especially in comparison to other beverages. [Consider that] there are some bottled waters out there that are priced higher than our product but have vastly lower costs of production.”
Meanwhile, at Balance, a functional water, co-founder Martin Chalk noted that from its inception, the company had attempted to “future proof” the beverage against rising seasonal and commodity costs. Chalk said he specifically focused on five key attributes that that he believed would give the brand widespread appeal across regional and cultural lines and, ultimately, long-term success.
“We wanted Balance to be a global product; create a point of differentiation in packaging; have broad appeal among a variety of consumers; be a locally made and sustainable product; and offer an emotional connection to the consumer via a compelling background story,” Chalk said.
Balance’s main functional ingredient, wildflower, arrives from Australia as a concentrate and is then added to water, much like Coke’s and Pepsi’s syrup concentrates. However, unlike the two colas, the ingredient is naturally sourced from company-owned fields and, unaffected by seasonal changes, is harvested year-round.
“Because we own our own supply chain, we’re immune from rising color, flavor and sweetener costs. Also we see a lot of companies struggling with importing costs, but Balance is able to offset both environmental and transportation costs that say, Fiji Water, may have,” Chalk said.
For Xing Tea, however, the issue with costs is one rooted in lack of available of shelf space in the retail market and, as a result, the ensuing competition in pricing among other beverage companies.
“‘The ‘big boys’ work off such slim margins that they have to constantly stock and move product,” said Tom Lebon, co-owner of New Age Beverage. “And so after Coke, Pepsi and Dr Pepper/Snapple products, there is only 3 to 5 percent of space on the shelf for other beverages. The problem is that some companies out there think that means that you have to price your product at $ .99 to compete.”
Lebon said that despite the fact that commodity costs were not yet an issue for his company, other RTD tea companies like AriZona and Sweet Leaf, who both sell $ .99 priced products, were putting the entire category at risk by selling at a price point that was impractical for a premium product with relatively high ingredient costs.
“We’re OK with costs for now because we’re locked in with our suppliers. But tea is a premium product, and you have the category being run down by companies who want sheer volume,” Lebon said. “It’s becoming like cases of bottled water – there’s no profit margin in it. Why jeopardize the category when it could be as profitable as [the energy category]? ”
Stating that “we’re not a 99-cent brand, and we wouldn’t want or be able to do that,” New Age will instead focus on targeted distribution of Xing Tea, Lebon said, adding that he expects to achieve the same overall sales numbers as some companies that are selling RTD teas at a greater volume but with a lower price.
“When retailers put us on the shelf, we pull,” Lebon said. “So for us, it’s just a matter of finding the right points of distribution.”