Gerry’s Insights: Revisiting the Landgrab

At a time that we’ve seen the rebirth of the Monroe Doctrine (rebranded as the Donroe Doctrine, or is it the Donroe Moctrine?), it seems timely for me to discuss the so-called landgrab strategy in beverages. It’s a topic worth revisiting because it has so much appeal to impatient entrepreneurs with eyes on the prize, including first-time founders who’ve heard the “Go big or go home!” exhortations from successfully exited beverage creators on podcasts and conference stages.

It’s an issue I revisit every year in my newsletter when I republish my annual “New Year’s Resolutions for Beverage Entrepreneurs,” which contains a lot of advice that argues against landgrabs: I warn people to start slowly in a confined geography or channel, to learn to say no to retail rollouts that can’t yet be adequately supported, to resolve to “make your mistakes off-Broadway” as you respond to the market’s instruction and refine your idea.

As I’m first to acknowledge, just about every one of my resolutions has been violated by one successful entrepreneur or another. Still, for those who truly believe in their concept and hope to see it live on, rather than seeking a quick score and getting out of town, I believe there’s much to be said for a more restrained approach. Unless, of course, you’re a Lance Collins or a Mike Repole, whose mastery of the segment has been demonstrated through multiple lucrative exits and who have the resources and investor trust and goodwill to stay in the game until something finally clicks. (In fairness, though they do go big, fast, they take a tempered approach in some ways – say by skipping so-called “flyover states” in the initial rollout, as Collins like to put it, or taking their time on even the most obvious line extensions, as Repole did in insisting on getting Body Armor right before he offered the lighter formulation that fans and retailers were clamoring for.)

As I write this, we’re seeing landgrabs a-plenty – and some of the fallout from landgrabs that so far haven’t panned out. Lucky Energy is going big, raising massive private-equity sums, no doubt bolstered by the prior success its founder had in building and exiting an earlier venture. (That was a tube-feeding venture whose success showed its founder to be a shrewd businessman, but in a segment with entirely different dynamics than ready-to-drink beverages.) The successful entrepreneur from a female undergarment venture is tapping her passionate fans’ ideas for her female-skewing Gorgie energy drink. Of course, another landgrabber, Poppi, just had a terrific exit to PepsiCo, and its key rival Olipop is believed to similarly be a coveted object of strategic desire. On the other side of the ledger, another landgrabber, Lemon Perfect, just cleaned house, from its CEO on down, as investments exceeding $100 million were deemed not to have moved the needle enough. Though I’m focused on entrepreneurs here, strategics are not immune: the much-ballyhooed Mas+ by Messi sports drink recently undertook a similar housecleaning as its backer, Mark Anthony Brands, did its own reset after a heavily funded rollout didn’t ignite.

Is patience even possible? I could point to several examples where it seems to have been rewarded, though in truth I wish there were more. AriZona Beverages continues as a family owned and operated business after a nasty battle with one of its cofounders who did want to pursue a strategic exit. Milo’s Sweet Tea seems to be motoring toward $1 billion without recourse to outside capital. On a smaller scale, looks at Joe Tea, which took a decade even to hopscotch across the Hudson River from its northern New Jersey base into New York City out of a desire to operate profitably. “Learn to say no,” indeed.

If caution is warranted in embarking on a landgrab, there are a couple of corollaries. One has to do with strategic alliances. This has the allure of plugging into a distribution network with national coverage rather than piecing together an independent network, maybe just in select regions. But there are real tradeoffs here. Even among the best at incubating new beverage brands, and many would place Keurig Dr Pepper at the top of the heap, you still have to navigate a system of uneven performers and even resign yourself to being part of a portfolio that includes rival brands, as C4 Energy found when KDP successively added Ghost and Black Rifle energy brands. Strategics also will always lean toward prioritizing their wholly owned brands, particularly those they’re able to produce themselves at a higher margin. The beer systems are particularly challenging: most of the megabrewers have shown uneven commitment to NAs, and in entering their system you find yourself working with some outstanding performers but also a larger share of houses that are mediocre and semi-committed at best. No wonder Walmart, tiring of the inconsistency, has pressured NA brands in beer houses to just go direct.

Even the most successful such alliances seem to hide ample stresses behind the scenes. After all, even as Anheuser-Busch co-conceived Ghost’s very successful RTD energy line, Ghost seemed to hate every minute of that partnership and eventually fled to Keurig Dr Pepper. For every NA partner of A-B’s that gets some focus and execution – including Monster Energy at a long-ago crucial stage of its development – there have been several others that don’t seem to have much benefited from the tie, including Icelandic Glacial, Hiball Energy and Super Coffee. To me, that signals that entrepreneurs might be better off piecemealing that jigsaw puzzle, even though all the pieces don’t fit together well. Taking that approach also argues for a more targeted effort that ultimately may stand the brand in better stead.

There’s also the matter of relying on private-equity financing to support the buildout. Certainly, to pursue the landgrab strategy, there are few alternatives aside from a risky strategic alliance. There’s much that’s appealing about them, beyond the candlelit white-tablecloth dinners they like to show themselves hosting in tropical rainforests as they hash out the world’s sustainability and nutrition issues with their portfolio brands. They claim to bring lots of operational expertise and valuable connections that might prove crucial in scaling the business.

Still, if patience truly is a virtue in the beverage incubation space, they might be the last ones to really live that value, since their incentives are stacked in favor of finding their exit in a few years. (Yes, I can name some PE shops and family offices that do seem to walk the walk.) Speaking as a guy who only went back to shopping at my local Fairway grocery in recent years after its disastrous experience with private-equity led it straight to bankruptcy (we’ll open stores all around the country! Hundreds of them! Tomorrow!), I question whether their decision-making always rates as judicious. And beyond the honeymoon phase, once the inevitable glitches of scaling up occur, they often prove not to be the allies you thought you could count on, as many founders have warned. That’s another argument for being the turtle, not the hare, and just slogging forward at your own pace.

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