Pepsi's IZZE Gamble

First of all, congratulations to IZZE for getting the deal done with Pepsi. Since John Bello joined as chairman late last year, it seemed to be only a matter of time before this deal would come to fruition.

Also on that note, it’s probably better for everyone involved that it was, in fact, Pepsi and not Coke doing the acquisition. Coke has a terrible history of buying and integrating small “new age” brands — Mad River and Planet Java to name two. There haven’t been any complaints so far on its co-distribution deal with Rockstar Energy Drink, but at the same time, Coke has also been pushing its own Full Throttle energy product, and we still wonder a bit whether Rockstar will eventually get the boot due to its stepchild status.

Pepsi, on the other hand, has had mixed results with its drink acquisitions, albeit with some major successes, like its purchases of Tropicana and Gatorade, as well as its recent, nimble work with the snack food brand Frito-Lay, where it’s skirted a potential land mine by introducing 100-calorie snack packs.

On the other hand, it’s basically bungled a much more expensive — and Bello-brokered — acquisition than IZZE, that of SoBe. In the past year, SoBe and Pepsi have experienced major problems existing as part of each other’s cultures. Look at the number of people who lost their positions in the SoBe headquarters last spring, and at the fiasco that took place when PepsiCo tried to use SoBe as a staging ground for its clumsy, anti-glaceau Lifewater launch, and one might look askance at the purchase.

Buttressing that opinion is that IZZE itself is a tough product to figure out. While it’s still popular among “Yoga Moms” and other shoppers who are always psyched for the up-sell, it’s still not a low-calorie panacea for those who are concerned about the country’s next generation of school-age fatties. Despite the fact that there’s a negligible calorie savings in a bottle of IZZE compared to a bottle of Pepsi — and there’s no diet IZZE at all — it’s those chubby children to whom IZZE will most likely be marketed in schools in the near future. In fact, there’s a strong argument to be made that it’s IZZE’s all-juice — and therefore in-school vending-friendly — formulation that made IZZE attractive to Pepsi in the first place.

And if the IZZE folks saw so much profitability waiting for it in the schools, why didn’t they hang onto the franchise themselves, particularly when they had hired Bello, a beverage Jedi Master if there ever was one, to help out? The company’s relatively low — $75 million — sales price might offer a clue. IZZE had received several rounds of venture capital, and had reportedly burned through all of it faster than a Rasta in Amsterdam. Despite IZZE’s momentum and potential, someone had to get paid, and quick, and Bello, with his ability to make things appear shipshape enough for a sale, as well as his connections with Pepsi, was just the guy to do it.

So here’s the rub — IZZE is undoubtedly the best known of the new generation of healthy alt-sodas, and the Yoga Moms on both coasts (and yes, we fully believe Boulder, Colo. is on the West Coast, it just sits on an especially high bluff) are a pretty powerful buying bloc, with the potential to boost a brand into the stratosphere. Just look what they did for Kashi.

But at the same time, no matter how juicy and vitamin C laden it is, IZZE is basically a soda. To their credit, that’s largely what co-founder Todd Woloson and co. have always claimed IZZE was, rather than try to snake-oil it as a good for you cure-all for a generation of overfed adolescent Weebles. But sodas are on the decline in a macro sense, and given the fact that Pepsi and Coke are both trying to avoid choking on their soda portfolios, it’s surprising that either company would want to tack yet another one on.

Pepsi thus far is saying that they’ll let the IZZE folks work it out for themselves, saying that they’ll give them “the freedom and autonomy to preserve its identity while we develop the brand and help it grow,” according to CEO Dawn Hudson. But so far that freedom and autonomy has only resulted in the occasional splurge among Oprah devotees and a surprisingly low valuation. That’s not to say that $75 million is nothing WE’D sneeze at, but we’re sure it doesn’t have Pepsi reaching for the cold medicine.

Still, there’s nothing to argue with the potential power of the Pepsi distribution system, and maybe there’s a slightly larger, more carefully considered alt-soda strategy going on here, especially given PepsiCo’s blessing of Pepsi America’s acquisition of Airforce Nutrisoda — yet another inexpensive purchase of a niche CSD with a degree of potential.

And there’s nothing wrong with imagining a growing generation of “IZZE kids” who are as likely to want that company’s graphically appealing swag as they were Coke t-shirts so many years ago. It could happen, it’s a pretty inexpensive gamble for the folks from Purchase to take, and if it pays off the returns would be bigger than at the roulette table.

But if it doesn’t, it would be a shame to see Pepsi start tinkering with IZZE the way it has with SoBe, trying to find products to fit the outsider image of a brand that was sold on potential, rather than performance. We’d rather not see that happen, because we fear new line extensions into Frozen IZZE Pops, IZZE Energy and Black Cherry Vanilla Izze. We’d hate to see them squeeze too hard, and sink a brand that has always had its own particular effervescence.