Quietly Hedging for the Future

In the world of Wall Street deals, it was so slight an acquisition it didn’t even merit a mention in any of the daily news sections I read: PepsiCo paid what insiders said was $75 million – pocket change – for privately-held-Izze Beverage.

What Pepsi got for its outlay is a healthieralternative soda that couldn’t have been doing much more than a million cases in annual volume – some in Starbucks, some in gourmet stores and supermarkets, some in schools. So obscure is Izze in the bigger realm of soft drinks that a Pepsi acquaintance of mine confided that, aside from the odd mention in trade journals he reads, it wasn’t a brand that was even on his radar.

So imagine his surprise when, mentioning at breakfast that Pepsi was about to announce the acquisition, his teenage daughter excitedly revealed that she was a closet fan of Izze. Apparently, now that it was entering the Pepsi orbit she could afford to admit it!

But that’s how these brands are. For those of us who tend to focus on big-volume brands launching in-your-face media assaults and grand merchandising displays at retail, brands like Izze and Switch and GuS and Fizzy Lizzy really are beneath notice. Still, they have loyal followings – even, it seems, within Pepsi households – and since many of these loyalists are young, these brands can’t be entirely written off without a hard look at the future.

In Izze’s case, the brand commands a premium price, has won a soft spot in moms’ hearts and is packed in classy glass bottles that provide a distinctive shelf presence next to the ocean of CSD line extensions packed in metal and plastic. It’s also a nifty on-premise play for delis, pizza parlors and corporate cafeterias looking to strike an upscale note or two. Like Frappuccino and Ethos Water, also in the Pepsi portfolio, it has a very visible presence in the aura-conferring Starbucks cold box. Not least, if Coca-Cola were to decide to counter Pepsi’s move, it’s hard to see what other brand in this segment has quite the presence of Izze, small as awareness is even for Izze.

Let’s not kid ourselves, though. Historically, this segment – what I think of as fizzy juices – has been quite problematic. I got worked up when Crystal Geyser’s Juice Squeeze turned up in my local Starbucks in the 1990, earning the honor of becoming the first beverage sold in Starbucks that my kids actually enjoyed. With 72 percent juice and 28 percent sparkling spring water, it seemed a parent’s dream. (We hadn’t learned to be scared of juice yet.) It didn’t go anywhere, though: it wasn’t “refreshing” enough for mainstream tastes, my more seasoned friends in the business explained to me, and there were punishing economics that made it hard to make a buck.

Now, driven in part by the backlash against conventional CSDs, these drinks may finally be about to break out (though the economics haven’t gotten any friendlier). So count Pepsi as showing a subtle intelligence in picking out the choicest alt-soda brand in the batch, recognizing that – despite the absence of any significant entry barrier – neither its soft-drink nor its Tropicana units are likely to be able to KO it convincingly – and being willing to pay a “strategic” price (read: one day’s sales in Minnesota) to get it. Also smartly, I think, Pepsi is resisting the urge to fold it into its headquarters development operation and its bottler network. Instead, taking a cue from its experience with SoBe – an acquisition that went inert fairly quickly once sku-pinching marketers and bottlers went to work – it’s said it will let the brand breathe. We’ll see, if the brand gathers momentum, whether Pepsi maintains that approach. So far, though, it’s looking like a good way to proceed with what may prove to be a very smart buy.

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