Naked Dealings: North Castle Partners

Combine regional smoothie manufacturers, and then blend to highlight unique combination of flavor offerings. Share with a public thirsty for tasty, all-natural drinks. That’s roughly the recipe that North Castle Partners, a Greenwich, Conn.-based private equity firm, used to build Naked Juice Company into a $150 million business. In January, PepsiCo acquired Naked Juice for an undisclosed amount.

It’s the latest in a line of healthy beverage acquisitions as part of a pledge by Cadbury Schweppes PLC, Coca-Cola Inc. and PepsiCo to cut back on the sugary drinks sold in public schools by 2008. “Could they create their own? Sure,” says North Castle’s Louis Marinaccio, the managing director who led the buildup of Naked Juice. He continues to serve on its board of directors. “But they’ve empirically answered the question of whether they want to.”

We talked to Marinaccio about his take on picking market innovators—and how a savvy company can prime itself for investors:

BevNET IBQ: How important is innovation in beverage manufacturing?

Louis Marinaccio: Incredibly important. As we look at what mattered for the success of Naked Juice and other beverage investments we made along the way, it’s a combination of a distinctive brand and a distinctive and ever-changing product portfolio. In some ways, just finding the next great thing is an innovation, if you turn that ingredient into a profit. In the case of antioxidants, one day the next great thing was blueberries; the next it was pomegranates and now it’s acai.

What do you consider when evaluating an idea against market potential?

We look at the success of previous beverage phenomena—like the smoothie business in general; or even certain product categories within it like pomegranate —and say,“Is this a fad or a trend?”A fad is something where there will be some quick consumer acceptance, some press generated, and then the product disappears. Either the value proposition is not being delivered by the product and the consumer realizes that it’s a marketing hype, or something else comes along.

Which current fad would you pass up?

I would say we would probably find ourselves not very interested in a new energy drink player. You’ve got Red Bull, you’ve got Monster, and you’ve got some of the new entrants from Anheuser-Busch, Coke and Pepsi, all with distribution and marketing muscle. Once a market has grown to two or three national players that are serving the full spectrum of customer channels, that have a consumer following, it’s very hard to be the fourth player into the market. While there may be a great idea, the market just doesn’t need another product with taurine, guarana, caffeine and sugar. It needs something different.

Some people might say, “Why did Naked Juice launch an energy line if that’s how you feel about energy drinks?” Naked Juice’s angle was to make it an all-natural product, so it’s literally the first all-natural energy drink to the market, based on only natural ingredients, based on no-sugar added, and no added caffeine. And so you’ve got a different angle delivering a new spin on the energy value proposition. It would have to be something like that to draw our interest.

When you’re considering investing, what do you look for in the company itself?

Our strategy is to come into an existing business with a proven concept, a history of distribution and consumer acceptance. We look for companies where we can partner with entrepreneurial management teams to take their businesses from the level of proving brand and product and distribution, with maybe $20 million in revenue and some history of profit, to the next level. Particularly, we look for a product portfolio that in some way promotes healthy living and quality of life. It could be natural and organic. Or it could be in some way value-added—functional ingredients, some form of new nutraceutical, protein addition or another concept that makes it more than just a quencher.

How do you like to see your capital used to grow a business?

Typically, what we find ourselves doing is creating liquidity for the prior owners. We are majority investors, so a good portion of our capital is to buy out existing shareholders. A smaller portion is deployed to support growth. Our typical investor blueprint would be to put together a partnership with the CEO or senior management of the business. We lay out a path to substantially acknowledge the growth of the “Is it a fad or a trend?” – Louis Marinaccio business, bring it to somewhere north of two to three times its current size, based on the opportunities that the company has and the product has in the marketplace. Capital could be used to support product development, or to enhance and professionalize the management team. It could simply be used to support retail expansion in the form of a new product launch, in trade promotion or in consumer marketing efforts.

The strategy with Naked Juice was a combination of upgrading the product portfolio, accelerating new product innovation and introduction and keeping the line fresh. We extended the shelf life of the product from a 17-day shelf life to a 30-day shelf life, so that it could support a national distribution strategy. We then worked with the management team to upgrade the sale force so they could have the capability to service national accounts as opposed to local and regional accounts, and really expand distribution rapidly through good customer partnerships.

One method with Naked Juice that was incredibly effective was a grassroots marketing campaign where the brand would interface with consumers at events in local markets where the product was sold. We put the product in consumers’ hands, allowed them to taste it and experience it. We found trial was the key; that anyone who tried the product became a consumer because it’s just a great product.

Considering the recent acquisitions, how can manufacturers set themselves apart as a company to invest in, rather than mimic?

Based on what the strategic buyers to whom we’ve spoken have said, and certainly what we’ve talked about during our time with Naked Juice, [beverage giants like Cadbury Schweppes PLC, Coca-Cola Inc. and PepsiCo] are looking for a handful of things, beyond healthy and alternative additions to their portfolio. They’re looking for businesses that have a proven concept, rather than have to create a product from scratch and test and find whether it has an acceptable consumer value proposition.

It seems like the winners are those that come up with a solid value proposition that’s based on some kind of technological step forward, rather than just a marketing proposition. By that I mean if it’s an infused water, that there really is content in the water, in terms of vitamins, minerals and supplements. It’s not just a nice brand, nice marketing, but when you turn over the bottle and there’s nothing in it. The consumers are tired of pure marketing and cosmetic beverages, and will receive and welcome truly new value propositions. And those are the types of businesses that have a better chance of creating some•thing sustainable and becoming more attractive for acquisition.