Big Deal!

Thanks to the miracle of smart phones, my contacts often zap me photos of interesting store displays they spot in their market meanderings. One subset that we occasionally flag in my newsletter consists of ridiculously hot deals on purportedly superpremium beverages. Besides appealing to my readers’ prurient interest, these impromptu case histories generally serve to support the notion that, despite rhetoric from top brass to the contrary, it’s easy to get sucked into brand-equity-draining deals when you’re trying to hit a volume number or appease an important retail customer. And, no surprise, the most egregious deals usually emanate from the major companies for whom moving vast tonnages of product seems always to be the overriding priority.

Given the premium-priced $4.1 billion that Coca-Cola paid for Glaceau, some of my respondents seem obsessed with tracking how low the price can go on its flagship Vitaminwater brand. Ten-for-$10 deals have become ubiquitous by now, but often enough they get way more aggressive than that, tossing in a free 32-oz. bottle of Coke’s Powerade brand or some other sweetener. Some deals we’ve spotted in recent years have taken the per-bottle cost of Vitaminwater down as low as 25 cents a bottle. True, Glaceau did its share of 10-for-$10’s even as an independent company, but the deals we’ve seen since Coke’s 2007 buyout go way beyond that in degree and frequency. But it’s not just Coke: just the other day, a reader sent me a photo of Tazo teas going for 50 cents per glass bottle in Publix groceries in Florida – 25 cents if one threw in a related tearpad offer. Since Starbucks chief Howard Schultz lately has been touting his Tazo brand as a high-potential franchise already worth a billion dollars, I’ve wondered whether he’s even aware of these deals being cooked up by his ready-to-drink partner, Pepsi.

Over the past few months these deals have become a focus of constant concern among independent entrepreneurs, who already work in a challenging enough realm on the cost and distribution side before losing any prospect of sustaining a premium price. And yet that seems to be precisely what’s been happening. Even for those with the fortitude to resist the margin-breaking impulse to match these deals, the trend means they’re further marginalized as consumers gravitate to the massive end-aisle displays and dump bins full of deeply discounted product – or, if there’s no deal this week, withhold their purchases so they can pantry-load a week later. In effect, it’s sucked the air out of the category, in a way that has put a big hurt on independent innovation.

Some of my friends on the entrepreneurial side insist this is all a massive conspiracy by the big companies, but I really doubt that’s the case. Maybe it’s an unanticipated consequence of the discounting, but I don’t believe it’s the actual strategy. I truly believe that, at a visceral level, their executives are not even aware of how much they’re devaluing a category. This view goes back to the days in the early 1990s when Coke and Pepsi first decided to attack the bottled water category. It may be hard to recall, but back then bottled water was a premium-priced segment, with only one major corporate player, Nestle Waters North America. The carnage only began once Coke and Pepsi entered with their tap-water brands, and we ended up with 24-unit cases of half-liter bottles routinely going for $3.99. As pricing went into the dumper, I can distinctly recall top Coke and Pepsi executives on analyst conference calls lamenting the stroke of bad luck that saw the margins of this premium segment evaporating at precisely the moment they chose to enter the category. Though they spoke as though this development was an act of God that had nothing whatsoever to do with their own activities, I never picked up the least hint of cynicism in those remarks. After all, if your obsessive focus is countering the price moves of your archrival, I suppose it’s hard to look up and ponder where this is taking the category. With NWNA showing it was fully up to withstanding their assault, Coke and Pepsi lately have backed off, but the damage has long been done. A once-premium category now is a warehouse-shipped commodity.

This same pattern has been replicated in category after category. In enhanced water, Coke’s constant dealing on Vitaminwater made it impossible for any other brand – even those with far more meaningful amounts of nutrients – to get the premium prices they need to stay viable. Only Pepsi’s entry, SoBe Life Water, with its own willingness to vie on price, has stayed in the game as a meaningful player. Most recently, I’m hearing that Glaceau’s electrolyte-infused bottled water line, Smartwater, has gotten more aggressive on price, with clear implications for an ecosystem of alternatives from independent players like AriZona, Metromint, Function and Activate.

Of course, one could argue that this is all a boon to recession-strapped consumers. In some ways it is, though the affluent demo targeted by some of the brands I’ve mentioned actually has withstood the economy’s pressures fairly well and can really afford to pay more than a quarter a bottle for a tea of the quality of Tazo. The way marketing works, though, the constant deep discounts also are draining these segments of the mystique that made them exciting to consumers in the first place, reducing them to yet another boring commodity – like CSDs and milk – not worth a moment’s thought at the shelf. To the extent that the excitement conjured up by new and different brands has any value, the beverage sector is all the poorer as a result.