It’s something we covered, at least partially, during December’s BevNET Live: Neil Kimberley (now with Essentia water, profiled in this issue), Greg Steltenpohl, the uber-entrepreneur who runs Califia Farms, and Bonnie Herzog, a CPG and retail analyst extraordinaire, knocked around the idea that the slow declines of colas like Coke and Pepsi – and drinks like Diet Coke and Sprite and Diet Pepsi and Dr Pepper alike – are creating opportunities for other brands, other types of drinks.
But as we focused on how entrepreneurs can fill the spaces that were being created, we didn’t spend a lot of time on the companies that are starting to decline. Now, as always, that notion of decline is couched in caveats – these are multinational corporations whose share prices depend as much on arbitrage and long-term commodity contracts as they do on innovative new product development.
But even well-hedged businesses are subject to change. The glaciers can slowly erode; so can the big three. It may go beyond the overall decline in consumption of sugary products and artificial sweeteners – it might just be changing tastes.
Kevin Klock, the CEO of the latest major challenger to Coke and Pepsi, has put forth the idea that the nation’s interests in certain flavors like Cola and Lemon/Lime aren’t necessarily in step anymore. Certainly, that idea fits with the broader change taking place in the world of carbonated drinks, where Sparkling Ice’s pairings of familiar and unfamiliar fruits are just a part of a new flavor spectrum that arcs from the sweet salinity of Monster Energy to the herbal unctuousness of Rockstar and the melted berry sucker tang of Red Bull.
They’re not traditional tastes, to be sure, but traditions themselves tend to change over time, and it might very well be that we’re seeing carbonation as the tradition, rather than flavor profile.
After all, effervescence preceded even Coke’s secret formula, and carbonation was served up in Champagne flutes long before it found its way into drugstores and egg creams.
So with that in mind, let’s think a bit about the ways these three companies are addressing glacial change, at least in recent view:
At Coke, there’s been a push to re-franchise bottlers following the lockstep absorption of CCE’s bottling operation. Right now it’s refranchising the Midwest via beer distributor Reyes and also a collection of wholesalers in the Northeast and potentially the Southwest. Even more headline-grabbing was Coke’s investment in Green Mountain Coffee Corp., which makes a home soda maker that may someday rival the Sodastream. These are not new flavors.
There’s also Venturing and Emerging Brands (VEB), which has taken a VC role behind a few promising alternative products, and the wholesale M&A in the purchase of Glaceau of a few years back (note that VEB is a sponsor of BevNET Live). These are new flavors and new products: the Glaceau move was intended to give Coke a foothold in alternatives in much the same way that Pepsi did when it picked up Gatorade.
The mix of innovation and efficiency puts Coke in a straddle, but it’s hard to see the company truly transforming into something else, as IBM and Microsoft did when they moved from hardware and software companies to service providers. Maybe that’s the path the GMCR deal is intended to demarcate, but it’s a very, very long-term play. Still, chasing disruption at the distribution level isn’t a bad idea, as many businesses that rely on the cloud will tell you.
Then there’s Pepsi, which has a split business model between snacks and drinks but a CEO, Indra Nooyi, with a unification theory. Yes, there are those who would ask that the company split itself between food and beverage, and from a shareholder value point of view, that would absolutely create a stir. But that’s just part of the war that PepsiCo is having with itself: the rest lies in the generational transformation that the company’s CEO is attempting to achieve. “Snackification” has been somewhat pilloried as a term, and it’s hard work to get the body to agree with the changes that the brain imposes, but people do shed the pounds, they do remake the way they look, they do perform better. Having a company-wide change of habit is innovative; the spirit is willing, but the flesh may still be too weak. The company has an innovation business in Naked and a heavy reliance on science through its Global Nutrition Group. It may yet achieve technological advances – whether those advances keep the company’s brands from slowly bleeding out as tastes change is a hard call.
At DPSG, meanwhile, the skeleton and internal organs are strong, but they don’t run on soda anymore. They company has massive potential but hasn’t focused its strength – which is that its ability as a co-packer and distributor aligns it perfectly with the needs of the wave of new beverage companies. DPSG is seeing an incredible surge in its ability to grow the companies in its allied brands portfolio, but hasn’t yet figured out how to add value beyond extended reach. Now, when you’re an entrepreneur, growing that reach is very important – but when you’re a giant, reach is nothing without aim. DPSG has been throwing innovation at the wall based around very low or mid-calorie CSDs, but the other companies have already tried that. Given the company’s chief strength of making other products bigger than they already are, wouldn’t it be time for a good old-fashioned roll-up of other companies? I’ve argued before that DPSG is, in fact, a roll-up itself of older entrepreneurial brands as it is. Sometimes, recognizing who you are can be a transformation in itself – if you are willing to decide to act.