Pricing Meditations

It’s a moment I come back to often:

A few years ago, on a hot summer afternoon, I took a break from work to go pedaling around my Upper West Side neighborhood to satisfy a sudden craving for a bracing ice-cold, big can of AriZona Iced Tea. As I roamed from seamy bodega to corner deli I was shocked to realize I couldn’t find any. It finally dawned on me that in my affluent area, retailers had come to recognize that there’s no need to trade down consumers who walk into their stores willing to pay $2 or more for a single-serve item by distracting with them with a humongous serving of tea at below a buck. Some of the retailers carried a couple of facings of AriZona’s smaller bottles at $1 or so, but I was resolute in my quest and it took me half a dozen stops before I could claim my AriZona big boy.

This points to a dilemma at the heart of beverages, particularly in the innovation space. On the one hand you have brands like Honest Tea that have a stated aim to democratize organics. If that’s the objective, then getting its products down to an accessible price point – say, a buck a bottle – would seem to be an eminently worthwhile goal. Don’t know about you, but I see a lot of Honest Tea out there at a buck a bottle these days, and it would be hard to deny those prices are bringing new consumers to organics. That would have to count as a good thing. (The flip side of that is the question asked most pointedly of the new breed of nutritionally rich HPP brands like Suja, Daily Greens and Harmless Harvest: if they’re truly meant to elevate Americans’ nutrition, how is that consistent with a price of $6 or $8 or even $10 per single-serve bottle? So we’re also seeing a race on that side to move prices to more accessible – but still superpremium – price points.)

On the other hand, brands that are carefully crafted from, say, Fair Trade, organic teas that are sourced halfway around the world need air to breathe in the form of sustainable margins. Operating on threadbare margins brought about by undue price promotion makes it harder to raise capital, put feet on the street to proselytize for the brand, and build a premium image. Even that master of targeting specific packages at specific prices for specific channels, Nestle Waters North America, seemed to realize soon enough that rendering its newly acquired organic iced tea brand, Sweet Leaf, as a 99-cent can sold in convenience stores was a short-sighted, unsustainable way to build the brand.

So it’s troubling to me to see the kinds of promotional maneuvering that’s going on in purportedly premium segments, even in retailers like Whole Foods, where deals run the gamut of 3-for-$5’s, 2-for-$4’s, 3-for-$4’s and of course 5-for-$5’s and 10-for-$10’s. Those frenetic deals first popped up a few years ago as a reaction to the last recession, but they’ve showed no sign of abating. Lots of entrepreneurs, like David Luks, marketer of the Deluxe Honeydrop honey-based beverages, complain that the low pricing is making it impossible for new brands to garner any traction; his reaction, stoked by allies at Whole Foods, was to segue from that beleaguered shelf-stable sector to the richer cold-pressed side. Others have fled the category altogether.

Coca-Cola’s Vitaminwater brand offers an instructive case history in how this tends to play out. Even as an independent company, the brand went for its share of price promos as it raced for the scale that would tempt a corporate suitor. But its eventual acquirer took the strategy to new heights, or lows: 10-for-$10 deals and bundling offers with the likes of Powerade that often took the price well below $1. (For a while my newsletter would gleefully track new price lows spotted by readers, until it simply wasn’t funny any more.)

That pricing strategy, unfortunately, deflated the enhanced water segment until it became a graveyard. Far more efficacious brands like Jones 24c and Talking Rain Activwater found the atmosphere unsustainable, with consumers automatically defaulting to the low price of Vitaminwater. In effect, Vitaminwater under Coke attained the same position as Capri Sun has kids’ drinks: so blinding in its promotional fervor that it seems to distract shoppers from whatever other purchases they might have been considering. Coke, with its purchasing power and company-owned distribution, likely makes money playing this game, even as it disables would-be rivals. But Vitaminwater has lost its allure as a brand, and even the low prices no longer seem able to stem its declines. Coke’s recent marketing exhortations to “Hydrate the hustle” likely won’t be enough to return that brand to premium status any time soon. To me, it’s kind of sad to see a vital, captivating brand devolve to commodity status so quickly, and to see the collateral damage it caused for other intriguing brands. The only good news is that by now Vitaminwater may have become so irrelevant that it’s been tempting entrepreneurs to offer new enhanced water brands, on the clear assumption that the elephant is finally out of the room.

Ironically, this is the reverse of what’s been happening in the core, mass-consumption beverage sectors, where the major soft drink companies lately have been patting themselves on the back for moving to more affirmative price-maintaining strategies for their core CSDs. In contrast to American brewers, who’ve always had a bias toward taking pricing, CSD makers in recent decades have failed to keep pace with inflation, pursuing a beggar-thy-neighbor promotional strategy that encouraged shoppers to pantry-load until the next grocery flier arrived touting 1-liter bottles for 99 cents or 12-packs of 12-ounce cans for $3. Over the past year, though, they seem to have gotten religion, eking out more dollars by reducing the frequency and depth of these promos and steering consumers to newer packaging configurations that offer them benefits like portion control at the price of a few more cents per ounce. Of course, it remains to be seen how durable these conversion experiences will prove. If I remember game theory correctly, it won’t necessarily take much of a trigger to send them stampeding back in the other direction.

Let’s hope, meanwhile, that the advent of the cold-pressed juices and coconut waters, kombuchas and other superpremium entries recalibrates consumers’ price perceptions, much the way Starbucks’ arrival 20 years ago recalibrated what Americans were willing to pay for coffee. And let’s not forget those shrewd retailers, like the ones I visited a few summers ago, who seem to be embracing consumers’ move toward better beverages. They may be less inclined to abet the descent of unique brands into commodity status, and more interested in maintaining their identities as special shopping destinations.

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