Follow the Bubbles

If you’re looking for the next explosive growth category in beverage, just follow the bubbles.

On its surface, the sparkling water segment is far from the cutting edge of modern beverage innovation. Fizzy water has been around in one form or another for decades, usually in the form of budget priced private label brands in 12 oz. cans or premium imports sourced from naturally sparkling mineral springs and packaged in glass bottles. Yet in recent years, as the popularity of sodas and sugar-sweetened soft drinks has continued to decline, retailers and consumers are shifting the way in which they view the category.

Few products have embodied that shift as prominently as LaCroix and Sparkling ICE. The former, founded 30 years ago by a farmer in Wisconsin, has used social media engagement and aggressive in-store merchandising of 12-packs of cans at both conventional and natural retailers to capture the imagination (and dollars) of millennial consumers. Though its parent company National Beverage Corporation does not release brand-specific sales figures, research analysts at Credit Suisse projected in an August report that LaCroix accounts for 35 to 40 percent of the company’s sales. Meanwhile, Sparkling ICE, the zero-calorie, flavored sparkling line from TalkingRain Beverages, generated $667 million in sales in 2016, thanks in part to its wide range of SKUs that have carved out a significant share of the real estate on ambient shelves at conventional groceries and in convenience store coolers.

More important than the numbers, however, the two brands have helped solidify the market for zero- or low-calorie sparkling waters that can play in between the super-premium and value ends of the spectrum. That has also paved the way for the next generation of brands to grow the category even further. Emerging brands and startups in the sparkling water space are employing different strategies to address the challenge of establishing differentiation within the increasingly crowded category, as well as preparing themselves to compete against like products from some of the industry’s major players.

Unlike some other categories, sparkling water has a relatively simple, fixed offering to consumers: carbonated water, either with flavoring or without. That means that as emerging brands seek to enter the market, they are finding an increasingly crowded space in which establishing differentiation can be difficult.

“This category is unique in that it is premium to water with a lower premium national brand and more than a few super-premium players,” said Jason Shiver, CEO of Waterloo Sparkling Water, an Austin, Tex.-based brand that produces a seven-SKU line of fruit flavored sparkling waters. The company, which recently secured $3.2 million in funding from beverage-focused venture capital firm CAVU Venture Partners, entered Whole Foods nationally in September, offering five varieties in 12-packs of 12 oz. cans for a suggested retail price of $5.99. “That left a huge void between the competitors where we lend ourselves more toward the mid-tier, but closer to the major national competitor.”

Although many rising sparkling water brands are sticking close to the tried-and-true fruit flavors that consumers have grown accustomed to in sparkling waters, there has been some notable innovation in how those familiar tastes are being delivered. Earlier this year, for example, Massachusetts-based Spindrift made the decision to remove all natural flavorings and essences from its seven-SKU sparkling water line and replace them with fresh pressed juices and purees, a move that founder and CEO Bill Creelman told BevNET in March matched the company’s desire to emphasize a simple, clean ingredient profile.

In August, organic beverage company Purity Organic took a similar route for its new sparkling line by exclusively using organic fruit juice to flavor its new sparkling line. Yet the addition of 100 percent of the daily recommended allowance of vitamin C to each SKU gives the brand a functional appeal that consumers can easily understand.

“The vitamin C functionality aspect was actually one of the most important features of the product that was appealing to consumers we talked to,” said Bernadette Aguirre, director of marketing at Purity Organic, calling it an important point of differentiation for the brand. “It ranked even higher than being low-calorie.”

Yet even with subtle differences in carbonation and flavor profiles, most sparkling waters offer essentially the same proposition in the liquid itself. That in turn increases companies burdens when it comes to marketing, merchandising and overall brand presentation; LaCroix’s success, for example, has been largely due to its strong performance on all three metrics.

With its colorful cans and slick branding, UGLY Drinks was created to resonate with and communicate directly to the younger audiences who have fueled the LaCroix phenomenon. The London-based brand, which is currently sold in over 1,000 independent retailers in the United Kingdom and will arrive in the U.S. in early 2018, markets a line of unsweetened sparkling waters made with natural fruit flavors and packaged in 12 oz. cans. As co-founder Hugh Thomas describes it, UGLY is “a brand for millennial consumers run by millennial consumers.”

“Our marketing will be focused on building a strong community of Ugly fans who see Ugly as a lifestyle brand and movement that they want to [be part of],” said Thomas, a former Vita Coco brand manager who started the company last year with partner Joe Benn. UGLY is looking to build that community by focusing its initial U.S. launch on servicing accounts in New York City through direct store distribution (DSD). “We want to deliver a brand of sparkling water that truly resonates with millennial consumers with a range of fun, flavored cans.”

Meanwhile, GIVN is aiming to create differentiation with its sparkling product by looking outside the bottle. The brand currently markets a line of premium still spring water that is naturally high in electrolytes. For each bottle sold, the company provides the equivalent of one day of clean water to underserved communities around the world. With the forthcoming launch of its sparkling variety, GIVN is again looking toward its social mission and sustainability to have a significant influence on consumers’ choices.

“Our core differentiation of social impact really drives a wedge between our brand and all of the other competitors on the market,” said John House, CEO and co-founder of GIVN. “Offering a seriously good water that includes a seriously good impact is one of, if not the primary reason why we’ve expanded so rapidly to date.”

Despite their best efforts to create differentiation and offer a unique message, younger brands in the sparkling water category work under the knowledge that they aren’t the only ones looking to grow the market. Major players like The Coca-Cola Company and PepsiCo have been watching as well, particularly as factors such as declining soda sales, regional adoption of taxes on sugar-sweetened beverages, and efforts to diversify their respective brand portfolios with healthier options take on greater influence in their decision making.

In 2015, Coke introduced an unflavored sparkling version of smartwater, one year after launching a flavored sparkling line extension of its other water brand, Dasani. PepsiCo also has multiple products positioned to compete across a range of use occasions and retail channels, such as Aquafina, with its 10 calorie flavored sparkling line that debuted last year, and IZZE. Even AriZona Beverages, best known for marketing value priced sweetened iced teas and juices, is making a play for the sparkling water consumer with the summer launch of a five-SKU line of fruity zero-calorie sparkling waters in slim cans. Add on Anheuser-Busch InBev’s July acquisition of Hiball, which markets sparkling water products through its Alta Palla line, and it becomes obvious that major CPG corporations are taking notice of the category’s enormous potential.

Yet, as indicated by the massive growth of Sparkling ICE and LaCroix, consumers are more than open to brands with a narrower focus on just sparkling water.

“I don’t get the sense that consumers have that same passion for brands built by the major beverage [brands],” said Brandon Cason, CMO at Waterloo. “If we can get enough people to try Waterloo and fall in love with it, the rest will take care of itself.”

Meanwhile, GIVN is hoping the combination of competitive pricing and social impact will give the brand an advantage over the category’s larger players.

“First, the economics of our product have to make sense to a retailer replacing Dasani, Aquafina or Nestle,” explained House, noting that GIVN offers its retail partners price parity to competing brands as often as possible. “Second, the economics of our product have to make sense to the consumer – in our case that means we don’t charge more for the social impact embedded in our product. Our product is always priced at or below the major brands product.”

Sparkling water sales appear set to continue growing in the years ahead, but even as they enjoy the moment, young brands are bracing themselves for the challenges that lie ahead.

“It’s important that the category gives space for brands to grow,” said Thomas. “Sparkling water could become commoditised with too many low value brands without story and personality entering the category, and this could prevent long term value and growth.”

The explosive growth of the category also means emerging brands will have to be prepared to produce more and more product.

“We have found that a big challenge is manufacturing capability to scale with demand,” said House. He noted that while high demand has presented an opportunity for more co-packers to get involved, many are already operating at full capacity. “For co-packers looking to upgrade to provide sparkling options, the equipment costs have skyrocketed due to the craft beer revolution. So the net for any brand trying to launch or expand a sparkling water line is that there are meaningful manufacturing constraints in the market at present.”