Gerry’s Insights: The Sparkling Cycle

With a recent revenue miss by parent National Beverage, we may be seeing the first signs that the torrid growth rate of La Croix Sparkling Water is starting to tail off. But the brand continues to have an outsize impact on the beverage industry, drawing in a raft of new brands seeking either to knock it off or to do it one better. As we’ve seen in other categories, a breakout brand’s first-mover advantage can be difficult to overcome even by the major food and beverage players; throw in the unusual way La Croix built its business and that challenge may be even bigger.

La Croix, of course, is part of the portfolio of once-sleepy National Beverage, a collection of cats-and-dogs soft drink brands operated adeptly by the Caporella clan. Though the company is publicly traded, the Caporellas continue to run FIZZ as though it’s a family business (not necessarily damning – the same could have been said of the Busch family during Anheuser-Busch’s heyday), and their disclosures on their business are famously opaque despite all the exclamation points and all-caps declarations splattered on its earnings releases. Once just a regional water, La Croix seemed to come out of nowhere as a national brand a few years ago, adeptly riding the wave of consumers looking for a glide path away from CSDs, much as Sparkling Ice did over at Talking Rain.

What makes La Croix unusual in the annals of breakout brands is that it didn’t start out as a premium brand, sold a bottle at a time out of the cold box, but rather has been unrelentingly value-driven all the way, moved in 8- and 12-unit can multipacks. That may be a reflection of the Caporellas’ orientation in their core portfolio toward generating velocity with brands that may no longer hold much consumer intrigue or premium appeal but have the benefit of bold flavor or regional heritage or sheer familiarity.

By contrast, when you think of other shelf-stable beverages that have struck it big on the new-wave side, most came from the premium end, offering a mix of ingredients and lifestyle positioning that allowed them to support the higher prices that in turn could enable them to ride the learning curve on costs and support their use of DSD distribution to get to the right impulse locations at retail: brands like Snapple, Nantucket Nectars, Fuze, Vitaminwater, Honest Tea, Vita Coco Coconut Water and Bai. Indeed, when I encounter owners of emerging brands who express skepticism about the value of DSD, I’m prone to remind them that it’s hard to find any breakout brands on the shelf-stable side that did not rely heavily on DSD in their early stages. Those DSD partners are particularly crucial in getting single-serve packs into impulse-driven cold boxes. Well, La Croix is one of those rare exceptions.

As for the value piece, even brands we associate with value, like AriZona Iced Tea or Sparkling Ice, started out at the premium end. At the time AriZona launched, it may have offered 50 percent more iced tea than Snapple at the same 99-cent price, but that was still in premium territory. Monster Energy followed a similar tack versus Red Bull, offering twice the liquid – 16 ounces – at the same $1.99 price and has stayed resolutely premium since then. Even Sparkling Ice, for all its 10-for-$10 promo activity, is essentially a premium brand, especially in the cold box.

But La Croix, from the beginning, harnessed a simple recipe, striking packaging and a deft social-media touch to go out aggressively on price with almost no recourse to DSD distribution. That greatly compounds the challenge of all the companies hoping to join La Croix in exploiting this segment. It’s worth exploring the range of strategies we’re seeing from the newer entrants.

Several are going straight down the middle, basically trying to go head-to-head with La Croix. That’s true of Austin-based Waterloo, backed by the influential private-equity shop CAVU, and more recently of Pepsi, with its new Bubly brand. Both seem willing to go down and dirty on price – during a recent visit to Austin, I saw Waterloo actually undercutting La Croix on price in some stores – and both employ DSD distribution to get to retail. That higher-cost approach could prove hard to sustain, even for a player with the resources of a PepsiCo. A flock of regional entrants is trying a similar approach.

Others are going in the opposite direction, offering a bit more than La Croix to justify a premium price that can win retailers’ attention and justify the more expensive DSD route to retail. That might include more sophisticated flavor profiles, as with flavored sparkling waters unveiled by the likes of Icelandic Glacial and Eternal Water (both of them sourced, naturally alkaline waters, further value-adds for some consumers). Others are planting a seed of doubt about the purportedly natural flavor systems employed by La Croix and rivals like Hint Fizz, most notably Spindrift, which makes much of its conveying fruit essences straight from the orchard to its drinks. (There seem to be local variants of this approach in many cities, too.)

Some are targeting the same occasions with offerings that trade off the zero-calorie pitch in favor of a bit of fruit juice to offer a more robust mouthfeel, as with the canned sparkling line recently launched by juice player Purity Organic. And caffeine doesn’t hurt as a come-on, as with Avitae’s sparkling entries or New Wave, a recent entrant out of Southern California that melds 15 percent juice content with a modest hit of caffeine.

Will any of these various strategies work? It’s debatable. Even the promise of richer offerings bringing higher margins did little for many years to dislodge brands like AriZona or Vitaminwater from their perches, as retailers greatly appreciate high-velocity brands that essentially sell themselves. That’s particularly true of a brand like La Croix that seems beloved by millennials, precisely the demographic that merchants are scrambling to corral these days. No question, La Croix’s eschewing of DSD may put a damper on the brand’s eventual size, lessening its presence in key impulse channels, but so far that hasn’t proved the big issue some of us had predicted. So, while it will be fun to watch this battle play out, there’s a good chance La Croix has little to fear beyond the natural cycle of once-hot brands and segments that inevitably reach a crescendo and begin their decline. As brands like AriZona show, that could prove to be a long, lucrative cycle.