Since launching the brand in 2015, FORTO founder and CEO Neel Premkumar has worked tirelessly to prove that there was a viable market for a premium, organic coffee-based energy shot. He’s been largely successful: during that time the brand has grown into one of the best-selling organic coffee products in the U.S., attracting both big-name investors (coffee multinational JAB, Keurig Dr Pepper and NBA legend Shaquille O’Neal, to name a few) and national retailers like Target, Walmart, CVS, Walgreens and Dollar General. But as FORTO enters 2021, the real work is only now just starting.
While the growth momentum that has pushed the brand — named a Rising Star at BevNET’s Best of 2018 Awards — to this point is still strong, the new year brings new challenges. Keurig Dr Pepper remains an investor in the parent company Dyla Brands, but the conglomerate is no longer distributing FORTO shots. Those are now moving through wholesale consolidators and will be the brand’s central focus after its 11 oz. energy coffee line was discontinued at the end of 2020. Dyla also sells Stur, a liquid drink enhancer, and has responsibility for the powdered drinks portfolio at KDP; according to Premkumar, those parts of the business are increasingly important.
In a revealing conversation with BevNET managing editor Martin Caballero, Premkumar shared his thoughts on a wide range of topics, from guiding the brand through its transition out of DSD distribution to the current market dynamics for center-aisle coffee drinks to how FORTO is refining its position as a product that plays simultaneously within the organic coffee space and the energy shot category.
What is the top priority for FORTO this year?
We just took the brand back into wholesale distribution, which is the same route to market that 5-Hour Energy and most of the other shelf-stable shots are. So [the priority is] really ensuring that all the accounts complete the transition over from DSD — the majority of which has happened — and make sure the in-stock rates are everything we wanted them to be. And then we’ll be driving a lot more advertising once we have it back on Amazon, including content with Shaquille O’Neal, that will probably come out by the end of Q1.
How can going to that wholesale model help address some of the issues and challenges that you guys faced with DSD?
DSD I think is very powerful for certain categories and products, typically larger RTD products like cans of soda or sports drinks or energy drinks. I’m not sure that there’s ever been a brand that has scaled without it. Energy shots is a category that is not ever typically seen in DSD — it’s a general merchandise buyer, typically sold at the checkout next to Bic lighters and batteries and tobacco and candy. So it’s a different buyer than the typical DSD beverage buyer. It’s a different route to market, usually through wholesale consolidators in the convenience channel or direct to the account in the rest of the market. So we had some challenges, not from lack of trying on both sides, with just getting the product in stock and ensuring that the supply was as consistent as some of the competitors on the shelf.
What have you guys learned about effective merchandising in stores for the shots? Is being near point-of-sale next to general merchandise items where you want the brand to be?
I’ve found that it varies quite a bit by channel, and sometimes by region. 5-Hour did a really nice job building their business with displays that went on the shelf and on the counter when they launched around 2004, just after the FDA had taken tobacco behind the counter. So the counters were empty and they had a lot of success building these kinds of fixtures and racks. So four years ago when we launched, there was already by then an established category section which typically were like shelving units under the bottom of the counter or in an end-cap aisle in convenience stores. So it’s harder there to really stand out, because those tend to be more random, one-off purchases. The places I think we’ve seen the most success, and I think that’s been true of a lot of the smaller energy shot players, is when we have some kind of secondary merchandising unit that really stood out. So we’ve tested things like a coffee cup merchandising unit on the top of the counter. In CVS stores and in some convenience store chains, we have a cooler door rack that goes on the inside of the door for the RTD coffee set, and that’s made a big difference. It really varies by account. We are in a test right now with Walmart in the Southeast at the checkout, where we are outselling 5-Hour Energy per point-of-sale. We have secondary displays that we put up in those stores. I think merchandising is really critical. Unfortunately, there’s no one size fits all. What worked for 5-Hour 15 years ago won’t work for other folks now.
With taste and organic ingredients being two major callouts for FORTO, are you seeing a big difference in terms of the way the product is perceived when placed inside versus outside the cooler?
So our product is really unique — we are really the only coffee shot. We are the only company in North America that invested in a fairly unusual production system that allows us to do a shelf-stable product with milk. Nobody else in North America can make something below 4 oz. with milk that is shelf-stable. The other thing is that we have a really rare IP: we control the shape of a coffee cup, in small form, in perpetuity. The actual outline of the coffee cup is a trade dress protection, similar to the Coke bottle contour. We kind of have this market to ourselves, now the question is how to get the right consumers to try it. The repeat rates are really high, but we’ve got to get the right consumers. The RTD shelf in the coffee aisle and the RTD coffee consumer is where we want to be. But it’s hard to be on the shelf next to Starbucks Frappuccino because we’ve got a 2 oz. shot. When you think about it, if we are going after RTD coffee consumption, coffee is either consumed hot or cold, not room temperature. So that’s probably the biggest hurdle for putting it on the shelf next to 5-Hour, versus getting a secondary merchandising unit where it’s in a cooler.
Talk to me about why the full-size RTD line was discontinued at the end of 2020. Was this something that was more driven by market conditions or more linked to the product or brand itself?
It’s a good question. We launched this two years ago. Walmart was the one that approached us; we were selling the shots and they were happy with it and they kept saying the concept of an organic RTD coffee could really work. So we developed it in partnership with them, and they were our exclusive partner for the first year. We had just gotten in the KDP distribution network, so we asked them if we could work with them, and KDP said they could accommodate us. So that’s how the product emerged. And the first year it did about $10 million in sales just at Walmart. I think we developed a really good product. It’s a delicious tasting product. The secret to some of the taste behind FORTO is that we use organic whole milk. In a 2 oz. bottle, it’s pretty small, you aren’t getting many calories or much sugar. But the taste is incomparable — we had head-to-head sensory with a number of other products in the category and we were beating them soundly. We were on the shelf at Walmart and were probably the number four brand in terms of RTD coffee, behind Starbucks, Dunkin’ and Java.
We had a really good package and good product — the challenge is just the cogs and the margin. The item had such a unique bottle shape, which resonated because it looks like a cup of coffee from a cafe. But it is also a lot more expensive than cans. The ingredients were more expensive than almost any other coffee. Our initial thinking was that on a certain scale it could make sense financially for us. But I think what emerged over time as we started going beyond Walmart, we realized that to get to that scale we’d have to spend millions of dollars, and we’d basically have to take money away from the rest of the company which was doing really well on the drink mix side. Does it make sense to spend this many millions of dollars and never be profitable with the hope that one day, three to five years from now, we could make this work. Or it might be longer even. The board and I and KDP just felt it wasn’t a great gamble. In today’s environment, ensuring that you profitability already or a path towards it makes more sense.
Broader challenges of being successful in center aisle?
I’ve done a lot of self-reflection and talking through with the organization and the board, even before we made the decision, as to how and why it could have worked differently. It was not from lack of trying, and I think we had a really good partner in KDP. I think there are a few things that really came out. The first is that RTD coffee, the unit velocities on average in the set, including amongst the top ten SKUs which are all Frappuccinos, are much, much, much lower than the comparable unit velocities of the average SKU in energy drinks or water or certainly CSDs. The top ten energy drink SKUs are volumes faster turning than the top ten RTD coffee SKUs. And I think over the last five to 10 years, most companies, big or small, have jumped into RTD coffee with the expectation that, because 80% of the U.S. population drinks coffee, they will eventually migrate to the format, and once they do the velocities are really going to pick up. And that was the general bet that most players that jumped in this market took, and the same bet that we made two-plus years ago. Unfortunately the velocities are just not close to that. We had built a model based on the category continuing to grow and grow and that cold brew was going to take over what energy drinks were for the millennial generation. We didn’t see those numbers across the industry.
Second, a lot of other startups and big companies are enamored with RTD coffee. So there are a ton of entrants, which really affects the cost to do a model like this. Every single year for every single account that we ever talked to, the slotting fees kept jumping. In some accounts it might be $10,000 the first year, then $15,000 to $20,000 the second year and $25,000-plus the third year. Yet the unit velocity didn’t really change much from a category perspective. So there’s so many entrants, with not a bigger pie for everybody, and the velocity not justifying what we were expecting it would eventually get to and we didn’t know when it would. Those things combined, led us to think that you can spend money — and some companies have done a good job of spending money and trying to grab market share — but they will have a hard time getting to real profitability.
And honestly, in the beverage industry there are a bunch of companies that have done this and never become profitable. They’ve gotten great market share and they have great products and eventually they get taken out. I think that’s a strategy that obviously works for a lot of people, but if we didn’t have another 90% of our business doing really well and profitable and growing, I would have said let’s try it. But we do. I had a benchmark comparison.
How is that experience informing how you guys think about innovation? Is energy coffee still the identity and guiding principle for the brand?
We have this amazing package on the RTD coffee side, so we are looking at potentially selling it off or allowing other people to produce using that format. I think if another company is willing to invest behind it, they could easily replicate the kind of sales success that we had at just one account. In shots, the margins are better and with the right route to market, with the right distribution and no holes on the shelf, it can be a really good scalable business if you have something different and unique, which we do. I think our number one challenge is getting it in the right system, and then figure out how to invest behind this to continuously scale. Our repeat rate is 43% on the shots, about 10-15 points higher than most products. I think we’ve got something that consumers are buying, we just need to give them the right merchandising option in the store and then target them on Amazon and D2C. On the innovation side, it’s interesting because not that many SKUs do the majority of the volume in RTD coffee. There’s a bit more variety with at-home and brewed coffee. I think our plan would be to start launching different flavors and trying different things with certain account partners.
Are you looking for an eventual exit?
We passed $100 million in revenue, which is really exciting, and we are profitable and still growing. Even on the drink mixes, the ACV is probably 40%. So I think there’s a pretty strong upside. I’d like to get the business up to $200 to $250 million in the next couple of years. That’s our fixation. If there’s a partner that comes along, great. If not, that’s OK too.