Gerry’s Insights: Can’t Beat Them? Buy Them

A couple of years ago, seeing an unmet need, Glazer’s Beer & Beverage decided to step up on the non-alcoholic beverage distribution front in north Texas by acquiring a couple of smaller houses and promising an upgrade to a truly full-service operation. That meant stepping outside its beer footprint in the state, a move that likely made its core suppliers uncomfortable, as it meant Glazer’s was now competing, at least with NAs, against their franchised partners in Dallas/Fort Worth. So it was an experiment that drew both enthusiasm and some degree of skepticism. But the new house, named Jumbo after a key brand in a predecessor company of Glazer’s, soon onboarded an impressive array of fast-growing brands, including those energy growth stars Celsius and C4, and had suppliers believing that maybe there finally was a committed and well-resourced unaligned operation available to them in the area if they weren’t aligned with a strategic like Keurig Dr Pepper, one with extensive reach into both large-format and small-format retailers.

Sadly, that experiment was ending just as I was writing this column. Celsius and C4 exited nearly simultaneously to the Pepsi and KDP systems, respectively, and more recently Congo Brands abruptly shifted its Prime and Alani brands elsewhere. As a standalone NA house without the support of an established beer business, that left Jumbo without the necessary scale to support its ambitions. Rather than regress to sparse coverage, Glazer’s shut the doors effective Feb. 29. Apparently, the Congo move was the last straw.

Longtime watchers of the beverage business may say, ‘that’s how the business works and Glazer’s should have expected this.’ NAs lack the franchise protection of alcoholic brands, but Glazer’s knows that by virtue of working NAs in its 12 beer markets, which it will continue to do. Besides, NA-only houses in other markets like Big Geyser in New York, B&E Juice in Connecticut and Intrastate in Detroit have managed to weather this cycle of arrivals and departures without the stabilizing effect of franchised soft drink brands.

Still, it’s a troubling pattern. After all, these unaligned distributors represent a key pipeline for new innovation to get to retail. At this point, wholesalers have no reason to believe the heartfelt assertions of new-brand owners that they’re here for the long haul. (A few actually seem to be, but wholesalers have no reason to believe any of them.) Their contractual terms are getting increasingly stiffer as they factor in the accelerating speed with which igniting brands are grabbed by strategics. Sadly, history shows that even brands that have been reliable, trustworthy partners are liable to chisel the wholesalers on the way out, if not on the buyouts then on ancillary items like billbacks and inventory. Meanwhile, few of these strategic exits prove to be a platform for an enduring brand. Look at the biggest exits of the past decade and a half: Vitaminwater essentially is inert within the Coca-Cola portfolio (though its sibling Smartwater has fared better), Bai has proved an embarrassment to the KDP team that inherited it from a prior regime and Body Armor almost immediately moved into decline following Coke’s pickup, though it’s still early days and the soda giant is making an earnest effort to get it back on track. Many end up killed outright.

Currently, the industry is exceedingly excited by a new class of gut pops, led by Olipop and Poppi, that seem to be having success poaching drinkers directly from the ranks of CSD users, despite a much higher retail price. Olipop isn’t a DSD play, but Poppi moves through the ranks of many of the same wholesalers who’ve helped ignite brands like Monster, Bang, Celsius, C4 and Prime, and they’re expressing palpable anxiety to me that it might be the next one to flee. Ditto Congo’s Prime and Alani brands, though Congo has proved to be an unpredictable partner, as Jumbo discovered, and most distributors don’t seem to be baking a long-term relationship into their calculations.

When one takes a longer perspective, one can wonder what all this activity means. As noted earlier, it’s hard to think of many strategic acquisitions that have kept those brands on their disruptive course. Would those brands have gotten further on their own? As family-operated businesses, AriZona Iced Tea and Milo’s Sweet Tea seem to have maintained their special sauce, though AriZona has struggled to make a dent in the healthier side of the segment. Red Bull remains a dazzling growth engine, even through the demise of its founder Dietrich Mateschitz. And Monster Energy may be aligned with Coke, but by continuing to operate independently, generally in control of its marketing and production decisions, it remains a coveted source of margin and growth to its retail partners. Its acquisition of the craft beer collection once called CanArchy (now Monster Brewing) has now given it a distribution system independent of Coke’s, for both alcohol and NA brands, that offers a new avenue for experimentation.

Back to the strategics: they rarely seem able to continue the momentum of their pickups, as the stream of impairment charges they often quietly take attests. I continue to believe that most go into these deals believing in good faith that they can find a way to be good stewards going forward, devising clever ways to incent the founders to stick around a while and to keep the operations out of their bureaucratic maw. But despite good intentions, I believe, it almost never pans out quite that way. Inevitably, the founders move on, compromises are made to the recipes and inertia creeps in. Is that such a terrible outcome for the acquirers, though? A new brand that might have caused severe disruption to the acquirer’s core brands has been neutralized, unwittingly or not. Certainly, for the publicly traded strategics, Wall Street doesn’t seem to exact any great punishment for these misfires.

Hence that concern about the fate of Olipop or Poppi: the risk that they may pose a genuine threat to the core CSD business of Coke, Pepsi and KDP certainly baits those companies to pay – or overpay – for those brands. That way they can either ride the wave or neutralize it. It should be worth a billion or two to avert any threat these brands pose.

Is this an area that the empowered trust busters in the Biden administration should be monitoring? There might be a germ of evidence, assuming the president wins another term. It materialized recently when the Federal Trade Commission moved on some of the major tech players over their investments in generative AI companies and major cloud service providers. “Companies are deploying a range of strategies in developing and using AI, including pursuing partnerships and direct investments with AI developers to get access to key technologies and inputs needed for AI development,” the agency said, and it wants to see what competitive impact this is having. It doesn’t seem like a huge leap to apply that reasoning to other categories of goods and services, especially if the AI investigation bears fruit. Meanwhile, there’s no reason to expect the cycle to stop, at continued cost to the wholesalers who help foster beverage innovation.

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