Inside Incubation: A Look at the Growing Ranks of Beverage Incubators

With institutional investors getting a bad rap in beverages these days – the National Enquirer version of the complaint is they force you to juice your projections in order to get the deal done, then steal your company when you fail to hit those unrealistic targets – a lot of early-stage beverage companies have been in a quandary as to where else to turn once they’ve reached the limits of where friends-and-family and angels can take them. (In fairness, the institutional groups have their own grievances against beverages as good investment prospects.)

One avenue worth a gander – albeit with a careful eye – is the growing ranks of beverage incubators.  “Grade school for consumer products,” is how Dino Sarti, a partner in an incubator called L.A. Libations, put it at the recent BevNET Live conference in Santa Monica, and that kind of captures their essence. Though they take various forms and their substance is not always easy to separate from their marketing hype, the incubators offer a range of expertise in critical areas such as product development, distribution and financing (including sometimes serving as an intermediary with the institutions). For new brands, they offer the prospect of devising a grounded development and launch plan. For the distributors and retailers who’re being pitched, they offer some assurance that the entrepreneur has received at least minimal adult supervision on the way to market.

I’ll admit I find the borders to be blurry between incubators and other species of service providers to new brands: consultancies like Cascadia Managing Brands and Jim Tonkin’s Healthy Brand Builders; boutique private-equity shops like First Beverage Group; sales agencies like Coast Brands Group (which itself launched an incubation unit earlier this year). But it’s worth scanning some of the options.

Incubation units launched by the beverage giants always garner a disproportionate share of attention because those companies represent such an obvious strategic exit for new brands. Currently, Coca-Cola’s Venturing & Emerging Brands unit has earned a spot in everyone’s Rolodex for its bias toward action and willingness to experiment. (It operates separately from another incubator, minority-owned by Coke, called Brain-Twist in New York.) Among other strategics, the Learning Labs concept established by Pepsi Bottling Group seems to continue on at PepsiCo, though its strategy and approach remain murky, whether by design or because of the ongoing churn at PepsiCo. We might also include Nestle Waters North America among these, though I get the sense so far that NWNA prefers not to go really small in chasing opportunities.

Partnering with one of those is a fairly predictable aspiration, because of their national distribution networks and identity as potential acquirers. But it can leave you exposed to the whims of those companies’ own portfolio strategies as they, for example, launch their own entries into the same category. (Or, as in the case of Anheuser-Busch with its 9th Street Beverage unit, the incubator can be abruptly abandoned when the core strategy changes.)

Among strategics not wedded to a specific national channel is Sunsweet, which has been involved with brands like Function, Ayala Herbal Water and C2O Coconut Water. Independent Coke bottler Coca-Cola Consolidated has remained committed to an incubation unit called BYB, which has scored a sizable success with its sub-premium Tum-E Yummies kids line while looking to build premium brands such as Bean & Body and Bazza. And Sunny Delight Beverage Co. has sought to move beyond its value-price niche with plays such as Bossa Nova acai.  All three meld the deep resources of a big company, a channel-agnostic approach to distribution, and leadership by big-company lifers who’ve proved surprisingly agile in the emerging-brand realm.

Then there are the independents. Big Red has successfully grown its core soft drinks while placing a side bet on Thomas Kemper Soda and winning the assignment to produce and distribute the much-ballyhooed Street King energy shot line. Shadow Beverages, created by some old Pepsi hands, has been on an impressive run, capped by its assignment to develop a multi-tier functional line for GNC. GBS Growth Partners got started helping Coke Consolidated devise its BYB plan but has managed forays into fresh teas, energy drinks and functionals.

Among others, L.A. Libations has served as an agent for relatively established brands like Icelandic Glacial water while nurturing small brands, some of them Coke entries like Illycaffe, and recently launching an aloe line of its own. Maverick Brands, though it seems to prefer to operate under the radar, has done well with Sunkist Naturals and launched a coconut water play called Coco Libre. And Brands Within Reach has parlayed its success managing Danone’s Volvic brand into a broad array of investments, acquisitions and agency assignments.

Though it’s hard for outsiders to sort out the incubators’ different approaches and verify their claims, they do offer advantages to startups. They usually bring deep experience in a range of disciplines, and are more likely to be agnostic on the right distribution approach than a strategic with a captive system to keep humming. Most have solid contacts at retail chains, though it’s important that these have been deployed not just on mainstream sodas and teas, where brand-building is a very different game. And while they generally prefer an ownership stake as well as a retainer, that’s not a bad thing in keeping the partners aligned, as long as it’s tied to measurable accomplishments by the incubator. As GBS partner Jack Brennan promised at BevNET Live, “we also understand that the entrepreneur needs to make a big part of the money, so we’re not greedy.”

Editor’s note: This article also appears in the December 2011 issue of BevNET Magazine.