It’s been nearly two weeks since Carl Sweat, the former CEO of FRS, packed up his office in Foster City and began the long, cross-country drive that would take him back to Georgia. In the interim, company officials have surfaced to discuss what the next steps are for the quercetin-based functional drink and supplement line.
Sweat, a former Coke executive whose tenure was marked by the brand’s inconsistent performance even as it tried to take advantage of a distribution agreement through PepsiCo’s warehouse delivery division, reached what has only been termed a mutual separation with the company not long ago.
An upbeat, dynamic personality, Sweat nevertheless became a lightning rod for industry criticism amid marketing expenses that reached tens of millions of dollars and a variety of changes to the product’s ready-to-drink packaging and formula failed to create a large wave of pervasive growth for the product line. He has turned down requests for comment, but left a trail of tweets and cryptic photos from the road.
The company’s chief financial officer, David Henderson, has slid into the top spot on an interim basis. Matt Kohler, the company’s chief marketing officer, and Tim Arneson, its head of sales, are currently answering questions about the brand and its future plans.
In a wide-ranging interview with Kohler, the CMO lay much of the blame on the PepsiCo arrangement, which, he said, had resulted in a paltry all-channel volume through the larger company’s warehouse clients, who were instead focused on more popular products like Gatorade.
“I think if you look at the way the brand started, they went to a large national distribution strategy, and the execution just wasn’t there,” Kohler said. “We staffed up and we spent money to support a national distribution network. We had lots of people, we had lots of money to support the brand because we’re getting this retail footprint and the execution wasn’t there. And that forces you to rethink the business.”
“If you’re looking for honesty,” he added, “it clearly did not pan out the way we wanted it to, and that ended up being a very expensive thing for us.”
So on to the future plans, which go beyond personnel changes, and include financial, structural, product and route-to-market changes that the new leadership hopes can stimulate momentum.
An Insider Purchase
The big-ticket item is the company’s recent purchase of Nutravail, a contract manufacturing facility for supplements formerly owned by FRS board member Tom Lines. FRS had already used Nutravail to manufacture its branded chews and mixes, both of which are sold online and in stores.
Lines, an international businessman and oenophile who is one of FRS’ largest investors, is also one of its largest suppliers – via Nutravail and his Quercegen operation, which supplies the bulk of the quercetin used in FRS products.
The Nutravail acquisition was accompanied by another round of investment from Lines and Oak Capital, the California-based private equity group that is the lead investor in the company. Lines, who told BevNET that the investment round was “deep tens of millions” said that he had invested cash in the company and that the Nutravail purchase had been Sweat’s idea.
“It’s a serious synergy,” Lines said. “Let’s say you change the business model of FRS… toward a more concentrated model. If it was in a position to start expanding around the world, and was selling concentrate, Nutravail would be the perfect partner for it.”
One way to fund Lines’ ongoing investment in FRS would have been through money owed to Nutravail – a possibility raised repeatedly during the reporting of this story – but he said that the company had always paid its bills on time and was not in any debt to the manufacturer.
In a statement released today, Jim Quandt, the Chairman of the Board for FRS, said the Nutravail acquisition would give FRS the opportunity to add revenue by manufacturing supplements for other companies while maintaining its chew and concentrate business. Nutravail produces private label products for retailers nationwide. (Quandt has not returned calls by BevNET regarding Sweat or FRS.)
Meanwhile, another legacy of the Nutravail acquisition is that Nutravail CEO Rick O’Neil is set to take a more active role in the management of both companies.
So maybe FRS, which had shown terrific potential as a supplement company before its foray into the beverage world, where the going has been much tougher, is headed back to a less beverage-oriented, more supplement-focused platform for its quercetin, right?
“Beverages have been a significant part of our portfolio and will remain a major part,” Kohler said.
That’s where changes in the distribution model will determine the company’s future, particularly with regard to ready-to-drink beverages. In announcing the Nutravail deal, FRS also issued a press release today referring to the company’s “rollout of an enhanced distribution network,” but as with much of the picture it presents, the reality is more complicated.
Something of a Wash
As FRS and PepsiCo began running out the clock on their three-year distribution agreement, Sweat had reached an agreement with L.A. Libations, a company known for its ability to seed brands like Zico and Evian in potential growth channels.
In the fall, L.A. Libations began the process of shoring up FRS’ existing chain store accounts and courting new retailers for the brand, most notably through a trial in Costco via that company’s health and beauty departments, where many functional products can be found. Also ongoing is a test run with Wal-Mart, which is expected to expand 125 stores in March.
But since the expiration of the Pepsi deal, the L.A. Libations team has had to offer sales support in more traditional channels like supermarkets – channels that the FRS team had hoped to grow via a higher-touch DSD network instead. Going from a warehouse delivery system through PepsiCo with unsatisfactory support, to an arrangement like the one the company currenlty has with Safeway, where broadline wholesaler UNFI is now servicing 35 to 40 percent of its stores, is something of a wash.
Similarly, drug store accounts – which represent a retail channel that was independent of the PepsiCo deal, and one where FRS had begun to make headway in recent months, gaining a national deal with Walgreen’s – have also asked that the company to continue as a direct-ship supplier.
“We’ve had discussions about going DSD with drug customers,” Arneson said, “But they say they’d prefer we stay direct until we build out a national DSD system.”
So how many DSD partnerships does FRS have right now?
“More than two dozen,” he said. The majority, he added, are concentrated in California and the West, while others are scattered throughout the Central and
“The practical reality is we talk to our customers about what’s in bounds and what’s out of bounds and we work within those guidelines.”
L.A. Libations is also trying to work within those guidelines – and an admittedly sub-optimal distribution mix — as well. Where his company can bring DSD partners on board, L.A. Libations co-founder Danny Stepper said, they are working to close the gaps.
“It’s not exactly what we signed up for, but we’re partners, and we’re moving fast,” Stepper said. “But the Pepsi thing was a pretty big deal. There are companies who want the brand, there’s no doubt about that. But we were signed up to manage the customers.”
Marketing and the Mix
Those customers will be sold a slightly different mix of products. The company’s move last year to extend the FRS ready-to-drink line into a variety of new functionalities has been slow to catch on in some cases. The Healthy Defense line is already being scuttled – and its Healthy Slim variety has attracted a class-action lawsuit in California under that state’s consumer fraud statutes.
The product and marketing mix going forward will rely more heavily on its core Healthy Energy products, which try to put the long-term effects of using quercetin on a daily basis front-and-center.
To that end, however, board member Lines said he believes there have been mistakes made in the way the brand has been marketed.
“It hasn’t translated, and there are going to be some serious transitions on the translation of the matter,” he said. “The message needs to be that it’s not another energy drink. They’re not the same product at all.”
FRS has had a tough run of luck in its marketing mix in the past year, enduring both the public disgrace of cyclist Lance Armstrong, a longtime investor , board member, and erstwhile face of the brand, and also a rapid decline in the playing time for Tim Tebow, a talented football player whose trade to the New York Jets became a high-profile flop as he languished on the team’s bench.
But even that bad luck isn’t the key to revitalizing the brand’s fortunes, Lines said.
“We’ve targeted it heavily toward sport,” he said. “Our audience is probably a little older than we have targeted, folks who are at huge risk for lifestyle-related diseases. There’s a bigger body of evidence that shows this can help you prevent these… you sit around, you have some fat in your arteries, you don’t feel good, you have a stroke, high blood pressure, you keel over. If you add up all the little health benefits around quercetin… it can really take off.”
Kohler said that the company’s current marketing thrust remains athletic events like those affiliated with Crossfit athletic programs – he called them “point of sweat” – and in the promise of enhanced athletic performance that has led many consumers to the product. He also said he recognized the value of the brand as a health supplement, citing its scientifically-tested ability to help cancer patients maintain energy levels as they undergo chemotherapy.
Kohler decried companies that are “just marketing sugar water with lifestyle marketing and some vitamin sprinkles on top of it,” adding, “I feel proud to work for a company with a product that really, really works.”
“I get calls from people who are like, ‘My wife is going through chemo, and she just takes on this product, and it’s completely changed our lives,’” he said. “That’s the kind of thing where I say to myself, my God, we really have something here.”
Where it might thrive, however, remains a work in progress.
BevNET Managing Editor Ray Latif contributed to this story.