As new trends and consumer preferences actively shape the beverage market, the specialty retail channel is changing.
Every January, a wide spectrum of retailers, buyers, manufacturers and brands working within the specialty channel meet for the Specialty Food Association’s annual Winter Fancy Food Show in San Francisco. While overall attendance has been growing, the rise in beverage companies exhibiting at the show has been particularly notable, underscoring the category’s prominence as a sales driver for the channel. According to data from the National Specialty Food Association, beverage sales totalled $10.5 billion in 2016, equivalent to about 18 percent of the total specialty retail market. With water, refrigerated juices, functional beverages and RTD tea and coffee leading the way, beverage growth outperformed food between 2014 and 2016, growing 24 percent versus 15 percent.
The specialty channel still aims to serve consumers looking for distinctive and innovative beverage products, but that category has had outsized growth — which means its role within the channel’s commercial ecosystem is evolving. As it always has, the specialty channel is acting as an important laboratory for products that may eventually migrate into the mainstream — but as the channel itself moves and combines to be more prominent within mainstream stores, the testing has to happen faster and the pipeline is crowded.
While most beverage brands have ambitions for success beyond just specialty retailers, that doesn’t mean the channel is just a stepping stone to the mainstream.
Speaking with BevNET at the Fancy Food Show, Phillip Kafarakis, president of the Specialty Food Association, cited a rise in beverage brands exhibiting at the show as an example of growing interest in the category, particularly as it relates to capturing on-trend ingredients and functional benefits. “There’s more innovation in beverage than ever before,” he said.
That growth in innovation, however, has presented the specialty channel with a unique challenge: while consumers look to those retailers more than ever for innovative and on-trend products, conventional and mainstream retailers are also increasingly trying to stay ahead of the curve with their beverage sets. Larger outlets are looking to categories such as kombucha, cold brew coffee and premium sparkling waters, items which were once the exclusive domain of specialty markets, as they seek to bring in consumers who are increasingly conscious about reading labels and making healthier choices in beverage. Sometimes brands don’t have as much time to test the premise.
“Mainstream and specialty are now serving the same consumers,” said Paul Harney, VP at Harney & Sons Fine Teas. “There’s more funding and more distribution around beverages now, so I think specialty retailers are more selective about what they bring in now. It has to turn, first and foremost.”
That blending of channels Harney noted, means that the amount of growth in beverage has made the category more challenging in certain ways within the specialty channel.
Harney’s company is itself an example of the changes in both the manufacturing and distributing components of serving the specialty channel. In addition selling loose leaf teas and distributing products to independent retailers in the New York City market, the Millerton, N.Y.-based Harney also makes a line of ready-to-drink (RTD) teas. At the show, the company debuted Beet Berry, the newest flavor in its 16 oz. bottled American Buzz line. Though marketed to the specialty channel, Harney noted that the product was in sync with consumer trends that are prevalent across all beverage types and retailers: clean ingredient label, low sugar, and a degree of functional or health benefits.
“We want to provide the retailers with something that they can understand,” he said. “A lot of customers are asking for low-sugar products, so this fits in with that mix.”
As specialty and mainstream channels continue to find a common consumer audience, does that decrease the incentive to build in the former? Not according to Fred Neubauer, a former president at KeHE and CEO of FDM Sales Management, an accelerator that works with small food and beverage brands.
“There aren’t as many stores [in specialty channel] but they have a high indexing consumer for these types of products,” he said. “At the end of the day, when somebody goes into a store like Fresh Market, they know they are paying more than they would at a different retailer. But they are also paying for innovation and merchandising and atmosphere. I think that the specialty is still the playground for innovation in most spaces.”
Incubation and Innovation
As specialty retailers sort through the increasingly competitive beverage category, they have become growing consumer demand for innovative, and often healthier, products. Several brands at the Fancy Food Show spoke about the importance of fueling their respective innovation pipelines through the specialty channel, where their strong connections with those consumers can yield bigger achievements.
“Specialty is our most important channel, because that’s where the innovation is seeded,” said Dan Mader, senior VP of sales at Califia Farms. The brand has made new product development one of its cornerstones, pushing it into over 80 ready-to-drink SKUs spanning across categories from cold brew coffee to nut milks. As Mader explained, by presenting innovative products to the consumers demanding them, education can happen in the aisle and on the shelf. “The ideas are in the natural and specialty channel, and they can grow as concepts from there.”
And the consumers are increasingly familiar with those newer concepts.
Felicia Vieira entered the specialty beverage market in 2013 as the founder and CEO of Crafted Cocktails, a shrubs and mixers brand that has found placement in retailers ranging from H-E-B to Bed, Bath & Beyond. At WFFS 2018, the company debuted a line of drinking vinegars and announced it was expanding beyond cocktails, and will rebrand as Crafted Beverage Company.
Shrubs and mixers, Vieira said, are becoming increasingly understood by specialty channel consumers and buyers, and the company no longer struggles to educate consumers on its products, and the name change reflects that decision to move beyond the single scope of alcohol-related products.
“They know us, they know the brand, and the whole consumer market has changed,” Viera said. “All the new emerging brands that are like us don’t need to convince people anymore — it’s already established. So now it’s just about new product introduction, new flavors and new ideas. We know who our buyers and what our market is, so it’s just having new conversations.”
The Challenge for Startups
But within those areas that have crossed over from specialty to mainstream, the fast growth continues to attract a lot of competition, meaning that it is still hard to break through.
For Ryan Emmons, founder and CEO of bottled water brand Waiakea, finding success in specialty has not been a simple task. Even for a brand in a rapidly growing category like bottled water, Emmons said the relatively small size of the specialty channel poses a challenge to startups.
“There’s not a huge chance for velocity, especially when you’re in our category, in comparison to the other channels,” Emmons said.
Having strong brokers was vital for Waiakea to earn placement early on, he said. Startups are frequently hindered by small sales teams and crowded shelf space in specialty retailers, particularly in grab-and-go coolers.
“Most of the bottled waters that are consistently in the cold box have really solid DSD relationships, they have really serious exclusivities, and if you don’t have that same DSD relationship and the same guy going in there and stocking the shelves every day, then your stuff is just not going to be consistently there,” he said. “And if you’re not in the cold box then you’re on the dry shelf, and there’s nothing happening on the dry shelf.”
For Waiakea, persistence and cultivating close relationships with a handful of specialty retailers was vital to the self-funded brand surviving. And growing slow has paid off, allowing the company to eventually partner with C.A. Fortune Sales and Marketing and find placement in Whole Foods.
In less crowded categories, however, growth via specialty can come fast. Nutpods differentiated early by being a dairy alternative product that was ahead of the curve on removing ingredients such as carrageenan from its labels. Combined with its online success, Madeline Haydon said the brand has leveraged the specialty channel to quickly expand into mainstream retailers.
“We’re not even three years on the market, and yet Publix found us and asked us if we would come on board in their stores — which we were thrilled about,” Haydon said. “Now we’ve been able to secure the Krogers, the Wegmans, the Publix and H-E-Bs, and it’s been on the strength of how we’ve built our brand in specialty and natural. So now as we’ve seen that tectonic shift as mainstream retailers like Krogers are taking in premium brand products, it really speaks to how today’s consumers have evolved and shifted.”