In the business world, money talks. But deciding where the money goes takes many lengthy discussions.
In recent months, investment and acquisitions across a range of thriving categories have helped to shape and disrupt the beverage landscape. The completion of the $18.7 billion merger of Keurig Green Mountain and Dr Pepper Snapple Group has resulted in Fiji Water leaving the DPS distribution stable and has sparked rumors that others in the company’s allied brands portfolio may be prepping their own exits.
Meanwhile, natural energy drinks have been at the center of multiple investments and acquisitions, but as the category looks to finally take off it now faces increased competition from cold brew coffee.
Finally, alcoholic beverage companies appear to be paying increased attention to kombucha, with Molson Coors’ recent acquisition of Clearly Kombucha an example of both the desire for beer giants to diversify and the massive mainstream potential for kombucha.
BevNET spoke separately with Whipstitch Capital managing director Mike Burgmaier, Blueberry Ventures managing director Arif Fazal, and Green Circle Capital Partners managing director Stu Strumwasser to get investment-side insight into how the market is evolving, what brand owners should know, and where these developments might lead the industry next.
Allied Brands at Crossroads in Keurig Dr Pepper Merger
The formation of Keurig Dr Pepper (KDP) has thrown the future of the former Dr Pepper Snapple Group’s allied brands portfolio into doubt.
The group — a collection of independent brands which are distributed through the DPS network in select regions — have been some of the company’s strongest performers in recent years, led by better-for-you drinks like BodyArmor, Core, High Brew Coffee, Vita Coco and Bai, which was acquired by DPS for $1.7 billion in 2016. Post-merger, some allied brands have begun exploring their distribution options moving forward. On the day of the deal’s close last month, Fiji announced it was ending its distribution partnership with KDP and analysts have speculated others could follow. Meanwhile, according to a CNBC report, another allied brand, Texas-based soda company Big Red, has been acquired by KDP in a $200 million deal.
According to Burgmaier, the merger presents an opportunity for both KDP and the brands. KDP could make moves to acquire allied brands it wants to keep around, while others could find deals elsewhere in the market. Many of them, he said, are at a level where they could demand high valuations and be acquired by an entity like The Coca-Cola Company or PepsiCo, but exiting the DPS stable could also create uncertainty.
“It obviously creates a higher level of risk for some of them if they have a situation where they leave Keurig Dr Pepper and there’s no other suitor out there for them,” he said.
Strumwasser said he was concerned that KDP parent JAB Holding Co.’s large stakes in the coffee category, particularly a large push into RTD from Peet’s Coffee, could be problematic for High Brew if the company sees the two brands in direct competition.
“I think you sort of have to look at it category by category, but you have a few big brands there that are probably going to be looking for a home,” Strumwasser said. “But we’re investment bankers, so to me out of chaos comes opportunity.”
Many of the brands knew they were entering an uncertain future when they signed with DPS as allied brands, Burgmaier said, having inked a deal with no guarantee they would be acquired. Because the brands were deeply embedded within the DPS distribution network, there were concerns that a buyout by a third party would come with a myriad of logistical issues for transitioning to new networks. And if more brands end their partnerships, finding comparable distribution could be a challenge.
But with KDP, there is also potential to finally gain long-term security.
“With Keurig Dr Pepper, if they are looking to not do as many independent allied brand relationships and are more interested in either owning, or not, then they just created a new potential buyer,” he said. “They can remove some of the murkiness of just being an allied brand.”
Can Natural Energy Make it Big?
Entrepreneurs in the energy drink space have long sought to deliver clean and natural alternatives to the mainstream category leaders. But just in the past year, the pace of investment seems to have accelerated: Organic guayusa-based brand Runa was acquired by All Market, Inc. in June, yerba mate brand Guayaki took outside investment for the first time in its 20 year history, and MatchaBar closed an $8 million round as it seeks to grow its matcha-based energy line, Hustle. According to Burgmaier, the space may finally be ready for mainstream appeal, but brands still face headwinds going forward.
“It’s interesting because there have been a few players and attempted plays in natural energy over the years, but nothing has really stuck,” Burgmaier said. “HiBall obviously did well in getting acquired by AB InBev, and now you’ve got Runa, but there have been several failures along the way.”
Burgmaier said he sees HiBall and Runa’s low sugar and clean ingredient labels as reasons for the brands’ continued growth. Now, he added, those brands need to leverage their positions within larger companies to seize market share and bring in new consumers.
“At the core it’s still a very small category, the natural energy space, so I think in some ways investors need to be careful,” Burgmaier said. “There’s definitely a big opportunity. But in a lot of ways even the leaders in the category need to prove themselves to get to a larger scale.”
The category must also contend with the rise of cold brew coffee, which represents a direct competitor in the low-calorie, natural energy space. According to Fazal, natural energy drink brands should be concerned about coffee’s ability to eat into their market share. Innovations, such as sparkling cold brew, provide consumers with familiar flavor profiles that Americans are used to, as opposed to relatively new ingredients like matcha, guayasa, and yerba mate, of which many U.S. consumers may not yet be aware.
“If I’m positioned as natural energy, or frankly if I’m positioned as non-natural energy, I’m absolutely thinking about RTD coffee being a significant player in the category,” Fazal said.
Strumwasser said matcha in particular is gaining traction as a functional ingredient, but he isn’t yet sure of its ability to sell as an energy ingredient. Comparatively, the emergence of RTD coffee, particularly as a low-to-zero calorie alternative to Starbucks’ dominant (and indulgent) Frappuccino line, is “a true disruptor” in the space, he noted.
Alcohol Looks to Kombucha, Category Growing Fast
If further confirmation was needed of the kombucha category’s explosive growth, it arrived in June with the announcement that multi-national beer corporation Molson Coors had acquired Clearly Kombucha. The deal is another indication that alcohol industry leaders are taking a serious look at this emerging category, a trend that is likely to continue and that could potentially create an unusual dynamic where alcohol conglomerates find themselves in direct competition with non-alc brands.
According to Fazal, an investor in and board member of Revive Kombucha, the interest in the category from major beer players, as well as CSD companies, may stem from stagnant and declining sales. The growing kombucha market can offer a way to draw in new consumer demographics.
“I think them [alcohol companies] thinking about kombucha is another validation point around the fact that these types of beverages are here to stay, that consumers desire them, and that we are going to see more big beverage players have at least one brand, but likely multiple,” Fazal said. “My sort of stretch guess is that as this category grows and evolves the bigs will have a couple brands positioned differently within the category, much like they’ve done in CSD and much like they’ve done in beer.”
Strumwasser is also enthusiastic about kombucha’s growth, noting that kombucha has “a natural adjacency to beer” in that both are brewed and fermented. And like big soda, he said, beer companies are, as a trend, using free cash flow to acquire emerging brands and diversify their portfolios and kombucha is a target with huge potential. In particular, he said, AB InBev is making a major push to grow its non-alcoholic business.
However, he noted that any alcohol company will need to prepare for the necessity of cold chain distribution — a requirement for kombucha, but uncommon for beer.
According to Burgmaier, the category is experiencing rapid growth and investments are likely to keep flowing into it. However, brands will need to show they have carved out a unique space and offer an accessible taste and strong brand profile within the category, while also proving gains and velocity.
“There are several out there that are ready to be larger, national brands,” he said. “And I think we’re going to see a couple of those deals done in the next six to 12 months. It’s just such a unique category that I think some of the smaller brands justify investment as opposed to the smaller brands in other categories…. It’s like this moment in time where kombucha has caught fire and it’s not going to stop. We don’t see it stopping at all, it’s just started.”