When The Bubble’s Bursting: Inside LaCroix’s Decline

As the sparkling water category experiences all time highs, LaCroix — the brand that helped ignite the trend — should have a lot to celebrate right now. Instead, the 38 year-old brand is struggling to maintain dominance in a marketplace that is rapidly moving past it.

Last month, LaCroix maker National Beverage Corp. reported financial results for the full fiscal year ending April 27 that showed two straight quarters of declining sales; since August, the company’s stock price has fallen from $118 to below $42 per share. The disappointing performance came on the heels of a critical report by Guggenheim Securities that warned LaCroix sales are “effectively in free fall,” sparking mainstream media speculation about the brand’s decline — with outlets from CNN to Vox theorizing how and why the company had fallen so fast.

One reason suggested by analysts was a highly publicized lawsuit that alleged the product contained synthetic ingredients used in “cockroach insecticides.” Others suggested that National Beverage CEO Nick Caporella’s controversial public statements and allegations of sexual harassment, which have since been dropped, were having an impact on the brand.

While it’s possible the negative media attention has impacted LaCroix sales, the primary reason was one that many category pioneers across CPG industries have faced: there’s simply more brands to compete with today than there were five years ago.

Sparkling water sales have rocketed in recent years, growing 16.3% in retail in the past year to $2.42 billion, according to Nielsen. While LaCroix contributed significantly to that growth in the past, the category is now bolstered by new entrants such as PepsiCo’s Bubly and Nestlé’s Poland Springs Sparkling line, alongside rising independents such as Spindrift, and well-resourced established brands like Polar, Perrier, and Topo Chico that have also benefited from the rising tide. LaCroix comparatively, saw sales decrease 12.7% over the 12-week period ending June 15, Nielsen reported.

So why can’t LaCroix keep pace with its insurgent competitors? Speaking with BevNET, analysts and distributors said the company doesn’t have the infrastructure to keep up.

Unexpected Success

“I think LaCroix was in the right place at the right time,” said Jim Watson, senior beverage analyst at Rabobank.

Sparkling water’s rise has come as consumers seek healthier alternatives to sugary carbonated soft drinks, and according to Watson, LaCroix was uniquely positioned to draw the attention of health-minded shoppers through its wide portfolio of flavored SKUs and “cool, kind of retro” brand identity that exudes authenticity.

Over the past few years National Beverage significantly expanded distribution of LaCroix in grocery and conventional channel accounts while social media influencers spread brand awareness by flaunting their love with memes, shirts and even branded swimwear. In mainstream media channels the brand often became a go-to reference point for the entire sparkling water category, helping it gain prominent placements in key accounts such as Whole Foods.

“They had just enough heritage, just enough brand equity to hit that consumer sweetspot and become the top trend,” Watson told BevNET. “But I don’t know that it ever reflected their long term brand proposition as opposed to a company that had the right product out there at the right time.”

Founded in 1985, the Florida-based National Beverage Corp. has a broad, cross-category brand portfolio, but very few standouts. Though it produces legacy soft drinks such as Shasta and Faygo, as well as selling energy drink brand Rip It for U.S. military accounts, LaCroix makes up roughly half of the company’s entire business.

Laurent Grandet, the lead food and beverage analyst at Guggenheim Securities who authored the report announcing LaCroix’s “free fall,” told BevNET that he believed National Beverage likely did not anticipate the brand’s sudden success. He said the company’s lack of evolution in marketing, innovation and field strategy as signs that LaCroix’s rise and fall have been organic.

“If you look at the range of LaCroix four years ago, about 90% of it is exactly the same as what you can see in stores today,” Grandet said. “In terms of management, in terms of price architecture they didn’t change much. They still sell in [multi-packs] of six or 12 and they don’t have single serve to go into convenience stores. They’re not overly creative or aggressive in terms of trying new ways of growth in the segment.”

Distribution Struggles

While LaCroix sales may be down double digits in conventional channels, one of its Northeast direct store delivery distribution partners, Hudson News Distributors, saw a 45% year-to-date increase last month. Tom Dowdy, chief revenue officer for Hudson, said early summer orders have risen and show little sign of decline. But, he said, that doesn’t mean the company isn’t suffering elsewhere.

National Beverage employs a hybrid distribution system with an emphasis on conventional grocery and club, convenience, and food service channels. According to its most recent Securities and Exchange Commission (SEC) filing, the company relies on warehouse distribution for the majority of its retail channels while utilizing a direct store delivery network only for convenience and independent accounts.

According to Dowdy, it’s National Beverage’s over-reliance on the warehouse model that has been one of the biggest contributions to LaCroix lagging behind its competition. Since major players such as Pepsi and Nestlé Waters have moved into the category, LaCroix has had little representation on the floor to maintain dominance over in-store displays and cooler placement. Comparatively Pepsi, Nestlé Waters, and Northeast category leader Polar all operate DSD networks that include merchandisers dedicated to maintaining display space, planogram integrity, and securing secondary placement in coolers.

Pepsi in particular, Dowdy said, has used its established control over checkout line coolers to place Bubly alongside its core soft drink brands.

“[Pepsi has] added [Bubly] to all of those secondary locations, and they can do that because they’re so powerful,” Dowdy said. “If you’re buying Bubly today, were you previously a LaCroix customer? And are you buying it because you see it, it’s there, it’s convenient and LaCroix isn’t?”

To further complicate National Beverage’s route-to-market, Dowdy said warehouse space limitations are motivating grocers to use DSD, another potential advantage for companies like Pepsi and Polar.

According to Grandet, National Beverage’s reliance on warehouse distribution has broadly locked the company out of the convenience channel, leaving 20 percent of the market unavailable unless it takes measures to build a DSD network. Grandet has for months been skeptical of LaCroix’s distribution, noting the brand’s decline has come as its retail penetration plateaus.

“The growth over the last few years has been due to growing distribution,” Grandet said. “Now, they have reached the maximum they can get to by themselves and will need a partner to go into convenience. They don’t have merchandising and marketing capabilities, and the only thing they do [for marketing] is digital. It’s very poor marketing and when I see big guys like Pepsi or Coke coming in it will be very difficult for them to fight that.”

But it’s not just major category players that are putting pressure on LaCroix, Grandet noted. The proliferation of private label brands, which can beat LaCroix on price by as much as 40%, has made it even harder to compete. According to Nielsen, private label products lead the category, generating $520 million in sales in the 52-week period ending June 15 and accounting for 21.5% of the dollar share and one-third of the unit share. LaCroix, comparatively, controlled 19.6% of the dollar share and 19.1% of the unit share in the same period.

While LaCroix may be down in the channel, that doesn’t mean there isn’t still strong sell-through. According to Dowdy many retailers, such as Publix in the Southeast, will use LaCroix as its loss leader, frequently marking down the brand to about wholesale price to bring in millennial shoppers. But that only further begs the question: do consumers want LaCroix, or do they just want cheap seltzer?

“I think you look at brands that have a meteoric rise to the top … there’s always a couple of stumbles along the way and you lose your mojo,” Dowdy said. “Then it becomes about how loyal is your consumer? Are they buying your brand because they love it, because they love the way it tastes, because the packaging totally blows them away? Or are they buying it because they want it cheap? You’ve gotta define all that stuff and then really figure out how stable is this, how sustainable is this?”

Keeping Bubbles Fresh

For Grandet, LaCroix has not only lost ground with distribution, but also with innovation. The company’s decision to focus solely on flavor innovations (and often polarizing flavors for sparkling waters such as coffee and hibiscus) has led the brand to lose ground. He pointed to brands such as Poland Spring, which sources its water from natural springs, and Spindrift, which uses fruit juice, as taking market share from LaCroix by providing much needed differentiation in a category overrun by simplistic formulations.

“In my view, with the value of the brand that they have, [National Beverage] could have tried to premiumize [LaCroix],” Grandet said. “They could have tried to go into restaurants or the on-premise channel. They could have introduced a single serve, because they only sell in multi-packs. Or they could even have tried to change the type of water they use…. Because at the end of the day, everybody can do a sparkling flavored water. You just need to work with a flavor house, have a good design company and so be it.”

For a brand like Spindrift, which launched in 2010, premiumization and differentiation has led it to become the fastest growing company in the category. According to Nielsen, the brand reported 150.8% dollar sales growth for the four-week period ending June 15.

Spindrift founder and CEO Bill Creelman told BevNET that 72% of the brand’s dollar gains are incremental to the sparkling water category, showing the brand is succeeding in its goal of converting sugary beverage drinkers to low calorie sparkling drinks.

Creelman emphasized his focus on partnering with food service accounts and retailers “who are excited about profiling ingredients” such as Northeast chains Sweetgreen, Dig Inn, Bolocco, and Cava to reach consumers and rise above the competition.

Spindrift also uses its clean ingredient label as a jumping off point to communicate with consumers, Creelman said, pointing to the company’s social media channels where the brand looks to start conversations.

“The sparkling water category is very old, so when you go into the sets and look at them you very often see what we call a ‘sea of sameness,’ a lot of products that are very similar from an ingredient perspective,” Creelman told BevNET. “So what we try to do is work with [retailers] to let them know there’s an alternative. There’s a product that uses real lemons and real oranges and we can develop a set, then a storyline that goes with it. What else might you be doing in your store around real ingredients? What other brands are talking about transparency and how can we weave that narrative together to make sense of this category in a way that [consumers] may not be familiar with today?”

Although it stands out from most carbonated brands due to its use of dyes and artificial sweeteners, Sparkling Ice leads the sparkling water category (after private label) with about $500 million in annual retail sales, according to Nielsen, with a 14.9% increase in year-to-date dollar sales as of June 15. The brand has experienced consistent growth over the past year, in large part due to an internal restructuring of its parent company Talking Rain and brand refresh that saw Sparkling Ice update its label and drop artificial colors and flavors from its formulation.

“Due to the pace of business and how consumer tastes and preferences are shifting, innovation is really more important than ever now,” Talking Rain CEO Chris Hall told BevNET. “Innovation, in general, to keep the brand fresh and provide the variety. Because consumers today do like variety, and that’s one of things LaCroix has done over the years and we believe in that as well.”

Can LaCroix Come Back?

In a statement sent to BevNET, National Beverage wrote that “LaCroix uniquely defined the Sparkling Water category to improve consumers’ health consciousness. LaCroix’s commitment to improved beverage health resulted in an expansion of significant retail space for the category – bringing more choice to consumers. LaCroix is the category leader bringing consumers a feeling of joy, natural zest and delightful gratification.”

The company declined further comment, deferring to a press release defending LaCroix’s “innocence” in the wake of the synthetic ingredient accusations. The release emphasized that LaCroix cans use non-BPA based liners, that the product undergoes consistent water quality tests, and that it is made only with non-GMO, certified natural flavors.

“We never have, and never will, make false statements about our products,” the release stated.

According to Rabobank’s Jim Watson, negative media stories may have in fact hurt the brand’s standing in the consumer’s mind, but he said he was “skeptical” of how much consumers actually pay attention to scandals. Instead, he feels brand loyalty for LaCroix may not be as strong as once believed and the influx of new brands represents a return “to a more natural state of affairs” where the category is divided among multiple companies.

“There is most certainly brand loyalty in sparkling water, but I still think the loyalty in that category may be slightly less than some other categories,” he said. “The consumer might be more willing to take whatever flavored water is there at eye level in the cooler at the right price and it might be slightly more difficult to defend for LaCroix.”

Grandet, however, believes the negative publicity has also had an impact, and the prominence of other sparkling water brands with more concrete natural claims has given consumers options they can feel better about. He also suggested that LaCroix’s rise led National Beverage to de-emphasize its other brands and end private label production, leaving the company with little to fall back on as the brand’s run of dominance comes to an end.

A comeback is not out of the question, Grandet said, but it would require a significant new strategy that includes stronger marketing, smarter innovation, and new approaches to distribution.

“I think it could be done,” Grandet said. “But maybe next year, because the summer is lost for them. All the displays, all the shelf space has been allocated as of March and the winners will be Bubly and the brands from Nestlé. This year is over for them.”