Goldman Sachs Equity Research analysts walked away “with increased confidence” in Zevia’s ability to hit or surpass its ambitious 30% growth target this year, the firm said in a report this week.
The group held a series of meetings on Tuesday with Zevia CEO Paddy Spence, in which “management struck a bullish tone,” according to coverage issued by Goldman Sachs yesterday. The meetings “reinforced our confidence” that the publicly traded, zero-calorie soft drink maker can continue to expand in its existing channels while also moving into new ones: specifically warehouse club, where variety packs are driving trial in several regional pilot programs, and in c-stores through the use of channel-specific packaging and merchandising. The report also highlighted the strength of Zevia’s internal R&D, which has allowed the brand to successfully iterate on and improve products, or introduce completely new innovations (such as its new Creamy Root Beer SKU).
Launched in 2007, Zevia generated $110 million in net sales last year. Goldman Sachs is maintaining a 29% sales growth target ($41 million) in Q3 2021, just one point lower than the company’s own estimate.
“In short, Zevia is raising the bar in terms of talent (tough to quantify but a key driver) [and] innovation, and it sounds like the company is on the cusp of reinventing the business to create a platform brand which should support faster growth,” analysts wrote. “We view a lot of these changes at [Zevia] as step function changes especially as retailers reset their shelves in the spring of 2022.”
In terms of fitting into the competitive low calorie CSD set, Zevia has found room to grow in untracked channels like e-commerce — the brand is the top-selling CSD on Amazon, with online accounting for around 13% of total sales — and certain subsets of natural and club channels (as well as international markets), which collectively represent around 50% of the overall business, the report stated. By operating mainly in multi-packs, the brand has continued to ride the momentum of pantry stocking trends even as pandemic-inspired purchasing behavior is receding.
“Zevia [management] recognizes that the tracked channel data is not painting a full picture of the company’s business and, based on our conversations today, we are optimistic that [management] is likely to step-up its disclosures of trends in non-tracked channels over time to give investors a better sense as to how its business in aggregate is performing,” the report stated.
Analysts also noted that Zevia’s relatively simple proposition — using stevia to create sugar-free, calorie-free versions of familiar carbonated soft drink flavors — has succeeded where others have struggled, citing the failure of the stevia-sweetened Coca-Cola Life, which was not zero-calorie. Through its ability to balance taste appeal with its use of natural ingredients, not to mention the name itself, the company has developed strong brand recognition for stevia-based drinks that competitors with similar attributes may find difficult to dislodge. Those types of callouts, along with the company’s B Corp credentials, have helped Zevia attract a younger audience that contrasts with that of Coca-Cola and Pepsi.
Widening gross margins have also been encouraging, according to the report. Zevia management told Goldman Sachs that margins are likely to expand through better sourcing, declining COGS per case and continued retailer interest in high-margin formats. Other factors — strong repeat purchase rates and an asset-light business.