Even with his efforts to push the category forward and his Ivy League credentials, Paddy Spence approaches the CSD industry with the everyman in mind.
Zevia, the CSD company of which Spence is the CEO, does indeed contain no calories, sugar and artificial sweeteners, but it’s also flavored in well-known styles: Cola, Cherry Cola, Grape, Orange, Ginger Ale, Cream Soda. There’s more (15 to be precise), but Grapefruit Citrus is about as esoteric as it gets.
“We really leverage familiarity,” Spence said.
By communicating the brand’s health-focused proposition in easily comprehensible terms while targeting the everyman, the everymom and the everykids, Spence has posted hearty results. Last year, Zevia racked up $60 million in retail sales from 16,000 stores. And by boosting the company’s presence in single-serve channels such as gas stations and convenience stores, those figures could easily rise.
Bonnie Herzog, the managing director of beverage, tobacco and consumer research for Wells Fargo Securities, held a conference call with Spence on Wednesday and covered an expansive amount of subjects on the company’s history and future. Spence began by discussing his work as the head of sales and marketing for Kashi and casually mentioned his founding of SPINS, a supplier of data from the natural and specialty channels. He then broke down the strategies that have provided Zevia with an established foothold in the mainstream channel to complement its foundation in the natural channel.
Roots of Distribution and Infrastructure
Based on early purchasing data, Spence said that the company decided at an early juncture that it would begin as a warehouse brand. In 2010, 31 percent of the company’s transactions came from multiple 6-packs. Consumers were buying eight cans on average. That number has since grown to 37 percent. These figures tell Spence that a significant portion of the company’s consumers are going to the store knowing they want Zevia.
“That’s a planned purchase,” he said.
The warehouse-centric approach has had a number of ripple effects for the business from channel and infrastructural perspectives. From a channel standpoint, Zevia has focused on natural retail chains such as Whole Foods and Sprouts, and more recently conventional food and supermarket chains as well as drug and mass stores. The strategy has also enabled the company to keep a lean and efficient sales force (the company has 22 employees), Spence said. For example, one person covers Whole Foods nationally. Another person covers Kroger nationally. This contrasts with the need for a number of feet on the street to push for more business in local gas and convenience stores.
To follow this strategy, Zevia complemented its 6-packs with the recently-released 10-packs, which offer another choice and better value for high-volume accounts.
“Soda is a ubiquitous category,” Spence said. “It’s in every channel, even Staples and Office Depot or Toys R Us are selling a little bit of soda.”
Gradual Shift to Single Serve
With Zevia’s growth concentrated in centralized shelf placements of natural and conventional grocery accounts, Spence has taken his time to polish the brand for single-serve channels that he formerly placed on the back burner of the business plan.
“I definitely see us building out single serve while continuing to drive transactions with multiples in our other channels,” he said.
The brand has already established a strong footing in the natural, drug and mass channels, and it’s doing some business in warehouse clubs such as Costco. However, Spence said that there’s still plenty of other space in the market for this kind of product, especially in the convenience and gas channels.
Spence also envisions room for growth via educational institutions, foodservice operations and even hospitals. While nurses routinely dish out CSDs to settle stomachs, Spence doesn’t think it makes much sense to serve beverages with the caloric and sugar content of Coca-Cola or Pepsi in a place that specializes on health.
For single units, Zevia will conduct regional tests and analyze flavor and purchasing dynamics along with cold box vs. dry shelf placement. He believes Zevia has a great chance to carry its success into these channels because of its competitive pricing against the giant cola brands. On promotion, a 16 oz. can sells for 99 cents. Everyday prices range from $1.29 to $1.49.
Spence said that he can’t yet share the test locations, however, he added that the brand has nationwide demand. It’s not just a favorite of denizens on the coasts and in college towns. Some of Zevia’s key markets are where it had no presence three or four years ago, he said. In the Carolinas, he points to Harris Teeter and Ingles Markets. In Texas, it’s Whole Foods, Kroger and H-E-B, among others. In Wisconsin, a small store called Woodman’s Foods stocks all 15 Zevia flavors and performs well.
“We’re a brand with some unusual pockets of geographic strength,” Spence said. “And I guess I can just say we’ll be looking to play to those strengths in our convenience and gas tests.”
A few other points to note from the call:
This is the first generation of young people growing up with the soda stigma, Spence said, and the cola giants have struggled to connect with these consumers. Instead, the demographic has moved to energy drinks, waters and better-for-you products. He thinks Zevia plays a substantial role in the better-for-you category with the vegetarian and health-focused portion of this age group.
A massive chunk of Zevia’s growth can be attributed to increased purchases of category participants, Spence said. While Diet Coke drinkers are seeking moderation, Zevia drinkers don’t have the same thinking. “Because we’re a 0-calorie, natural item, there’s frankly no consumption ceiling,” Spence said. “And our consumer feels good about going from four to six to eight cans a day.”
Spence said that a small but still significant piece of Zevia’s growth comes from brand switching by consumers. “We don’t seek to convert people from full-sugar or full-calorie soda to zero. That’s a tough switch,” Spence said. “But if someone’s drinking Diet Coke or Diet Sunkist, we’re a pretty easy switch for that individual.”
As the cola giants mull innovation plans, Spence wonders how an established brand can release a beverage with a better-for-you perception without compromising the core offerings. A higher cost of goods could complicate price points and a philosophical shift could damage a brand. Spence said: “how do you do that without cannibalizing your existing franchise?”
Following up on the previous point, Spence doesn’t believe in the incremental efforts of mid-calorie CSDs such as Pepsi Next, Coca-Cola Life and the Dr Pepper Snapple TEN line. Mid-calorie orange juice, such as Trop50, works because of its healthful perception and vitamin content. However, mid-calorie CSDs are often viewed as a lesser version of the full-calorie option or as a dose of empty calories. “You end up satisfying no one,” Spence said.
Zevia knows that it won’t be able to outspend Coca-Cola, PepsiCo and Dr Pepper Snapple Group, so there’s little room for error on the marketing front. “We had to be laser-focused in terms of our targets,” Spence said. Because of the product’s appeal to the everyman and everymom, old-school tactics such as free standing inserts in magazines and coupons in Sunday newspapers have drawn solid trial figures. The company has plans to announce a professional sports sponsorship later this year.
As a smaller brand, Zevia can’t tell retailers to reduce facings of Diet Coke. However, the company has asked retailers to consider replacing brands such as Diet Barq’s and Fanta flavors, for example. This had led to retailers giving Zevia more centralized placements in the CSD aisles of mass accounts, rather than a placement with natural products in the back of the store. “It’s really about taking incremental facings that have possibly been overallocated to some of those shrinking brands and bringing in a new brand,” Spence said.
In January, Herzog interviewed Kevin Klock, the CEO of Sparkling ICE. Klock stated that his brand could reach $1 billion in sales by 2018. On the flip side, Spence believes that Sparkling ICE’s growth is unsustainable. He mentioned the product’s artificial sweetening and coloring and thinks that the headwinds of artificial sweeteners will be too great a hurdle for Sparkling ICE to overcome. “Sparkling ICE is a price-driven phenomenon,” Spence said.