THE FIRST DROP BY JEFFREY KLINEMAN
What’s Your Archetype? A thought on business models as we enter the new year:
things are shifting, but there are still some basics that are worth remembering. Entrepreneurs are always reinventing the pathways to growing a brand, but there are recurring growth patterns when it comes to beverage companies. They don’t necessarily conform exclusively to these patterns – warehouse and DSD can overlap, and omnichannel is hybrid in nature – but see if these archetypes seem familiar to you. I’ve also included some “lookouts” for when you find yourself. Warehouse/Broadline: you’re selling a pretty inexpensive product that you feel can be reliably shipped to and serviced by the retailer rather than your team in-market; you have invested heavily in tightly controlled pricing and commodity and operations costs. Your sales team is effective but not huge because it tends to work with a network of accounts who are pretty well established. You rely on broker networks to get you up and running but a strong sales team keeps key accounts happy. Your super-strengths are reliability and affordability. Weakness: Times change. People stop being as interested in your product (see: Orange Juice). You’ve established your route to market but you’ve caused your margin cushion to all but evaporate; you get squeezed by commodity price spikes. At scale, even when you make money, there’s little room for growth; innovators can erode your position irrevocably. DSD: you’re selling a premium product and you’re growing region-by-region, supporting the right sales to the right accounts as guided by your network of distributors. You’re super focused, deploying data tools to determine your selling story, you pay attention to your margin so that even when you take into account the high cost of third-party distribution, you’re still attractive to potential investors while you grow. You emphasize something about your product: premium appearance or ingredients, functionality or taste, in the interest of creating “pull.” Weakness: The costs mean you’re taking on debt and investors to juice your expansion; investors are absolutely important but their need to realize return means that you create a clock on when you’re going to sell. You can get by without transacting, but that’s the ultimate goal since you’re likely playing from behind. Regardless, you have to be really careful with margins – you’re going to have to grow large enough that your revenues can eventually overtake the cost incurred to create that growth. And, as longtime beverage counselor Bill Sipper notes, DSD distributors are “needy… in the beginning, they just deliver. You and your sales team do all the work in the beginning until you are able to prove your product is working.” Direct-to-Consumer: You’re focused on acquiring consumers whose passions for a product means that its cost is less of a concern than its presence in their lives. Repeat consumption is important and you are constantly listening to your customers about the ways that you can maintain the relationship. If they’re on board and you can keep them interested, you create a highly profitable cycle, and you only have one customer, the end user. Your marketing process is your sales process, because you aren’t relying on in-store placement, and there’s a lot of focus on making it easy to purchase from your site. Weakness: Scale is hard to achieve, which means that if you have investors who are looking at growth, you’re going to have to cross the chasm to the physical world and it’s expensive to effectively create a new sales operation to do that. If it works, people might buy you anywhere; if it doesn’t, you’re last week’s “as seen on tv” product. And Amazon and shipping costs are getting more expensive. Omnichannel: You figure out a combined sales and marketing operation that relies on your product’s optimal characteristics 6 BEVNET MAGAZINE – JANUARY/FEBRUARY 2022 2018
that suit both online and brick-and-mortar channels. You hope to create enough of a phenomenon online that offline trial is encouraged and price it low enough to mean that your online consumers will also support offline purchases so that retailers will continue to stock you. Subscription revenue online is both a steady stream, but also a marketing play for visibility and growth offline. Weakness: you have to have intense focus; it helps to adopt this strategy from the start. Picking the right channels for offline growth is product specific and you basically develop a second business. While a balance between sales channels means that you have a cushion should one shut down, that balance is also key to long term success, so if one slows dramatically the business could need to be reconfigured. You may shrink or grow your team accordingly, because you’re running several sales teams, and may have wild inventory swings as well. Now, here’s the really difficult part: while entrepreneurs with strong knowledge of their products (something more elusive than it sounds) might feel like it’s easy to pick their route, it’s very hard to convince the right partners along each path to come along with them. Key retail accounts, distributors, investors and consumers all have to see the virtue; for native omnichannel operations, that convincing has to take place on different tracks simultaneously, just to get started. Data is very scarce at the start for brick and mortar brands; sample data is so small as to be potentially irrelevant for early D2C brands. To truly align your business with your life goals, though, I’d say you need to begin with an ending in mind: if you want to be huge, know it’s going to take more time and money than you can fathom, and structure your finances so that you can handle the stalls that accompany driving forward all the time. You have to be willing to cede a lot of the business to investors because you’re buying into the idea that when you sell, it’s better to sell your 10 percent of a $1 billion brand than 50 percent of a $100 million brand. But if your ending is that you’d rather own and maintain that $100 million brand over the long term, then you build your company differently. Control is more important. But there are other changes in the environment that can affect your decisions: As we’ve heard repeatedly, exits for brands to strategic acquirers have evolved to become much more about seeing the potential to add profitability to the buyer’s existing portfolio rather than about adding a shiny brand that is going to take hundreds of millions of dollars in support before it becomes a viable winner. That means that fast growth has to be disciplined, because then you create a brand that’s more likely to stand up on its own. Better to be the pursued than the pursuer. Second, knowing that margins need to support a path to profitability, it’s also important that you not lock yourself into a company that can’t eventually grow. A lot of brands that try to leap from the screen to the store fall spectacularly in the moat between them. Maybe the best expansion is the incorporation of other good brands into your sales and marketing engine, especially as you think about the perfect channels for you to try out in the physical world. Third, really carefully evaluate your growth options beyond all of the patterns we’ve discussed above. You’ll be bombarded with options: international containers; cruise lines; foodservice; the Google cafeteria. You have to weigh the cost of visibility, the hassle, against your resources, strategy, and their effect on your all-important focus. Finally, remember: as we’ve learned in the past two years, it can all change in the time it takes for one international sneeze. So knowing your costs is going to let you understand on a day-to-day basis whether it’s worth it to stay on your planned route, or to try a side road. Best of luck. Photo by Samara Doole on Unsplash
