Middling Innovation

So now we’re in financial market with a completely different vibe than just 18 months ago. The same investors, it seems, whose exuberance blew newly public issues into stratospheric valuations have suddenly turned very sober, holding those same targets to standards of financial discipline that never were mentioned during their road shows. Less visibly, it hasn’t been much different on the private side, with the recipients of tens of millions now taking severe haircuts on valuation. Look at oatmilk giant Oatly: never a word said about immediate profitability in its road shows (and never a word asked, that I recall), yet it arguably underpriced a share offering that soared from a valuation of $10 billion to $13 billion upon its debut. Oatly’s executive team could not have been clearer that all discretionary cash flow would go toward building new plants all over the world, following its highly integrated production model. Now of course, it’s getting hammered on the Street, despite generally meeting its commitments on sales growth and continuing that global plant buildout with surprisingly few glitches, given the current period of supply chain snarls. Like others, it’s now pursuing an asset-light model (or asset-lighter, anyway) and assuring investors it’s aiming for profitability.

Shifts like these are all the more necessary because of a complementary shift occurring on the side of the strategics who’re usually the ultimate buyers of emerging beverage brands. Many have come to the realization, perhaps with an extra nudge from the portfolio prioritizing that the pandemic demanded, that their old model of partnering with early-stage brands to build the next big platforms didn’t really work. At least, not in any way meaningful to multibillion-dollar multinationals that need serious growth increments, and quickly, not modest additions that add complexity but not enough topline heft to impress investors. We’re still seeing deals getting done, with Keurig Dr Pepper particularly active with its Athletic Brewing and Nutrabolt alliances, but even those are explosively growing brands and, in C4 Energy’s case, beyond trivial size.

From this perspective it doesn’t hurt to look at Coca-Cola’s influential Venturing & Emerging Brands incubation unit, whatever exactly is left of it these days. In over 15 years of existence, it’s plied a conscientious course trying to uncover trends driving consumer behavior and the outside brands that might fill them. From what I’ve heard it’s always operated honorably and has been an enthusiastic champion of beverage innovation (including by sponsoring BevNET’s own Showdown competitions). Yet what does it really have to show for all the hard work? It may have fumbled some key investments, like the coconut water brand Zico, but it also did pretty well by its Honest Tea investment, carefully onboarding it into the broader bottling system, maintaining its organic credibility and commitments to the growing community. At least, until this past year, when it shocked the beverage world by announcing that this brand would be sunsetted. Even after a decade-plus in Coke’s grip, Honest was well shy of the billiondollar sales level by which the company measures innovation successes and simply wasn’t worth the - minimal - focus and space on the trucks any more. So even what might be viewed as VEB’s best success proved inconsequential to a behemoth like Coke.

That’s a sobering conclusion. There seems to be a similar rethinking going on among most of the big beverage and beer players. After all, why should they expect different outcomes?

For those in the innovation space there’s a very interesting offshoot of those twin forces. If most of the strategics are disillusioned with the incubation model, and the investors are risk-averse, then early-stage brands need to come up with a new model beyond blowing up the top line at any cost to win the notice of would-be acquirers. Lately, several operators and deal-makers have been pointing to the emergence of this model as a kind of safe space where brand-builders now can ply their craft unmolested by deep-pocketed multinationals with priorities that can shift on a whim. Not a backwater, exactly, but at least a more placid pool where the big guys are less likely to fish, either as acquirers or by launching knockoffs. At Vita Coco that’s explicitly underpinning their ambition of becoming a multiplatform player in coconut water and adjacent categories. At the recent ICR investor conference, CEO Martin Roper spoke of how even a $100 million brand might be viewed as “niche” in the current climate. So the longer-term plan he’s hatched with executive chairman/co-founder Mike Kirban is to grow or acquire one or several brands in that range that move through similar channels to the core coconut waters. Those are “niches the big guys wouldn’t worry about,” he figures.

Zico’s founder (and restored owner) Mark Rampolla, who runs the PowerPlant Ventures investment shop, sees the planets aligned for a range of operators who can be stewards of these mid-range brands. The strategics, he blogged, are “clearly not interested in managing hundreds of small, niche brands under their existing umbrellas – and we’re starting to see roll-up companies fill the void. Before long, I expect there will soon be a new group of public, multi-brand companies that take over and fill this void.” Or privately held ones, I would add.

Of course, beverage roll-ups haven’t exactly had a brilliant history. New Age Beverage alone would have been enough to tarnish that notion with its discredited push to acquire troubled brands cheaply with a view to tapping synergies. That never materialized, and the company veered into the get-rich-quicker realm of multilevel supplement marketing and eventually spiraled into bankruptcy. But it never really invested in those brands, and some already had had their shot and failed. There’s a wry comment I’ve heard over the years about how this idea of pooling a pair of weakened brands in the hope they can unlock some synergies is not much different than two drunks propping each other up at the bar. Platform operators like Vita Coco with a sizable, established brand and demonstrated history of responsible fiscal stewardship are a different story. Talking Rain and AriZona Beverages might similarly qualify, but so would a bunch of earlier-stage companies trying to suss out their ultimate goals.

This changed landscape likely will preference a different breed of entrepreneur, those who’re not just about the adrenaline rush of blowing up the topline for a quick flip – “carpetbaggers,” I sometimes call them – but rather those who genuinely enjoy engaging in the daily challenges of the business without any timeline of when to move on.

Just in the iced tea business we can point to the likes of AriZona, Milo’s and Joe Tea as patient, family-run businesses that have demonstrated impressive commitment and staying power. And hey, those young surf dudes at acai pioneer Sambazon have certainly surprised me by how long they’ve stuck around – 22 years and counting. Personally, I’d like to see more of these patient, long-term players “out here in the middle,” to cadge a song title from James McMurtry. As the smalltown paramour sings to his big-city girlfriend in that classic, “Wish you were here, my love.”