Gerry’s Insights Staying Optimistic Amidst Inflation

Silver Linings

Even as the nation has been turning the corner on two horrifi c plague years, lifting spirits and reopening some crucial channels, recent months have brought a rash of dispiriting developments for the innovation sphere. Public markets have grown precarious, sending valuations of early-stage bevcos crashing down amid a broader correction. That has rippled out to the private market, making deals harder to get done: considerable uncertainty over proper valuation has led to nervous investors demanding preferences that may be hard for entrepreneurs to swallow. And some strategics seem to have done an about-face from their long fl irtation with cutting-edge brands, looking mostly internally for innovation as they focus on incremental improvements within incumbent categories that have already established a large addressable market. As they rethink their priorities, they’re jettisoning brands that don’t fi t that vision. In rapid succession, Coca-Cola said it’s killing its Honest Tea brand by yearend, Starbucks unloaded HPP pioneer Evolution Fresh and Nestlé dumped cold-brewed coffee maker Chameleon. After PepsiCo semidivested its juice brands, including KeVita and Naked, earlier this year, there were signs that it was ready to throw Tazo Tea overboard too before news of Honest Tea’s pending demise seemed to give that brand a new lease on life. At the same time, as the stresses have mounted, top execs at growth companies like Flow Beverage and Alkaline Water have headed for the exits.

It leaves us at an uncertain moment. After all, as the pandemic demonstrated, the broader trends toward healthier brands, sustainability and ecommerce are not going away. But there are more potholes on the road to success. As I’ll try to show, that could prove benefi cial to brands with solid concepts, disciplined management teams and patience, as well as to the independent DSD channels that still play a crucial role in incubating them. But even if the broader economy manages to avoid falling into a recession, the coming 12 to 18 months may be uncomfortable.

Take the matter of capital. Just a year ago, entrepreneurs were exulting over the emergence of the public markets as a hospitable oasis for brands hitting those health, sustainability and ecomm buttons. It offered a compelling alternative to the strategics, who were leaning away from fl irtations with edgier brands, as well as to the privateequity fi rms that are still very much in the game. No question, some of the valuations accorded newly public fi rms had “bubble” written all over them, whether it was for established companies with a meaningful topline like Oatly, Dutch Bros and Vita Coco (and, in Vita Coco’s case, demonstrated profi tability) or emerging companies such as Laird Superfood. Even in the fi rst fl ush of market exuberance, observers could be heard warning that some degree of correction was warranted.

That has now happened. Those multiples have come crashing down and companies that had been eyeing the public markets, from Hint Water to Chobani, may need to put pencil to paper again.

As for the vibe at the strategics, perhaps a rethinking was in order. By now we’re all familiar with the pattern: those strategics make investments in – or outright acquisitions of – ballyhooed new brands with a degree of fanfare and then gradually go quieter on them. In part that’s because they’re still not yet material to events like the quarterly earnings cycle but it’s also because the excitement seeps out as marketing and innovation pizzazz fi zzle and the brands don’t scale up to expectations. Sometimes the category itself doesn’t scale up quite as envisioned, as with coconut water or kombucha. The founders and core team members inevitably move on to more exciting pursuits, “professional” managers take over and the execs who championed the deal themselves move on to new assignments. Though Honest Tea was a groundbreaking brand that was beloved by its consumers, it still is a far cry from the $1 billion that earns a victory lap at Coca-Cola. The organic cred it lent Coke was nice but it seemed easier to just elevate the company’s self-created (but mediocre) Gold Peak brand to try to capture some of those more selective shoppers. (Meanwhile, Honest Tea cofounder Seth Goldman is scrambling to put together a new organic line called Just Ice Tea – get it? “Just-ice,” as in poetic justice.)

Which all brings me to the silver linings. For starters, that lesson the strategics have learned – that the big winners aren’t necessarily brands that break new ground but rather those that offer an incremental improvement over what consumers already have been consuming in large volume – may be salutary for entrepreneurs too. Maybe they don’t need to spend years in the wilderness refi ning their product proposition from bleeding-edge to something with a better chance of broad acceptance. After all, that’s how things played out for Body Armor, which evolved from a so-called “super drink” crammed with obscure, expensive and bad-tasting functional ingredients to a sports drink that’s a step up from Gatorade but not breakthrough in any way. It was rewarded with a lucrative exit to Coke. Let not the perfect be the enemy of the good, this thinking seems to go. That view seems to have been embraced by the strategics. At Keurig Dr Pepper, the promise of the small caffeinated seltzer brand it acquired, Limitless, seems to have been overshadowed by the broader promise of Polar Seltzer, the down-to-earth brand it picked up for national distribution.

It shouldn’t hurt either to move away from the growth-at-any-cost strategy of many emerging brands. Though entrepreneurs I sometimes deride as carpetbaggers are all about the exit – the sooner the better – I have a soft spot for those who seem to genuinely enjoy participating in the beverage business and are not in a great rush to get out. Though it’s the riverboat gamblers who capture the public’s attention and that of young entrepreneurs, it’s not unheard of for new beverage brands to blossom without recourse to outside fi nancing, as AriZona Iced Tea and 5-Hour Energy did years ago and growing brands like Milo’s Tea and Joe Tea seem to be currently doing. Though Vita Coco took advantage of the receptive public markets, it had been profi table and cutting dividend checks for quite a few years. Such feats are possible. It would be nice to see more of them.

I’ll point to one more silver lining: with the strategics currently not deep in the hunt for new brands, promising entries might be available for a longer time to the beer wholesalers and other distributors that remain vital in incubating them, before they migrate to one of the established soft drink systems, a point of great frustration to distributors over the years. (It’s a particularly tough nut for beer wholesalers to swallow, since they don’t have to worry much about the fl ight risk of alcoholic brands, given franchise laws.) True, cobbling together a network of independent DSD partners is like assembling a jigsaw puzzle where the pieces don’t quite fi t, but it would be nice to see what that often-denigrated channel could accomplish if it actually got to keep some of those brands for more than a few years. It might surprise folks.