GERRY’S INSIGHTS
By Gerry Khermouch
THE RECESSION AND INNOVATION: TAKING STOCK AS I WRITE THIS, A LOT OF companies in diverse businesses are bringing in strong earnings numbers, the stock market has started recovering some of its losses and some economists are saying maybe we’re truly moving out of the recession. I’m not entirely convinced, but I do, of course, hope they’re right. Still, this talk of hitting an economic inflection point offers a good pretext to take stock of the toll the recession has taken on the innovation side of the beverage business. One way to do it is by assessing some of the costs the downturn has exacted. We can start with new-product introductions. They took a big hit – 30 percent for U.S. food and beverage launches in 2009, if you believe the numbers put out by Mintel. That alone would certainly seem to be a black mark, but that still leaves hundreds of new beverage brands – not a tiny pool! Judging by the lively, ambitious crowds at the BevNET Live events of the past year, and by what I’ve seen while roaming stores and distributor warehouses, the entrepreneurs are still out there in force. And recall this rule of thumb: economic downturns, by forcing downsized corporate drones out into the real world, often spur new-company and new-brand formation. Taking this all into account, I’d argue that the damage hasn’t been too severe. Certainly, premium brands like Activate and Neuro, with a well-thoughtout plan and point of difference, seem to be drawing intense interest from retailers, distributors and consumers. (That’s not to say that I don’t also hear constant laments from wholesalers that the next big thing isn’t out there. But I’ve learned to take that one with a grain of salt. They – and I – often don’t immediately recognize the next big thing, even when it’s staring everyone right in the face.) There have been brands that have vanished and companies that have shut their doors, whether Bombilla & Gourd yerba 20.BEVERAGESPECTRUM.JULY-AUGUST.2010
mate drinks, the Currant C and Frutzzo juice lines, or kid-targeted lines like Wild Waters, Waddajuice and Y Water. I feel badly about these brands: they had their intriguing aspects and most were launched by entrepreneurs whom it was easy to root for. But none had really found their footing yet, and some were in segments that have been challenging even in good economic times. Truth is, given the recession’s severity, I feared the casualty count would rise a lot higher. Some of my friends in the business warn me not to jump to conclusions, that this is a make-or-break summer for many young beverage brands; if they fail to hit their sales targets, we may well see another wave of closures. Nevertheless, I think the small independent players have survived the downturn reasonably well. Still, there’s the toll the recession, and its underlying causes, have taken on entrepreneurs’ ability to raise money. In theory, there’s lots of money parked on the sidelines, at a time investors are looking for more tangible kinds of plays than the financial and technology vehicles that, they now realize, they never really understood. In practice, with investors so traumatized by the events of the past couple of years, it’s been tough for beverage entrepreneurs to pull in much dough on reasonable terms. But is that entirely a bad thing? Readers of my newsletter will know that I’ve inveighed often enough about the risks of raising too much capital too easily, how doing so breeds inefficiency and overexpansion, raising the ante in a game that only a few can possibly win. A tight capital environment forces small companies to really prioritize, to prove their concept in just a few markets, where the inevitable mistakes made along the way don’t burn a lot of capital and credibility. It seems to me that many of the more differentiated young brands are doing OK in bringing in new money, whether it’s Sambazon or Mix1 or Hint. And certainly strategic
partners continue in the hunt – particularly when you define “strategic” to mean more than just Coke and Pepsi. Such varied beverage companies as Nestle, Sunny Delight Beverage and Coca-Cola Consolidated Bottling have shown an appetite for new brands, and Tata continues in the hunt. Some have come out of left field, like Sunsweet, which took a stake in Ayala as part of a diversification push. They’re all voting with their resources and attention that consumers’ push to healthier, more functional beverages hasn’t been derailed by the recent economic adversity. Other recession-related problems? Well, pricing, of course. But the big soft drink companies continue to marvel at how “rational” the pricing environment has remained, and while many consumers have traded down, brands at a modest premium continue to do OK, as do some with elevated price points but clear value for the money (protein drinks, functional brands, energy drinks). Promotion frequency may be higher but I don’t think it’s necessary to run a 10-for-$10 every other week to hold your space. Nor do many retailers seem to have dropped their yen for experimentation. Just as they’re ignoring the experts’ complaints that they’re over-sku’ed in craft beers, they seem happy to devote a disproportionate amount of shelf space to intriguing new non-alcoholic beverage choices, and not always in return for a hefty slotting check. Bottom line: it’s been a rough couple of years for many of us, but I don’t think we need to worry that the pipeline of innovative products is drying up. Hopefully, companies that have weathered the crucible of the recession will have learned operate in a smarter, more disciplined and straightforward way that serves the industry better. Longtime beverage-watcher Gerry Khermouch is executive editor of Beverage Business Insights, a twice-weekly e-newsletter covering the nonalcoholic beverage sector.