High-Hanging Fruit Read online

  The more I thought about it, the more I realized that I knew near nothing about the beverage industry. Yes, I was a supplier of beverage cartons and knew about packaging and a little about processing, but launching an actual beverage would be a whole new world. I had studied some of this for my MBA but I had no practical experience with product development, branding, consumer marketing, distribution, or retail sales—in short, everything it takes to start and run a consumer product business. But I knew how to learn and decided it was time for a crash course in the beverage industry.

  CHAPTER 3

  LEARN FROM THOSE WHO CLIMBED BEFORE

  So let’s say you’ve done the hard work of coming up with a big idea, one that both fits with your values and principles and can make the world a better place. You’re excited and energized and ready to dive in, but as you begin to think more about it and talk it over with friends or family, you hit your first major roadblock: a full realization of just how many competitors you’ll face. No matter what industry you’re in, I can guarantee that the marketplace is crowded and the competition fierce. Once you realize this, your confidence may waver and you may even think about giving up before you’ve really begun.

  I fought through this roadblock not long after I began to get excited about coconut water. I hadn’t yet quit my day job when a business trip brought me to New York. I skipped out of a couple of meetings one afternoon to wander into Fairway Market on the Upper West Side. Walking into a massive American supermarket, particularly if you’ve just come back into the country, can be shocking. Though smaller in physical size than many suburban grocery stores, Fairway was so packed with product from floor to ceiling, aisle to aisle, front to back, that I wondered how any product could rise above the noise and attract a consumer’s attention. Competing in this crowded market of products seemed impossible.

  During my lifetime, the American consumer packaged goods industry had been on a tear, offering up thousands of new brands and products every month to appeal to every imaginable human need and desire. When I was a kid the average supermarket had around eight thousand different products on the shelves. Only a few decades later, the weekend shopper at the supermarket might now have to sort through upward of forty thousand. “Consumers have always had choices, but today options have exploded beyond all reason,” said Barry Schwartz, author of The Paradox of Choice. “It’s the ethos of American society; the idea that freedom is good, more is better, and you enhance those ideas by offering choice. Logically you can’t hurt anyone by adding options. That’s the theory, but in practicality it’s not true.”

  But as I began to examine the offerings on the shelves, the challenge of creating a coconut water brand that would be noticed began to be less daunting. So many of the “new” offerings were simply spins and slight variations of old standards. A gallon of Breyers vanilla ice cream might take multiple forms: “Natural,” “French,” “No Sugar Added,” “Extra Creamy,” “Lactose-Free,” and “Homemade.” Then there were the thousands of look-alike and generic products that were simply mimicking category leaders. Companies were grabbing valuable shelf space (and bumping up their margins) but not really presenting consumers with anything truly unique.

  These dynamics were particularly at play in the beverage aisle. The large amount of floor space allocated to beverages wasn’t surprising given that the U.S. nonalcoholic packaged and fountain beverages industry generated over a quarter-trillion dollars in annual sales domestically. In 2005, that represented nearly 36 billion gallons in product annually or 121 gallons per person each year. Americans were drinking the equivalent of about four 12-ounce. cans of packaged beverage every single day. In the U.S., Coke’s brands and product extensions accounted for around 40 percent of what was being sold. Pepsi, with a similar number of offerings, held about a third of the market, while Dr Pepper Snapple brands together (known as Cadbury Schweppes at the time) had about 15 percent. Every other company in the marketplace was way back in the pack, the largest in the low single digits.

  Despite all those brands, all that shelf space, the huge financial resources, and hundreds of employees tasked with bringing new products to market, these big companies were doing a horrible job on the innovation front. At that time, only seven individual brands accounted for almost two-thirds of all sales: Coca-Cola Classic (itself with nearly 20 percent of the market), Diet Coke, Pepsi, Diet Pepsi, Mountain Dew (a Pepsi product), Sprite (a Coca-Cola product), and Dr Pepper. Nothing else came close. As for innovation, Coke and Pepsi had a long list of failures at launching new brands even after investing hundreds of millions of dollars and spending years of effort. New Coke, Fruitopia, Tab Clear, Josta, and Crystal Pepsi all failed to gain real momentum. Their relative successes were mostly derivative of other bestsellers: Sprite (1950s) was a 7UP knockoff, Powerade (1990s) followed Gatorade, and Dasani (1999 by Coke) and Aquafina (1994 by Pepsi) were knockoffs of the many bottled waters.

  While Coke and Pepsi were category-leading brands and very well-run companies, outside of their core carbonated brands, they weren’t having much success bringing anything truly new to market. This put them in a bind because by 2003, traditional soft drinks were falling from their high watermark. Even if soda sales declined by only 1 percent per year in the U.S., that meant the big dogs—Coke, Pepsi, Dr Pepper—would lose more than $300 million in sales. That also meant that every three years people were drinking $1 billion worth of something else, more when you account for population growth. Industry experts were beginning to speculate that there would be $10 billion worth of beverage sales up for grabs in a decade if the decline of soda accelerated as expected.

  Though not evident in the main fifty-foot beverage aisle with sodas, teas, waters, and sports drinks, another section of Fairway existed that was significantly different and much more interesting. At the front of the store was a six-foot-wide refrigerated section that offered individual bottles meant as grab-and-go purchases. This cooler was stocked with brands, a few of which I had heard of, including Red Bull and Snapple, but others that were new to me: Monster, Rockstar, and other energy drinks; and Izze, Jones Soda, GuS, and other interesting spins on carbonated soft drinks. There were also bottles of Honest Tea, Steaz tea, and Fuze; Smartwater, Volvic water, Nantucket Nectars, POM Wonderful, Odwalla, Naked Juice, and Muscle Milk. More than any other brand, Vitaminwater dominated the display with seven different brightly colored bottles.

  Given the relatively small space available in that front-of-the-store refrigerator, it was hard to see these players as major competition to the legacy brands in the market. Then I reconsidered, as I witnessed half a dozen consumers step in and grab one or more bottles. Though buying one or two units at a time, their purchases were clearly adding up. In fifteen minutes I watched ten times the number of consumers take something from this shelf versus the main beverage aisle, which relied on purchases of multipacks, large jugs, and other volume formats. I also saw two restocking guys go to work in that time refilling the cooler from a cart loaded with cases of different brands. One of the guys, wearing a green smock, seemed like he worked for the store. The other was wearing a black Vitaminwater T-shirt. I asked him if he worked for Glacéau (I knew that was the parent company of the Vitaminwater brand). He said, “Como?” So I switched to Spanish. “Tú trabajas para la empresa Vitaminwater?” “No,” he said, “para Big Geyser, la distribuidora.” I made a mental note of that.

  I couldn’t find any coconut water in this cooler or in the main beverage aisle. That was good news. I did finally locate some in the ethnic aisle on the bottom shelf next to Cuban black beans and canned chili peppers, and there were three brands in tall, cheap-looking cans. Clearly, that wasn’t the place for the brand I was imagining. No question I wanted to see my product someday in that front refrigerated case with the exciting new beverages. But I knew I had a lot to learn about how to get it on that shelf and stand out from the crowd.

  Walking back to my hotel, I decided to take a pee
k at the shelves of a couple of little corner markets. The greater New York area has thousands of these small independently owned shops. One of the stores I walked into was filled with organic produce, fresh flowers, fine cheeses, and fresh baked bread. The beverage cooler, though smaller than the one at Fairway, had many of the same products. Clearly someone was buying these drinks, as I could only imagine what real estate cost in this neighborhood and I’m sure every inch of cooler space would be dedicated only to products that consistently sold at a high profit margin. I would later learn that for many of these bodega operators, the beverage “cold box” alone generated enough profit to cover their rent.

  Compared to, say, making a car, barriers to entry for beverages are relatively low. (It’s not a coincidence that setting up a lemonade stand is often a kid’s first experience in running a business.) I would find out later that over three thousand new nonalcoholic beverages were launched every year. Most of these new brands didn’t first appear in major retail outlets. They were being rolled out at farmers’ markets, county fairs, and in small mom-and-pop stores across the country like the bodega I was in. This is where the innovation was happening in the beverage industry.

  I shifted my attention from what was on the shelves to the customers doing the shopping. Given the markups in these small shops, I had a hard time imagining anyone filling up a shopping cart—in fact, shopping carts wouldn’t fit down these narrow aisles. This was a place to get things on the go. Some of the shoppers were construction workers grabbing a beer at the end of the day. Others were business professionals buying a coffee, Coke, or water.

  But there were also a number of consumers in their twenties, thirties, and forties who were different. They were groomed and stylish, in an understated sort of way. Though wearing distressed printed T-shirts and jeans that gave them the appearance of being down and out, their shoes gave them away. Here were the famed hipsters everyone was starting to talk about. Several women, I noticed, carried yoga mats under their arms, and many of the men were also clearly fresh from a workout. They were taking time to read labels and compare products, and I got the feeling that they were willing to spend money on quality food and drink. A couple bought some of the beverages that were new and different. I picked up a bottle of Fuze and while paying for it at the counter asked the clerk, “Does this sell well?”

  “Yes, yes, sell good, sell good,” he said in a strong Asian accent, not interested in talking to me.

  “Who brings this to you?”

  He said, “No time kwes-ton. Tree dollar, please. Many customer. You come later. A-na-der time. Aks kwes-ton. Bye bye.”

  I could have seen these entrepreneurial beverage brands in this small bodega as yet more competition, but I didn’t really think of them in that way. Honestly, I was excited to join them. Simply from my introduction to these products, I imagined the people behind them must be interested in the same sort of objectives and mission. Yes, they were potential competitors, but they were also fellow seekers and their success to date offered proof of a growing desire in the marketplace for something different, new, and healthier. Little did I know most of them would not see it the same way and that it was virtually a cage match to the death to try to get and keep that valuable shelf space. That Korean shopkeeper’s annoyance at my questions was my first clue. He was probably sick and tired of being quizzed by would-be entrepreneurs and pushy salesmen on an hourly basis. I later learned that these types of stores were on the front line of the new beverage wars and that this conflict was serious, brutal, and bloody. Any of the three thousand new beverages every year had about as much chance of surviving as any random high school senior getting into Harvard; in fact, less.

  When I got back home to El Salvador, I began to devote my early mornings and evenings to reading everything I could find about recent trends and successes in the beverage industry. As I had gleaned from my on-the-ground research, innovation in nonalcoholic beverages was coming from outside corporate offices. If the big guys did have a successful new brand in their portfolio, it was almost always because they had purchased it from an entrepreneur who had brought it to life.

  Further, the ranks of those successful beverage entrepreneurs came from a broad range of backgrounds rather than former industry professionals with an inside track. Indeed, students of innovation in all fields often conclude that being an outsider confers a big advantage: you’re not constrained by the conventional wisdom about why a particular product or approach will or won’t work.

  WHO WILL YOU KICK OFF THE SHELF?

  I had learned that retailers, distributors, and others in the industry would tend to think about what product ours would substitute: “Who are you going to kick off the shelf?” the saying goes. So I knew my first goal would be to define the beverage categories that coconut water might fall into and then research the winners and losers in each. That first part proved easier said than done. Those who analyzed the beverage industry generally broke down products into a half-dozen broad categories: carbonated soft drinks, juices, sports drinks, energy drinks, bottled water, and ready-to-drink teas. Some had defined a category being referred to as “New Age.” These included herbal iced teas, specialty smoothies, some shelf-stable dairy drinks, and some nutritionally enhanced beverages. Others used the term “functional beverages” to describe drinks that claimed to provide a specific physiological benefit like hydration, increased energy, or wakefulness.

  Interestingly, coconut water wasn’t tracked at all in the industry numbers. Reliable data on the size of the market represented in the ethnic aisle was nearly impossible to find. I wondered how the beverage industry might categorize it once they decided to track it. I didn’t want to put our brand next to those tall steel cans from brands like Goya or Foco anyway, with their low price point, added sugar, and preservatives. Clearly, coconut water wasn’t a carbonated soda and it wasn’t a tea. But how it fit into the other categories wasn’t so obvious. I assumed coconut water was technically a juice. I also felt that because it had an exotic and cross-cultural appeal, it could work in the New Age category as well as offer an attractive alternative to bottled water. With all those electrolytes, it was certainly functional and could be seen by many consumers as a sports drink. I thought about the challenge of introducing U.S. consumers to something foreign and thought there was something to learn from alternative milks like soy. In the end, where would I suggest a store manager place our product on his shelves? I didn’t have a clue.

  One of my biggest learnings was that plenty of upstart winners in the beverage game were not experts when they launched. In fact, many were complete outsiders. For example, three New York City friends, two of them window washers and the third the owner of a small health food store, created Snapple. SoBe was created by John Bello, who’d had early stints at Pepsi and General Foods but had achieved his business success manufacturing and marketing jerseys, helmets, and other merchandise licensed by the National Football League. Bello decided to jump into this growing market with his own brand, South Beach, later restaged as SoBe.

  This discovery led to another: that outsiders who venture into the beverage business could employ a ready network of companies positioned to help out the growing number of entrepreneurs. As with the hopeful forty-niners on the way to the gold fields, there are many companies ready to sell the modern-day beverage or food entrepreneur the tools and resources they’ll need to succeed.

  Flavor houses, from industry giant Wild Flavors to more boutique operations like Allen Flavors (AriZona Iced Tea’s longtime flavor house), offered to help procure ingredients and get the flavor right. Packaging brokers like Zuckerman Honickman would procure bottles and cans for ventures that were too small to be worth the attention of big producers. Co-packers scattered around the country could work out the kinks and complete the first production runs. Distributors could test out new products and stick with the winners. These early experiments and help weren’t cheap, so entrepreneurs needed financi
ng up front, and often gave away equity in their companies as well, to get access to this insider network.

  I came to understand that these suppliers, consultants, and middlemen companies were arguably the real success stories behind the new beverage bonanza. While they didn’t make headlines or sell their companies for lottery-size winnings, these companies (and there are hundreds of them) are the true backbone of the beverage ecosystem that, for a price, help bold entrepreneurs bring their dreams to market.

  This was particularly true of the distributors. Renowned independent distributor Big Geyser had helped put many brands on the map, including Nantucket Nectars, which then became one of the company’s most important brands in its powerful network of independent route owners across the city. When Cadbury bought Nantucket Nectars, they pulled it from Big Geyser and gave it to their own Snapple distributors in New York. The Big Geyser team lost a big brand and in their fury looked for another one to get behind in a big way. They turned their attention to a small, fledgling brand they already had on their trucks: Vitaminwater. By the time I was walking the streets of New York, Big Geyser was already proving that, though often overlooked from the outside, the motivations of a distributor can make or break a brand.

  THINKING OUTSIDE OF CATEGORIES

  The industry focus on categories made for interesting reading, and I was learning the lay of the land, but partway through my research, I began to wonder whether these somewhat arbitrary lines between product groupings were really important. I also thought it might be one of the things hindering the major players in the industry from innovating successfully. As a consumer, I knew that I never once thought in terms of these categories when I bought a beverage.