The following is transcript of Beverage Digest's podcast, The Breeze, Episode 10. Duane Stanford and John Sicher recap and analyze the most intriguing and unexpected developments in beverages from 2023, including the great alcohol crossover, cannabis regulation, the creator economy, BodyArmor’s journey, Bang Energy's fall and rebirth, surprising soda pricing results, and more. Companies covered include Coca-Cola, PepsiCo, Keurig Dr Pepper,  Athletic Brewing, Bang Energy, Prime Hydration, and many more.

Please excuse any transcription errors.

DS:

Hello and welcome again to The Breeze with Beverage Digest. I'm your host, Dwayne Stanford. This is where we bring you into the kinds of industry conversations that we have every day at Beverage Digest. We dissect what's happening, connect the dots and ask the most important question. What does this mean? I'd like to say hello again to my regular contributor here at the podcast, John Sicher. John, how are you?

JS:

Very well, Dwayne. Happy to be back and how are you

DS:

Doing? Fantastic. As you guys know out there, John has covered the beverage industry for almost three decades. First, as a former publisher of Beverage Digest and more recently as a consultant for companies including Coke and Body Armor. John also has served as an expert witness in beverage related court cases. John, before we get started, you joined us at Future Smarts last week in your neck of the Woods, New York City. Any quick takeaways from what you saw?

JS:

Yeah, I had a bunch of takeaways, actually, Dwayne, first, the themes that I picked up on, I thought that it presented the picture of a generally very healthy industry, an industry which is in some change. I think that in the post covid era, price and performance are going back to where they were pre covid. I think that your influencer panel was terrific and I think showed the importance of new kinds of marketing for a range of business and services certainly being adopted by the beverage industry and I thought they spoke well and explained well what influencer marketing is all about. I think certainly it pointed up the importance and the continuing importance of DSDs. I think the alcohol convergence with alcohol was an interesting topic and I think lastly, I think that a terrific speaker was Melody Richards from Walmart. I think that the comment she made about Walmart views themselves as a inflation fighter, I thought really pointed up the classic healthy ongoing dynamic between retailers wanting to hold the price on products for their customers and the beverage industry and other CPG industries needing to get more pricing. And I thought that her comments and other comments in the context of that during the day were very interesting.

DS:

You mentioned the influencer panel. That was a lot of fun. We had one of the co-founders of Poppy, we had someone from a company called Creator iq, which tries to basically create ROI metrics for influencer marketing and then we had an actual influencer named Preston Conrad who works with Poppy and they basically sat for a panel and just allowed me to ask them everything about how they do their work, how they make money, how they arrange deals between brands. I learned that no longer do influencers want to be called influencers. It's sort of a negative word now. They want to be called creators, which I think is really interesting in and of itself, but I felt like it was a real fun deep dive into that world and one of the kind of surprises for me was one of our polls that we ran during the conference day when we asked if people believe influencer marketing or creator marketing is a new paradigm or just a fad, and there was 90 plus percent of the audience who said it was a new paradigm.

So I think this is clearly here to stay. It's something that companies are contending with. Companies like Coca-Cola are spending 60 plus percent of their budget on digital now, which includes social media marketing. Just a fascinating panel. I'll write about it a little bit more in January too just to share it with those who weren't able to attend. So for today's episode, John and I have decided to dissect some of the biggest stories of this past year and I'm really excited about this because the idea is to reflect on what it all meant this past year, but we also want to look for clues about what to expect in 2024 and beyond. John, you ready to dive in on that?

JS:

I'm ready Dwayne.

DS:

So you touched on this a minute ago, but clearly the biggest story of the year has been pricing and volume performance. We talked about this in episode nine in great depth. I don't want it to be too repetitive, but things are moving quick. What have we learned do you think, in the last few weeks as pricing has decelerating and we've seen some volume pressure and even some pressure when it comes to private label?

JS:

I think we're seeing, as you and I discussed before, and to be very quick as you said, I think we're seeing a reversion to patterns pre covid. I don't think anything fundamentally has changed in this industry with the exception of the covid years and the intervention of the terrible pandemic, which really changed shopping, buying patterns, consumers preferences on a short-term basis. But I think what we're seeing now is we're going right back to what we saw in the years between 2015 and 2020, and I think that we're seeing a time when we're going to go back to the industry working very hard to get modest pricing gains. Volume will be down a bit and I think they're going to have to work hard to get some modest revenue gains based upon pricing and keeping volume as strong as they can.

DS:

It's really interesting because I think all that's absolutely true. One, looking at some of the more recent data data ending December 2nd, Nielsen data from Goldman Sachs, we see just really interesting things like the fact that volume performance in the last four week period is down about 1.4%. It had been down for the 12 week period by about 3.1%. So we're starting to see it kind of level off a little bit here. The volume decline as pricing has gone from around 13.6% gain for the 52 week period, again ending December 2nd and then four week period pricing has gained 5.7%, so quite a deceleration yet the volume decline has sort of lessened a little bit. What do you think is going on there?

JS:

Again, again, I think we're returning to a time when is going to decline volume growth is going to be hard to achieve. I think what we have to say to ourselves is basically that nothing fundamentally has changed in this industry since 2017, 18 and 19 and I don't think results are going to change. So I think what everything you're talking about, Dwayne paints a picture of the industry moving back to where it was before Covid, it was doing pretty well. It wasn't doing badly, it was doing pretty well, but some of these price gains that we saw in the last couple of years, 13% and better, it's just not going to continue. It can continue.

DS:

Yeah, I think the big question is, and 2024 should bear this out, has there been some reset at least of the consumer in terms of their expectation of pricing? I mean they're still getting almost 6%, they're still going to need to get pricing next year. Costs aren't skyrocketing right now, but costs are still up and they're going to continue to be up. So we will know next year whether there has been some level of reset that gives consumers or at least continues to allow companies to charge for some of these products to the range that they need to cover their costs and in a way that they can be profitable. And also we'll find out how good they are at managing those expectations for consumers, putting in the right kind of promotions when they make sense in order to keep that demand lever where it needs to be as well. And then of course marketing, that's going to be a big thing. How do you keep people devoted to your and willing to pay some of those prices?

JS:

And I think everybody should, and I'm write about it Dwayne, everyone should listen to what Melody Richard of Walmart has to say when she talked about Walmart sees themselves as an inflation fighter. I think that none of us know yet what 2024 is going to look like for the consumer. Stock market's very strong right now. Unemployment's in a pretty good shape. Inflation's certainly come down a bit, but 2024 is going to be probably a very complicated year and a very dynamic year. And I think that if we end up in 2024 at the end of 2024 with pricing up in the range of four to 5% volume down in the range of one to 2% and revenue growth in the 3%, 3.5%, I think the industry will need to say to itself it had a successful year because I don't see how it does much better than that.

DS:

Yeah, I think that would be managed things quite well. Another thing in recent data that really jumped out at me was the fact that private label CSDs in the last four week period are now down about 7.5%. Private label had been up 4.4% for the 52 week period. So as the prices elevated towards that 15% range over the course of the year, people started moving to private label within CSDs. Now it's not a huge category, it's less than five, around 5% or so, but that was still a warning sign, but we've seen that back off here in the last quarter at the same time that pricing increases have come down, I guess that probably follows, but is there any chance that the industry is kind of out of the woods to some degree on that kind of pressure?

JS:

I think so. I think that my view of private label is this. I think that many years ago private label had a bigger share of CSDs than it does now and has had recently. I think the run-up in pricing in the last couple of years, predictably help private label. We're talking about CSDs and as pricing has begun to drift, pricing increases have begun to drift down again, private label has reacted as it probably inevitably would. I think one of the issues for private label is this. I think that 20 years ago, 25 years ago, a lot of moms bought private label soft drinks for youngsters. I think it was a buy to save money. The flavors were especially in the flavors, less so in the Colas. I think that as volume has come down in CSDs, I think two things have happened. Fewer moms are probably buying CSDs for their kids and I think that Coke and Pepsi have done a better job marketing their big brands in the last 10 or 15 years. And I think those two things have created a negative pressure for private label. And I don't see that changing. I think private label will have a place in the CSD business, whatever its market share is now. Probably it's not going to be much higher than that anytime soon, but I don't think that private label CSDs are going to be a growth business anytime soon.

DS:

It's more a barometer, right? It's more just sort of an indicator of okay, consumers pushing back a little more, especially at the lower end of the scale and even the middle income levels. It's still a good barometer. Would you say?

JS:

It's a good barometer, but I also think it's a function of, again, I think that the two big Cola companies and KDP for that much have done a better job in the last 20 years of making their brands a compelling purchase. I think their marketing has been better. I think that they've done a much better job with innovation. I mean, look at all the new varieties of Coke and Pepsi and Mountain Dew. We have the new varieties of Sprite, the new varieties of Dr. Pepper. So I think when at a time when basically Colas were Colas, peppers were peppers, lemon limes were lemon limes, it was easier for private label to compete with good taste and Colas, peppers, citrus and lemon limes as Coke and Pepsi and KDP have begun to innovate and create lots of new and interesting brands and brands extensions. That's created a competitive hurdle for private label in my view. Yeah,

DS:

They've also created incentives for retailers because when you have this kind of revenue growth management that they have with new package sizes, they're not only making these drinks more profitable for them, they're making them more profitable for retailers as well and giving consumers reasons to get into that aisle or come to the store and pick up some of these, whether it be a mini can for even alcohol beverages or whatever. And then if you've got DSD, I mean this DSD is quite compelling obviously too when it comes to actually driving growth in those stores. So that's got to be contributing too, wouldn't you think?

JS:

I think it's an excellent point. I mean, private label had its heyday when the grocery business was basically a business of 12 packs and two liter. Today you walk into a grocery store and to your point, Dwayne, really the industry has done a good job. The big CSD companies have done a very good job with package differentiation. It's been a key to their revenue growth management, and I think that that's put additional pressure on private label. So again, I think private label will have a place in the carbonate soft drink business, but I think it's going to be a smaller place than it was a few decades ago and less of a threat to the big brand companies.

DS:

Another big story this year has been alcohol convergence, and this has been a story over the last couple of years, but this year was sort of where the rubber meets the road. I mean, you have a situation where PepsiCo has completely shaken up the industry and really caught the attention of beer distributors as PepsiCo becomes a distributor of alcoholic products as opposed to using another manufacturer. And for those maybe not as familiar in the us, alcohol is regulated at the state level through what's called a three tier system. And this is one where vertical integration is pretty much not allowed. Manufacturers have to be separate than wholesalers. Wholesalers have to be separate from retailers. PepsiCo has done a deal with Boston Beer for Boston Beer to create Hard Mountain Dew and left the manufacturing to Boston Beer. And PepsiCo has said, we're going to create Blue Cloud distributing and we're going to distribute those products ourselves.

And they've had to go into each state and get permission to do that. And a few states have challenged them and said, look, it looks to me like you're trying to have it both ways. Mountain Dew is your trademark. You're providing a syrup to help flavor it. Some of your trucks are being used for Blue Cloud to distribute products. You're using some facilities that are PepsiCo bottling type facilities, and they've raised questions about this. They've gotten through about 18 states. There's a handful of states that have either rejected or under appeal. And so I think clearly 2024 is going to shape up to be a real key year to find out whether PepsiCo can continue to push through on that and stick to this plan and try to become this distributor. Despite an enormous amount of pressure from distributors, beer distributors who say, look, you're encroaching on our territory.

They're used to having states with one or two or three beer distributors. They're not used to that kind of competition necessarily. So they're pushing back. Meanwhile, on the flip side, you've got Coca-Cola with its Red Tree subsidiary and they're saying very clearly, we will not compete with beer distributors. We will not distribute. We're going to just going to authorize our brands and we're going to market some of these products, but we're going to let distributors be distributors in this. So you've really created these two conflicting models in 20, 24, maybe a year for that to shake out. What are your thoughts as you sit back and watch that play out, John?

JS:

I think both companies are doing what they should be doing. Lemme tell you what I mean by that. Pepsi in the US is basically both a brand owner and bottler. It owns, you have the most recent numbers, Dwayne, I think Pepsi's company owned bottling operation handles probably what, 75 to 77% of its volume. Coke owns no, has no distribution, owns no bottling operations in the US anymore. So what we've seen and what you outlined really makes sense. The big news from Coke on the alcohol side has been about brands. Coke, simply Fresca, minute, may, Topo, Chico. And the big news in my opinion from PepsiCo has been Blue Cloud because they are a distributor, and what they're trying to do is basically add some heft and diversity to their distribution system by adding alcohol. So it's what both companies have done is logical, and I don't know to what extent you'd know this better than I, Dwayne, to what extent Blue Cloud is going to make a lot more headway into getting into more states next year. But it seems to me that that's an important priority for Pepsi if Blue Cloud's going to be a long-term success.

DS:

Yeah, I mean they've now run into some trouble in some of these states. So the question is can they turn it around in those states and actually they've won an appeal or so. So they have been able to get through states where they initially ran into resistance and how long are they going to be willing to invest in this type of situation where each additional state is a hurdle potentially, and it maybe gets harder from here. How much patients do they have to see that through long-term because eventually you do need the scale in order to make this work and presumably take on other brands. So it's going to be a real pivotal year when it comes to that.

JS:

It's very pivotal, but as I just said, Pepsi, north America is a very big bottler. Coke North America has no bottling operations. So it makes perfect sense that each company's doing what they're doing. And I think you're right. I think next year certainly I think Coke will have some success marketing and selling these brands through alcohol distribution chains. I think if Pepsi can get Blue Cloud and some of its big independent bottlers approved, I think that could be a very, very big, big important factor for this industry. But I don't know how that's going to play out over next year yet.

DS:

It's a really important point you're making about the difference in PepsiCo, and I mean at its core, PepsiCo is an operating company. I mean, Frito-Lay is an operation operating company. They distribute the products, they manufacture them. They're not afraid of operations, they own most of their bottling system. As you pointed out. They're not afraid of operations. So I think your point about it makes sense for them is exactly right. And so I do expect PepsiCo to figure out to try to figure this out and try to make a go of it. Coca-Cola on the other hand, as you also pointed out, doesn't own any of its bottling. They're not an operating company, they're a marketing company, so they're doing what makes sense for their system. So it's entirely possible that these two things aren't necessarily in conflict. They're just what's right for each of the two companies.

But at the end of the day, PepsiCo's got the more difficult road ahead, but potentially the more lucrative one if they can actually make it go and work it out over time. And there's a big debate right now within alcohol, which is the extent to which the three tier system is under threat because as younger legislators come on, someone's made that point recently, they look at alcohol different, they look at some of those models differently. Is there going to be pressure over time to change some of those models? I mean, that could work in PepsiCo's favor, but it's going to be a long uphill battle. So what's really interesting with this whole alcohol conversation at the same time that we see Coke and Pepsi creating alcohol products out of their key brands, I just wrote about another one this week, minute made spike, that's a new product from Coke.

So again, I would say they're past, they keep saying they're experimenting, but in my mind they're passed experimental phase. They're looking to make a go of this long term, but at the same time, you have all that going. You've got this trend where younger people are drinking less, they're either not drinking at all or just drinking less on specific occasions, mixing it up with non-ACO alcohol. So you've got a trend towards less alcohol at the same time that you have companies piling into alcohol. I mean, I'm not sure what that means exactly other than just like everything else these days in consumer marketing, it's all about segmentation and really trying to serve all the constituencies, but non-alcoholic beer. That's been an interesting story this year, not only because athletic brewing, which is the lead non-alcoholic brewer in the country, not only have they to accelerate and grow, they've hooked up with Keurig Dr. Pepper, which gave them a sizable investment. Keurig. Dr. Pepper is now an investor in that company. We talked to Justin Whitmore, chief strategy Officer for KDP at Future Smarts, and he talked about the fact that they're watching and learning and potentially there's some opportunity for them to distribute at some point and help them grow into some accounts and some channels where they aren't now. But as you look back at that, John, what is your take on the whole non-alcoholic beer sector and especially when it comes to the non-alcoholic companies being involved?

JS:

If I may, let me go back to the first part of what you're just talking about. You said young people, I think you said young people are drinking less alcohol, right? But think of it this way, for Coke and Pepsi, every case of alcoholic beverages they sell is a growth case for them because they weren't in it. So to the extent that they can use alcoholic versions of some of their brands to pick up drinking occasions they didn't have before and perhaps take share from the alcohol companies, those are growth cases for them. So I think what they're doing is exactly right, and I think that they're going to have some success because they've got very strong brands to use. I mean, there aren't a lot of stronger brands in the food and beverage business than Coke Mountain Dew, and some of Coke's juice brands like Minute Made and Simply Topo Chico, every case, every case they sell is a growth case.

It's probably not going to cannibalize their existing non-alcoholic brands. In terms of the non-alcoholic beer, I can tell you from personal experience and experience with friends of mine, I love it. I drink it more and more people I know drink it. It's low in calories, it tastes great. I can drink it after exercise it hydrates, I can drink it during the week for lunch. I get the great taste of a beer without the alcohol. I think these are in essence new kinds, a new twist on carbonated soft drinks. They're refreshing, they taste great. I personally think the non-alcoholic beer business has a big growth future ahead of it.

DS:

Yeah, so far I love beer, but non-alcoholic beer, I've just not been able to get there yet. I've tried some. They're good. I just wrote about in my opening thoughts in the issue this week about the fact that right now I'm not drinking as I try to get in shape, and it's been about a month and a half and I've just not gotten into the non-alcoholic beers, but a reader did tell me that I should really try the Guinness, by the way, I don't know if you tried that yet, but the Zero Alcohol Guinness definitely want to give that a shot, but I think for me there's a natural ceiling to it. I mean, there's something about alcohol and the functionality of it and the lowering of inhibition that basically creates higher consumption rates. And so I think there's a natural ceiling to it, but right now it's starting from almost nothing. I mean, non-alcoholic beer is a joke in this country, so there's plenty of room for that to grow right now. So here's my question though. Do you see non-alcoholic, traditional non-alcoholic beverage companies like Dr. Pepper, Coca-Cola PepsiCo actually putting non-alcoholic beer on their trucks eventually?

JS:

Eventually, yes. Again, I think that I don't see non-alcoholic beer as much of a replacement for alcoholic beer, but I think that there are some occasions for people who like beer like I do. So for example, on a hot summer day, if I play a set of tennis or in the morning have lunch and I'm going to play some tennis in the afternoon, I don't want a beer because I don't want the alcohol. But if I'm thirsty after playing some tennis in the hot sun, having a sandwich and a beer at lunch tastes great. Non-alcoholic beer works perfectly for me. And I think that's the kind of occasion where it's also low in calories, it tastes good. I think it's over time, it could cut a bit into the carbonated soft drink business and maybe even the sports drink business. Do I think it's going to replace alcoholic beer? No. To your point, the functionality of alcoholic beer is a big part of its appeal, but I think the taste and refreshment of the non-alcoholic beers presents some real growth opportunity.

DS:

Let's move on. Another issue is cannabis, and this has been kind of like a couple of year issue really, and there was a gold rush a couple of years ago with everyone wanting to get into cannabis beverages. I mean CBD, and that was going to be the precursor to THC eventually questions about whether it could cannibalize alcohol, whether this could be something that non-alcoholic companies would want to get into. The non-alcoholic companies like Coca-Cola stayed back on it to watch, turned out to be a great move because so far we've not seen the kind of regulation that would really open up that market. People who marketing that over state lines and creating the scale across state lines is just not possible right now because of the risk, the regulatory risk. What do you think is going to happen with that? I mean, do you think we're going to get any regulation anytime soon? I mean, I almost want to say 2024 is kind a year to watch for that, but I'm not convinced we're going to see meaningful movement on that yet either.

JS:

I don't think in an election year we're going to see meaningful movement on much at all, and probably not this. And I think we're going to still be talking about will there be federal regulation for the sale of cannabis for probably years to come. And some years ago, I thought this was going to be a big opportunity to create new kinds of functional beverages at this point in time. I don't see it happening anytime soon. I didn't see it happening during the four years of the Trump administration, conservative Republicans. I haven't seen it happening during, I guess three years now, the Biden administration moderate to liberal Democrats. I'm not sure I fully understand why, but I think that this is not going to be something which happens anytime soon.

DS:

Yeah, I remember Coca-Cola's, James Quincy, CEO of Coca-Cola talking at the time when everybody wanted to know are is Coke Pepsi? Are they going to get into cannabis beverages? Are they going to hook up with a company, invest in a company like Canopy Growth the way Constellation brands the beer company did? And he said at the time, well, we look at three things. First of all, is it safe? Is it efficacious? Does it do the thing it says it does, and then is it scalable? Can people repeat the drinking of these things? And I think he turned out to be quite prescient in terms of understanding what you needed to make that industry truly fly. Of course, entrepreneurs, they jump right in as they should. That's what entrepreneurs do. You take those risks and sometimes they pay off and sometimes they don't. All the people that wanted to be first movers are now having to rethink the entire strategy.

I do think long-term, to me, the thing that really has the most promised long-term is perhaps THC beverages, especially if you continue to see states legalize recreational use. I mean, edibles sort of seem to be one of the preferred methods now, and perhaps beverages will have a place in that eventually. And of course with that, there's implications for beer, but that'll be one to watch for sure. Another big thing this year was artificial intelligence chat. GPT at the end of last year made huge waves. I mean, artificial intelligence has been around for some time, but it really hit the public, the mass public consciousness this year because of chat GPT and people being able to get their hands on it and companies being able to use it and small companies being able to use it. You had Coca-Cola dive in a big way, both from their marketing approach, but also they've talked a lot about how they're trying to use it, whether it be in distribution or product segmentation, channel segmentation, that kind of thing. Artificial intelligence now is something that's talked about in all facets of these big companies like Coke and Pepsi and Dr. Pepper. What's your takeaway from all that, John, as you look forward, what do you expect to happen?

JS:

I don't pretend to know and understand a lot about ai, but I was on a call recently with Jamie Diamond, who's chairman, CEO of JP Morgan Chase, and he was asked by an investor, did he think that artificial intelligence was going to play a major role in the future of JP Morgan Chase? And he answered one word yes. I think that your speaker, Karen Jordan talked about that they're using AI more and more in their logistics operations, in their distribution business. It just seems to me what I glean and have come to believe, Dwayne, is that over the next couple of years, AI is going to be a very big and important tool for different companies in different ways.

DS:

Yeah, I totally agree with that. John Bang, bang energy. What an amazing story. I mean, this is a company that grew to the number three energy drink. It ended up in bankruptcy, and then this year it was sold to Monster. I mean, who would've ever guessed that monster being Bang's, arch Enemy? They sued each other for the last few years. Monster prevailed in those, and that was a large part of what precipitated the bankruptcy this year, and then they ended up buying them. What's that going to mean for energy drinks going forward? Do you think Monster's going to be able to, I mean, will they bring bang back to the prominence had had before? Do they need to? I don't know that they need to even. What's your take on that?

JS:

I think there are two things to watch. I think that Monster will probably create a decent-sized business out of Bang, but not a blockbuster. The other thing I'm interested to watch is the former owner of Bang, Mr. Awa. I think I'm pronouncing that correctly. He was a very high energy entrepreneur, and I wonder whether there's another chapter to watch for Mr. Walk, whether he feels that he has something more that he wants to prove and show about his expertise in building and marketing beverages. And I don't know if you've picked up anything along those lines, but I think watching for a development for Mr. Owo and either 20 24, 20 25 will be something to watch for.

DS:

Yeah, he does not go quietly into the night. I mean, he's sort of still in fight mode. The question is, does he at some point decide, okay, let's move on to the next venture and fight by way of creating a new challenger? We'll see. I think it's likely. I think it's likely as well. Body Armor, body Armor's been an interesting story. Coca-Cola has been working on plans to bring that, to get that brand back to the kind of growth it was used to before the KO acquisition of that full brand. I'm not sure within a company like Coca-Cola that it really has to return to those growth rates or even ever will, but they're clearly working on some plans to grow that and innovate. They've added, they've added some powders now and they've got their rapid hydration product, flash iv, which is interesting. But at the same time, they're trying to do that. You've got this Challenger Prime that's based on creator marketing, influencer marketing with two big time influencers, and that brand has done in a little over a year what it took years for Body Armor to achieve in terms of market share. That category is going to just continue to be interesting, wouldn't you say?

JS:

Definitely the way I look at the sports drink category, Dwayne, is there's Gatorade and everything else, and to be a successful part of everything else, you've got to be fast on your feet, innovative, a great marketer. And Body Armor was that, and it's not a surprise when Body Armor moved from independent ownership under Micro Poey to being a Coke brand that it lost a little bit of its sort of speed and excitement. And I don't criticize Coke for that. It's very hard for a great big company like Coke or p and g or PepsiCo to basically market and sell a small innovative fighter brand. And I think to your point, prime has now sort of picked up the mantle that Body Armor had before. Body Armor is a great brand. Koch can certainly improve its performance, and I believe then when they say they are working to do that, but I think the sports drink business is basically you've got to find a way to compete against Gatorade and you got to be fast, innovative, great marketing to do that.

And I think Body Armor slipped a little bit and Prime picked up some speed there. Body Armor certainly can improve its performance, but I don't think it's going to return to the kind of growth that it had 40, 50, 60% a year in its early years. And I'll tell you something else. If someone buys Prime five years from now, or three years from now or two years from now, if a big company buys Prime, I think the same thing. What happen to Prime? I think it's really important to understand that innovative entrepreneurs with deep pockets and good ideas can do exciting stuff. The second generation of those products in the hands of the big CPG companies is simply harder.

DS:

I think within Body Armor, I mean Federico Mohan, the CEO of the combined Body Armor Powerade, that's going to be really interesting. I think he's got a ton of energy, but aside from that, bottlers seem to like him. They seem to have some faith in what he's going to be able to do with that brand over time. They're retooling. He talks about it a lot about the fact that body armor, of course, they didn't have a rapid hydration product at the same time that brands like Electro Elite and then Gator Light following on have really opened up that whole market. They've added that. Now, the zero sugar space, I mean, that's one. I mean surely there's got to be innovation there potentially. You've got powders very important. Speaking of which powders, I mean, can you believe what's happened with powders in the last year? I mean, you've got Gatorade and Propel adding tablets.

I'm talking tablets and powders, these single serving answers. Flash IV is added. Body Armor, a powder electrolyte has a powder and a zero sugar liquid iv. The liter in sports, powdered hydration beverages has added a kids' version, a sugar-free version. I mean, this is a space that years ago when you had drops like MEO and Kraft doing that, and it sort of seemed to have all this promise for very light products that are easy to distribute, don't take up a lot of shelf space, but it is an interesting business. But there's something entirely new happening now with this, wouldn't you say?

JS:

Yeah, I would. And I think a lot of it has to do with e-commerce beverages have a relatively low share relative to other products in e-commerce. Part of the reason is that it's very heavy to ship. It's very, it's expensive and heavy to ship beverages. They're mostly water. And I think that the convenience and the cost effectiveness of just shipping basically a powder or a tablet, which contains the flavor and the ingredients is going to get more important and time goes on and gives the beverage business a way to play more strongly in e-commerce.

DS:

We talked about energy. We talked about sports strengths, KDP, they've made some really interesting investments. One in Nutrabolt, which makes C four, which is one of the energy drinks that's really been a challenger in the market in recent years. They're now going to give them a whole new distribution platform electrolyte. This is the rapid hydration product started from a pharmaceutical company in Mexico. They brought it here to the US in 2015. It really took off and they gained share, which surprised everyone. PepsiCo jumped in and created Gator Light as a rapid hydrator to compete with them and go after some of those same consumers. KDP now has investments in both KDP really sort of has their allied brand, their partnership model really kind of figured out at this point, wouldn't you say?

JS:

I think what they're doing is very smart. Larry Young started this a while back by adding Allied Brands, and there's a good reason for it. If you look at KDP and its bottling system, they don't really have a great big anchor brand because their biggest and most successful brand, Dr. Pepper is mainly sold in the Coke and Pepsi systems. So they are now adding Allied brands to give themselves growth platforms, to add appealing products for their bottlers and to add to the portfolio of products they go into retailers with. I'd make one prediction. Back in the 1990s, the Coke and Pepsi bottling system sold a lot of allied brands brands like Seven Up A and w, Sunkist, and then they decided to purge those brands out of their system and focus only on brands that they owned. That's already beginning to slip again, Coke, basically the Coke bottles sell Monster. The Pepsi bottlers have brands like Crush and Celsius. I believe that as the soft drink companies and the soft drink bottlers over the next couple of years, fight for ways to get new growth. I think you're going to see the Coke and Pepsi systems also following what KDP is doing and beginning to take on more allied brands with the support and encouragement of their brand owning companies and with their brand owning companies, Coke and Pepsi, figuring out ways to make money in doing that.

DS:

Well, we had, Matthew Dent, of course, is one of the speakers at Futures Marts, and they've done what he calls the stacking technique where they've basically gotten permission from PepsiCo to take on more KDP brands than just Dr. Pepper, which they've had for years. So now he's putting on trucks competitors basically. I mean, you've got RC on the same trucks as Pepsi Cola, of course, Matthew Dent, Buffalo Rock. He's the CEO of Buffalo Bach, the large Pepsi bottler out of Birmingham, Alabama, Birmingham, Georgia, Florida. And that was a pretty interesting deal and kind of speaks to what you're saying. So I guess what you're saying is do you see the potential for more bottlers even in the Coke and Pepsi system to do some of that?

JS:

I do. I do. I think that, again, it's all about growth. I think that Coke and Pepsi have great brands. I think they struggle for growth and their bottlers struggle for growth, and Covid was a aberration period. Pricing went through the roof. It was a very profitable time for bottlers. But I think as we move beyond 2023 into the next couple of years, I think that what KDP is doing and what Coke and Pepsi have begun to do with energy drink brands, Celsius and Monster, they're going to do more and more of. They are innovating and buying brands is difficult and expensive. And I think taking an equity stake or in a brand or becoming a master distributor for a brand and putting it through your bottler system, I think is a way to get some growth, understand more about other brands, give your bottlers some additional profits and volume to fill up their trucks. I think by the end of this decade, Dwayne, we're going to see a range of allied brands on Coke and Pepsi trucks, unlike what we see today.

DS:

Yeah, they could also be non-alcoholic alcohol products and alcohol products even. And the growth that is happening is happening on the dollar side. So if you have package diversification, revenue growth management, I mean, naturally that's less volume, but you still have to fill trucks. You still need full trucks for cost efficiencies, and you still to those routes need to be as efficient as possible, especially when you're a big public company. And so that's going to create more pressure to sort of consolidate what goes on these trucks and limit the number of runs or visits to stores and all of that. I mean, that's part of what's happening in terms of that kind of consolidation.

JS:

It is, and it's been trickling back. Remember back, I think in 2018, Coke took a stake in Body Armor and put it on Coke trucks. So they had an equity stake like they do in Monster. But again, I think that the bottlers need profitable growing brands, and one route to do that is going to be allied brands. And I think we're going to see more and more of that as the years go on. So

DS:

John, before we go, I want to ask you about one more Costa Coffee. I just did a takeout on a couple issues ago on their strategy in the us. I mean, we're really starting to see a little more post covid after so many stores had to close, and the timing of that acquisition was just terrible for Coke. They seemed to now be sort of finding their way back to a strategy here. Now that they've kind of gotten past that. You might call it a traumatic period, I don't know. I mean, clearly it was traumatic, but in terms of even that business, it was a challenging period for them. They're starting to now really lean into, again, the notion of putting machines into self-serve machines, cafe machines, into all kinds of outlets, whether it be food service or hotels or universities or airports. And even looking pretty heavily at the C-store market now. And the idea is that you have an automated barista that's the footprint of a freestyle soft drink machine, for instance, gives you the flexibility as a business to add premium coffee in a way that's cost effective and doesn't take up a ton of space, and more importantly, use tons of labor. Do you think this plan has legs?

JS:

Look, I think the bottom line is this. I think the bottom line is coffee is a very big category of beverages. Starbucks has proved that, and you got to be in coffee. So Coke's two competitors, what was Dr. Pepper's? Snapple is now Keurig, Dr. Pepper. That company's in coffee in a big way. PepsiCo with a Starbucks joint venture is in coffee in a big way. You got to be in coffee. Coke's going to use Costa. And whether this particular vector into the business for them is what they ultimately succeed with, I don't know. But I do know that Coke will basically be a bigger and bigger participant in the coffee business in the years to come, because they have to be. I mean, Starbucks is more than just a coffee store chain today, Starbucks is a very big beverage company and a lot of their drinks are coffee based. Some aren't, but you got to be in coffee. So what Coke's doing now is they're tiptoeing toward Ford with this particular strategy. Sounds interesting. Is that their ultimate strategy? I don't know. They probably don't either, but they will be a big factor in coffee over the next five years.

DS:

John Citrus, a pleasure as always to have you on the show today. So remember, you can read about all of these stories and more in Beverage Digest. Please remember to check out our website. You can subscribe there and we'll see in the new year.

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