The following is transcript of Beverage Digest's podcast, The Breeze, Episode 3. Duane Stanford invites Matt Hughes, Vice President of Incubation for New Revenue streams at Coca-Cola, to discuss the latest trends at Expo West in California.

Please excuse any transcription errors.

DS:

Hello and welcome back to The Breeze with Beverage Digest. I'm your host, Duane Stanford. This is where we talk beverage industry shop, and bring you into the kinds of 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?

Today, I'm welcoming onto the podcast Matt Hughes, who's probably got one of the more interesting jobs at global beverage giant Coca-Cola. He is Vice President of Incubation for New Revenue streams at Coke. Now, some may know this unit in the past as Venturing & Emerging brands. To put it simply, he is a direct conduit to the legions of entrepreneurs looking to build the next great beverage brand or even beverage category. Now, many, if not all of these entrepreneurs have dreams of one day selling to a large strategic player like Coke. Almost none of them will reach that point. Matt's job is to make sure Coke has the company's finger on the pulse of this activity. Matt, welcome to the podcast.

MH:

Thank you, Duane, for having me. I'm looking forward to the time today.

DS:

So that was a rather simplified description of what I imagine is a pretty complicated job. What would you add to that about what it is you do for Coke and Venturing & Emerging brands?

MH:

Well, we're constantly looking for the white space where it might make sense for Coca-Cola, our system in North America primarily, although we would love to see things scale around the world. We've been at this for a while, since 2007 when we set up Venturing & Emerging brands, really as a corporate venturing unit. The role of VEB and now new revenue streams has changed over time. Initially, we were looking to get into more categories. We've done that pretty effectively. The most recent of which has been beverage alcohol, ready to drink beverage alcohol, and as we've announced through your newsletter and others, the relationships that we've built with Molson Coors, and Constellation and now Brown-Forman to launch some great brands in this space as well. So it's really a mixed bag of efforts over a decade and a half and we put some wins on the board. We've had our share of failures as well as you would normally have in a corporate venturing unit, but it's certainly exciting and I think you captured the gist of what we're up to.

DS:

So with your role in mind, I asked you to join us because we recently both returned from Natural Products Expo West. Now, Expo West bills itself as the largest natural, organic and healthy products' event in the world. 65,000 people that attend this event, most of them are buyers. About 60% of them are buyers. And they attend this show at the Anaheim Convention Center outside Los Angeles where about 3000 brands exhibit, and they take up somewhere around 10 football fields. So it's just a massive show. And the brands here, they range from, I just launched five minutes ago to I've been grinding away from years or some are even thriving. And Expo West is where in 1989 you would've seen a brand like Honest Tea before it was Honest Tea. And then of course Coca-Cola would one day acquire. The event is basically a great place to get a sense of what the next big health and wellness trends will be in food and beverage. And of course that's why Beverage Digest attends. Did I capture the essence of Expo West, Matt, and how would you describe the feel and the vibe of that event?

MH:

Yeah, it's very high energy. It is day and night. There's no time for rest. It's a multi-day event and really it's been going on for quite a while. I've been attending for well over 20 years, the past 16 years with Coca-Cola. But before that, as a beverage entrepreneur, it was a must attend event. Interestingly, and Duane, it's very efficient if you think about your time, the fact that everybody who's anybody in the food and beverage space is probably going to be there, as you said, whether it's retailers, the buy side, whether it's the investment community, and certainly the founders, the entrepreneurs, and of course the strategics who are there with their brands. So it's super efficient place. Everybody's in the same five mile radius of each other for three to four days. And so it's a good way to be in a concentrated time and space situation.

I also think the chance to see so much new, I believe I read either in your newsletter or another one, over 30% of all the exhibitors were exhibiting for the first time this year. So the freshness of that, and you could just never replicate that going around and trying to visit these founders one-on-one. You can see them all in one place. So it's good for folks like us, but also across the whole continuum of people who play in the space to attend and attend pretty proactively Expo West.

DS:

Yes, you can cover just a ton of ground at this event. It would take you probably years to get around to these companies if you had to travel and you touched on this. But this event draws plenty of private and strategic investors as well, and they're trying to figure out what's next, what's the next big investment. I'm sure everybody has their sort of strategy for how to attack the show because it is so large and it takes a day. You can spend three days. We spent three days and didn't even get through it all. What is your strategy for attacking that when you go into it?

MH:

Yeah, my own personal hacks, right?

DS:

Yeah.

MH:

How to survive the Expo?

DS:

Yeah.

MH:

Yeah. For me, it's a couple of them I'll share with the audience. So one is I like to go to the supplement aisles and typically, and I think this has always been true for me so far, you'll see trends in the supplement aisles. They're not yet consumer products, they're not food or beverage yet, but the trends will be usually maybe two years ahead of the marketplace over there in the supplement space. So that's just an interesting place for me to walk down. I don't spend a lot of time at the booth there, but just looking for themes and trends and for example, 10 years ago, this is where we would've first started to see CBD be talked about, would've been in the supplement space.

Also, the downstairs hall, I don't remember the letter of the alphabet, but that's always sort of the high energy, smaller booths, earlier stage brands for the most part, although we've started to see that co-opted a little bit, but really high energy. Usually the founder is there working the booth, you're not meeting with somebody else, you're getting time with the founder. So that's a really, again, efficient way to spend a full day.

And then just looking for really themes, what might be new and interesting. For example, this year, what struck me, and I don't know if you saw this too, but mushrooms were everywhere. I was blown away by the fact that I saw not only mushrooms as an ingredient. Food and beverage with mushrooms in them, but also the booths themselves. Lots of people in mushroom costumes. It's the thing you remember. So something's going on with mushrooms, not sure exactly what it is, because we've seen mushroom ingredients before and adaptogens. But there's something different this year that I was picking up, at least from the sheer number of exhibitors.

And then also I'm looking for what's not there from previous visits. So for me this year, what was not there was CBD. Before COVID, before pandemic, we would've gone to the show and we would've seen at least one third of all the exhibitors would've been somehow talking about CBD or hemp and the benefits of that. And we just didn't see it at all this time around. So something has shifted there and I think we know why, but it was reinforcing to see it come through commercially, the fact that people just were not exhibiting against that opportunity at the moment.

DS:

It really is true. I didn't expect to see as much CBD as we've seen in years past, but I was shocked as well at how little CBD there was. You had to look very hard to see a CBD product. And of course the regulatory environment is what's happening there. Would you agree? A lot of it has to do with the fact that people don't have a clear line of sight to scaling these kinds of brands because of the regulatory environment.

MH:

I'm sure there's something there, yeah. But clearly it was a call it an anti-trend this year.

DS:

Yeah, and the mushrooms, you're right, there was even one exhibitor in new products that had basically models of different mushrooms where you could see the actual mushrooms. And obviously, we've written about the mushroom boom and some of these mushroom beverages, but you really did see it come to even more fullness this year.

MH:

And the other trend that I was picking up on was, and it was no surprise to me because we've been seeing this lift coming, but functionality was really on display. So I first saw it in the snack, the snack brands were screaming functionality. And that was a bit of a change for me, whether it was snacks with protein, snacks with probiotics, snacks with prebiotics, snacks good for your gut, et cetera. So that was, to me, a change. More around, again, the number of exhibitors who were much more overtly talking about the functionality through snacking. And then of course, in beverage we've had functionality, but there was even an amped up feeling that I was picking up from many of the exhibitors around delivering functionality and probably at a more deliberate form, moving from the pixie dust to the past, from functionality to something that's really the efficacy is much, much higher now.

DS:

And do you think that's because technology's getting better for these companies to process and emulsify these products?

MH:

Yeah.

DS:

Or is it just now the initial entrepreneurs showed away and everybody wants to get in on the action or maybe a little of both? I don't know. What do you think?

MH:

Yeah, I think you hit on one important topic. I think the capability providers, whether they be the co-manufacturers, the ingredient suppliers, the flavor houses, they've advanced. So that's become a real booming business in the space because many of the brands are just looking for asset like solutions so they can focus their dollars and resources on building the brand versus having dollars and time invested in manufacturing and things like that. So the capability providers have gotten better, they've advanced the ball for sure, and that's part of it. I think the transparency around efficacy, around what's really in this, what's the origin story, the rise of the content creators. All these things have conspired to deliver on a higher level of functionality being present for a lot of these food and beverage brands. And so they're bringing it to life in their booths at Expo.

DS:

So when you look at something like mushrooms and you see God, even more is happening with mushrooms, what do you thinking in terms of the VEB guy at Coca-Cola? Are you thinking, okay, is this something that can scale? Are you talking to founders to get a sense of that or is it more taking in the trends and making sure you're prepared to see what needs to be seen in the coming years related to this?

MH:

Yeah, let's be clear. I'm not announcing today that the Coca-Cola Company is getting into the mushroom business in a significant way, but look, we'll see. Can any of these things scale that are a bit out there from a general population perspective, who knows? It's worth watching, getting to know the founders, just all the normal things you would do in this space. So time will tell. I think taste is so, so important and I've yet to really see breakthrough technology that can provide that. Some of this functionality doesn't always match the need for great taste. Sometimes it happens, sometimes it doesn't. But end of the day scale needs to have great taste come with it. And so that'll be an important factor to watch in the future.

DS:

Yeah, I think that's a really great point. Some of these brands could do really good with a really affluent premium audience, but then can you bring it down to that next mainstream level and how does it translate? And of course, taste, I totally agree. It's so important. And functionality, of course. When you look at a mushroom beverage, one of the things about the mushroom space though is that it does seem like you do have more of these brands coming along that seem to have the taste right, but there's also this whole efficacy element. One of the things with CBD is there's not a ton of science, but there's a lot of claims. Mushrooms is one of those things that have been around for so long that it's almost proven out just by longevity and there is some science too. But that seems like that's going to help the potential for that to scale, yes or no?

MH:

Well, I think so, and I would just, well beyond mushrooms, if you look at some of the brands like GOOD IDEA, I don't know if you've visited them or not.

DS:

Uh-huh. Yep.

MH:

It's Doug Carlson, the founder of Fiji Waters behind that one. And that's really interesting. They've got a great product, it tastes great. They've got real science behind it. Metabolism, the whole idea about your metabolism is really important for how healthy you're going to be. And so they've got IP that basically allows them to put into a package for consumers something that tastes great and delivers on helping you build a healthier metabolism. So there's many examples like that where I think, as I said before, I think these capability providers have really raised the bar for the functionality. And so the efficacy is really starting to come through. And then one can imagine then some of these ideas, and we know they don't all work ultimately. There's still a high failure rate in this space. But some of these will likely break through. And it's just a question of who and when and how at what cost. But I'm bullish on the functionality.

DS:

There is this sort of natural ceiling because of price and some of these other things we talked about. In terms of scalability, do you think long term you'll have a situation where even strategic companies like Coke may be assemble a suite of these high premium beverages that can only reach to a certain level, but an aggregate become meaningful? Or are we going to progress with technology and get the price levels down and be able to mainstream it in such a way where you can have billion mushroom coffee brands?

MH:

Great question. I have no idea. I think, look, it's a complicated set of circumstances that you're raising. One is if you're strategic and you already have a portfolio of trademarks, could you utilize this technology now coming to the forefront in your existing trademarks? That would probably be a place that you would look. And then you're stretching trademarks in a new places. That would be probably a more efficient way to go at it than through an acquisition or investment thesis. But then some brands can't be stretched and therefore you would need to make an investment if you wanted it to be in the new spaces. But I think the situations will change and be different based on the unique needs of each of the companies that might be present in that space.

DS:

One thing, I noticed a lot of seaweed, especially when it comes to snacks and such, there was one seaweed beverage we wrote about, it's the only one I saw. They say they're the first seaweed beverage. I don't know if that's true. It seems to me there's a taste element there that's challenging, but of course if you can isolate the functionality and ingredients and use those in some good way, what's your thinking on seaweed?

MH:

Duane, I didn't get the opportunity to taste that one. But on the snacks, I think there's some really good brands today in the snacking space that utilize seaweed. And what I understand, and I've got a guy I know pretty well, came through our Founders' Forum several years ago, has one of those brands and there's clearly a sustainability narrative that is real. And so that's interesting. Again, snacking seems to work and obviously, there's a big Asian influence with seaweed and snacking historically, so it's not a new, new thing. Whereas as a beverage, that might be a bit more of a leap for the consumers. And again, I didn't get to taste that product, so don't know how approachable it is, but will be an interesting place to watch.

DS:

It really didn't taste like what you would think of seaweed. They figured out some way to isolate certain ingredients to be able to create a little better taste, but exactly what all is in it to make it do. That devil's in the details, of course, on that thing. What else? Did you see anything else that really caught your eye? Something that was really sort of almost like when you looked into supplements, what did you see that was far out?

MH:

Nothing really dramatic. I was interested to see, for example, there was one of the beverage brands was over in supplements, which I was surprised to see them there, BioLite.

DS:

Oh yeah.

MH:

Which is an Atlanta based company that I think you've written about. They were over in the supplement aisle, which I thought was clever because you don't typically run across a beverage there or a food product there. So that was interesting sort of their version of a hack. And so really, the functionality theme continues over in supplements and you get more science there than you would typically see in the food and beverage boost because usually speaking, they're making higher claims, there's usually clinicals involved, things like that. So it's a bit more science than it is natural, quite frankly. That's also a bit of a conundrum, I think, at the show, a natural show that has as much science as it does there. But in terms of other trends I saw-

DS:

Are you saying it's surprising that there is that much science going on?

MH:

Yeah, it's certainly worth noting, I think, and that we're seeing New Hope, which manages and puts on the show every year. They do a great job, by the way, but they've also evolved their remit to open up their platform a little bit wider than they have historically. And I think that's smart.

DS:

I see.

MH:

Yeah.

DS:

And why do you think that is? What is the long term?

MH:

Well, we're seeing blurring. Just look at how people shop, whether it's online, whether it's in traditional retail or in natural retail, as consumers, we're all blurring how we shop. And so I think the people staying in one shopping channel is not happening. And so I think it's smart to, again, to open up the platform to more participants this way.

DS:

Yeah, it makes sense. What else? What else did you see?

MH:

I saw, and we've seen this before, but more pronounced this year. And again, not as much around specific brands, but you just started to see the influencer come to bear a lot more. There were several influencers I'm told that were in the booths and then that drives a lot of traffic. And then I know downstairs, Danny Stepper and team at LA Libations had I think a dozen booths sort of side by side and across from each other, and they had some influencers in there with them, so you had a traffic jam, which I think was probably intentional, pretty smart, and it creates a lot of excitement and buzz. And so you saw that happening throughout the halls, just using LA Libations as an example of one, but really, really smart.

The other big traffic blocker was the late afternoon cocktail parties at several of the exhibitors also offered. That also drove traffic, I noticed.

DS:

Smart.

MH:

And so we certainly saw that.

And then the other trend that was pretty profound for me, and they've always been there, but there was more of them this year where the functionally based sparkling soft drinks, there were certainly lots of them this year. A couple of them in particular invested what seemed to be heavily in their booth space. Poppy in particular had a significant footprint, lots of people in their very colorful shirts and colors that they project. Olipop also I noticed had a big presence and several others. And so there was this, again, from a trim perspective, just saw more of that this year than in previous years. So that's typically a sign of, maybe there's more investment flowing into that space. There's certainly more founders and entrepreneurs in that space today than there have been.

DS:

Do you think those products, because there really were a lot of those products, did it even feel like double the amount last year or a third more or significantly more? Yes?

MH:

Significantly more. I'm not sure of the stat, but just observation, just walking through the halls, there were more of them for sure.

DS:

And so is this going to be a situation where you get a lot of players coming into that market, there's a lot of consumer interest in it, and there'll be some shakeout with a few big brands that'll be able to push through? Or is this also one of those that is going to be challenging to scale because of a price? They've figured out the taste for the most part, especially now that they've gone to these shelf stable formats. Is price still going to be a barrier there? Because some of these drinks are pretty pricey if you wanted to just replace a carbonated soft drink, for instance?

MH:

Well, historically, I think that would be true. I participated in the craft soda business a long time ago, and there was always a bit of an artificial ceiling to the size of the category. How big can the category be, right? And because sparkling soft drinks led by brands like Coca-Cola is so significant when you look at the sheer size of that and the sub-segments have not really emerged in a meaningful way historically. Price has probably been one of those factors. Taste has been certainly a factor historically. And then consumer acceptance of in terms of your daily routine or your weekly routine, those sort of things you get with the traditional soft drink brands, you don't typically get with these smaller, these sub-segment brands. But we'll see. You're right. The technology has improved for around taste, functionality has improved. And then we shall see if the consumers, I think also the rise during the pandemic of direct to consumer methods to get product to home. I think the smaller functional beverage brands like these functional soft drink brands has probably benefited from that as well.

DS:

But because of the price, one thing about carbonated soft drinks is there is this repeatability factor. Someone might drink several Coke Zeros in a day, for instance. With these probiotic sodas, because it's a functional beverage, it may be two or $3 a can. You're using it for specific health regimen. You don't necessarily have the same repeatability. Is there still really meaningful businesses in these kinds of products that are just very premium, meaningful businesses? Or do they have to figure out a way to make these things more repeatable? Or does that even really matter in that arena?

MH:

Yeah, well, Duane, it depends on who's keeping score and how you're keeping score. So when you come off of a basis of zero or very low bar, some of the founders may be looking at their business in a very healthy way. Whereas if you look at it through the macro size of some of the categories that companies like Coke participates in, it would be relatively insignificant today. So it's hard to answer that question because I think how you keep score could change based on where you're coming from. I think on repeatability or repeat, you're right, most categories have not enjoyed the usage frequency of some of the larger brands that have been here for a long time. Brands like Coke, but also in the water category like Smartwater and others, not just our brands, but many others. So that will be required. The breakthrough on that would be required to be truly scalable from the lens of a big strategic. How strategic, we'll look at this. I think that's correct. If you're looking at it through a different lens though, it may be plenty healthy.

DS:

What do you think when... Switching over to the investors now, so you have investors walking this floor. You're with a strategic company walking around. What kinds of things are you trying to learn from the brand owners and the founders, and what are the sorts of questions people are typically asking in that subset of people walking the show?

MH:

Yeah, Duane, good question. And it probably varies by the individual, but I think pretty consistently at this show, you would've heard private equity, venture capital folks asking about profitability, they would probably been very curious about profitability. We've seen, of course, a significant shift from focus on top line to you need to grow your top line, but what about how much money are you making? Can you make money? If you're not making money, when can you make money? Under what circumstances? So that seems to be top of mind for everybody in the space that I've talked to.

DS:

And why has that shifted? Why did that shift occur?

MH:

Yeah, I think that macro trends are here. We've seen quite timely, we've had all kinds of things happening, whether it's in the banking industry, in the lending industry, the cost of capital, of course, is significantly higher than it was not that long ago. A lot of macro trends have kicked in here that have led people who are making these decisions on allocation of their money, their investors' money. They're asking different questions. And so ultimately, these are commercial enterprises and the investment side wants to know how optimistic can they be towards an entity turning a profit and at some point a substantial profit.

But growth is important too. You can't unbalance that. That is a balancing part. And so are you in a high growth category? I know everyone's looking at categories for health too. Are these categories going to be big, really big, or are they going to be niche and maybe not as interesting to everybody? And we've seen that happen over the past decade where categories look hot and then they're not. So I think, again, not speaking for the world of investing, but I would imagine that's top of mind as well as the category you're participating in, is it going to be a healthy one?

DS:

There's not a ton of alcohol at Expo West, but there's some, and you mentioned early on that Venturing & Emerging brands, of course you're spending a fair amount of time in the alcohol space now. I mean, would you say that's one of the primary focus now of VEB? Or where does that fall on the portfolio initiative?

MH:

Yeah. Right. So we have a part of a group called New Revenue Streams here in North America. And we're building that platform with strategic relationships. It's certainly one of our main areas of focus. And as you've heard our leadership talk about it, we've separated the alcohol business from the core intentionally and for lots of reasons. One, focus. Two, regulatory elements. And so we're uniquely focused on this in North America, along with some global counterparts. And then we're working with great partners, relationships across the space and people like Molson Coors and Constellation Brands and Brown‑Forman. So we've been really fortunate to find our way into relationships with people who are very good at what they do.

DS:

Well, Matt Hughes, thanks so much for joining us on The Breeze today, and good luck at the next Expo West in the next year leading up to it.

MH:

All right, thanks, Duane. Appreciate your time today.

DS:

Absolutely. Take care.

Speaker 3:

The Breeze is produced by Beverage Digest. Visit our website to learn more about our products and subscribe to our newsletter. That's www.beveragedigest.com.