By Andrew Kaplan
It’s a good time to be a beverage entrepreneur. Many industries have by now bounced back from the Great Recession. But for the beverage market, it goes well beyond that. The industry has been experiencing an accelerating surge in investment in new startups. “There’s an abundance of capital available for food and beverage investments. It’s a very frothy market right now,” says Ross Colbert, global strategist, beverages, Rabobank International.
Ironically, part of the reason has been the ongoing bad news for the industry’s biggest companies. Coca-Cola, Pepsi, Anheuser-Busch InBev and MillerCoors have had a lock on so much of the industry for so long that the relatively recent stagnation in some of their brands and downright declines in others have both shaken the foundations of the industry and opened up opportunity for smaller brands coming into the market.
To use an analogy unusually pertinent to any beachgoer this summer, investors, like sharks, smell blood in the water. “There is a wave of new money coming into the beverage space,” says Bill Anderson, founder and CEO of First Beverage Group, a financial services company dedicated to the beverage industry. “This is money that since 2008 has been on the sidelines post-recession looking for the right long-term investments. A number of investors believe that the beverage industry is an ideal segment to invest in. Craft beer, for example, is one of the hottest consumer segments out there and you’re seeing a number of family offices and private equity firms with a desire to get into that space because of the high growth rates. These investors see that many of the major players are losing market share points every year which calculate into billions of dollars at play. And the same thing’s true in the non-alc space. As the big suppliers lose market share and lose dollars at retail, there’s an opportunity for well-funded brands to grab those dollars. There’s an incredible interest from almost all investor pools to invest in this very dynamic industry.”
James Tonkin, president of Healthy Brand Builders, a strategic consultancy that incubates and accelerates small to medium sized brands, adds that much of the investment in the beverage space is corning from some unusual sources. “Even companies that non-traditionally looked at this space—pharma companies, health-and-wellness companies, nutrition companies, supplement companies, all of them are looking at beverage application as one of the next waves of investment,” he says. “‘The engine behind that is a lot of people outside of the beverage industry have seen…the move away from unhealthy traditional beverages that have been around for many, many years to this healthful, better-for-you platform.”
The same surge in investment is going on in alcohol. Just tally up the number of craft brewers and distillers–some 3,500 craft breweries, and about 750 distilleries at last count–and the trend is obvious. In fact, according to Rabobank’s Colbert, the beverage segments seeing the most
investment have been craft beer and craft distilling, “The move toward smaller, regional, more authentic small-batch production is definitely on trend and it’s been the key driver in the growth and acceleration in craft beer and spirits,” he says.
According to the White Paper “Product Differentiation,” written by Debbie Wildrick, chief strategy officer of MetaBrand, a beverage incubator, “Since the year 2000, new product development in beverages has exploded.” In 1965, her research shows, the average supermarket had 20,000 items on the shelf. These days, there are somewhere around 40,000 items on the shelf. The rate of new beverages introduced in the U.S. since 2010 has jumped by as much as 22 percent in a single year, or 1,670 new products in just one year. According to Nielsen, the non-alcohol categories growing the most between 2011 and 2015 were iced tea, coffee, functional drinks and water.
And then consider how much it costs to get a beverage startup off the ground, and you can get a good picture of just how much money is being invested in the beverage industry for new startups each year. According to Wildrick, MetaBrand says $250,000 is the minimum amount to build a beverage brand ready for distribution, including the first production run. While Anderson says from what he sees, most beverage startups begin with anywhere from $50,000 to $500,000 from family and friends. As they grow, the second round of funding increases to several million dollars. “But the amount of each capital raise is highly dependent on the type of beverage, the need for production capacity, the brand’s go to market strategy and many other variables,” Anderson says.
While no one has calculated just how much money in total is being invested each year into the beverage industry, working with these numbers can get us a conservative estimate of how much money in total has been invested in beverage startups during any single year since 2000: $460 million.
Brad Barnhorn, an investor in beverage companies who also sits on numerous boards, including that of the probiotic brand KeVita and the coconut and acai drink company Zola, says it is also the success of some high-profile beverage startups that have helped fuel the current wave of investment in the industry. “I see no slowdown, and really honestly an acceleration from the entrepreneur side of people entering the space, and I think that’s a function of some very high-profile brands, and very creative brands, that sort of have a certain feel to them—companies like a Suja, or GT’s Kombucha, or KeVita, really cool brands that attract people who want to do cool, creative things.”
Another big part of the story, Barnhorn says, is what’s been going on at retail. “The focus on things like fresh and local really encourages and really provides a really rich platform for entrepreneurs to launch products,” he says. “Whereas ten years ago, if you were to launch [a better-for-you drink] it was really launching with Whole Foods on the retail side…it was still sort of a very niche area. Today, you talk about launching a product and it’s not just Whole Foods. You have a bunch of other natural foods retailers out there to help scale.”
As a result of this opening up of the options at retail, Barnhorn says, it doesn’t take as long as it once did for a new drink to find a solid footing. While it used to take anywhere from 6-8 years for a brand to jump from say a Whole Foods to more mainstream channels, “That’s become a two or three-year progression. It can be very fast,” he says.
Anderson’s First Beverage Group recently participated along with Polaris Partners and existing investors in a $13 million financing of the startup Drizly, an on-demand delivery service for beer, wine and liquor. “We think the company is a difference maker in how consumers will be able to enjoy beverage brands with greater convenience and provide consumers with a unique platform to better understand and enjoy a wider range of beverage brands,” Anderson says about the investment.
The cash infusion is welcomed news for the folks at Drizly, but not all of the industry’s startups are so lucky. “The industry itself still has a 92 or 93 percent mortality rate,” says Tonkin, who points out that he is currently working in some capacity with some 44 different companies. “The chances of you hitting a big success, like the Zico’s of the world which we had, those don’t come very often.”
Adds Colbert, “We’ve looked at this and determined it really takes a 6- to 7-year time horizon for beverage startups to really achieve enough scale to survive, enough distribution to sustain themselves, and typically it takes that [time] before you get to sustainable cash flow. The beverage industry has always been hyper-competitive because of the dominance of big brands, because of the cost of retail shelf space today, and the challenges with building a distributor network; it’s very challenging in that regard. So there is a high mortality rate for beverage startups.”
Also, while overall investment in the industry may be strong, the beverage industry still is not as attractive as others to some investors looking for a big payout; after all, a multi-billion-dollar deal like a vitaminwater sale to Coke, for example, is a rarity. “I think you see much more institutional capital focusing on things like healthy snacking where there is a sense that there is a broader set of exit pathways,” Barnhorn says. In other words, there just aren’t enough large companies in the beverage industry to buy up all the new smaller companies coming on to the market.
To give their brands more of a chance, many turn to so-called “angel investors” like Barnhorn or Tonkin, who will provide a cash infusion, in exchange for a part ownership of the company. An added bonus of the relationship is that these investors also share with the young company the lessons they’ve learned from their experiences in the beverage industry.
Erick Schnell, the founder of Steaz Tea, has since gone on to open up his own beverage incubation firm called MetaBrand. “My idea was to create a unique, one-stop-shop business model that served the natural side of the beverage industry,” he says. “So everything from in-house R&D with some of the best formulators I could find, to an outsourced operational team of some of the best operators I could hire, to a full-scale marketing and advisory team.” MetaBrand’s clients have included Runa tea, CideRoad and Tio Gazpacho, to name just a few.
Schnell adds: “Cash burn is a very big concern in the early years for these brands and if you look at why a lot of brands have not been able to survive their first and second year it’s because they’re burning too much cash and do not really realize it takes quite a lot of years before you become a profitable beverage business. So the whole concept of outsourcing management, outsourcing supply chain oversight, outsourcing production oversight, outsourcing formulation, all these things, including sales and distribution, are now very normal to write into your business plan as a young startup. Our model really only grew out of that demand.”
He adds that MetaBrand also provides the startups the seasoned industry pros, the C-level people, which they usually are unable to afford so early in their life cycles. “We’ve invested in C-level people. Our CFO is the former vp of finance for Bai, our COO is the former COO of Skinny Water,” he says.
All the startups in the craft beer industry are also creating an earthquake of sorts for that industry. For example, some of the regional craft brewers are now finding themselves squeezed between all the smaller startups, who have the advantage of being hyper-local, and the big brewers who have been buying up craft brewers. To preserve their autonomy and ensure their continued growth, some are uniting into one company called Enjoy Beer, whose founder and president Rich Doyle served as chairman and CEO of Harpoon Brewery for 28 years. Abita Brewing Co. recently joined Enjoy Beer as a founding brewery partner. “Abita happened much more quickly than we thought,” Doyle says. “We’d love to have another partner this year. They’ll come when they come, and we’ll do our best to be ready when they do.”
For startups, one option is Brew Hub, which offers, as its CEO Timothy Schoen points out, “priority, premium production space,” for startup craft brewers to get their operations off the ground. Brew Hub is building a network of breweries across the U.S. which will serve as production and distribution hubs for its members. In addition to brewing and packaging services, Brew Hub offers craft brewers assistance in sales, marketing and logistics initiatives, as well as legal and government affairs. “Demand for craft beer is growing exponentially,” Schoen says. “So how do you satisfy that current demand and future demand? You do it in a way that you can handle it on a timely basis and without risking all that you own. And that’s really where we come in.” Unlike Enjoy Beer, whose partner breweries become part owners of it, Brew Hub’s members contract with it for the different services they need.
Colbert, of Rabobank, believes it’s important for startups not to lose sight of the fact that tried-and-true experience can be just as valuable as a cash infusion at the outset. “Some of the best investors to use are former beverage executives or business owners who have an understanding of the beverage industry and what it requires to be successful,” he says, adding, “To avoid as many bumps as you can, listen to the consumer, and be prepared to adjust your business plan accordingly. Every beverage success story required the founder to make changes early on. Recognizing how and when to adjust the strategy can make the difference between success or failure.”