By Bill Anderson
In April 2009 Rogo Capital published a report entitled “Investing in Emerging Beverage Companies: Why EBITDA Doesn’t Matter”. In their white paper, Rogo Capital reported that “[s]ince 2001, only one emerging brand acquisition had positive EBITDA.” They concluded that “growing case sales (revenue) and not profitability (EBITDA) is the best indication for development of brand equity and a successful emerging beverage company.”
That report was written before the full impact of our country’s worst recession had become known, and it was still easy to believe at that time that there would be other acquisitions like Coke’s of Glaceau in the years ahead.
High-end beverage sales have been severely impacted by the recession, and according to a study by Alix Partners LLP, the decline in beverage sales will continue in the US over the next 12 months.
In response, more and more smart beverage entrepreneurs are adopting a new approach as they build their still developing brands. The revenue-focused approach – with all it comes with (including excessive marketing spends and multiple capital raises) – should now be a thing of the past. Now more than ever emerging brand companies must begin to develop a new financial rigor and discipline – and most importantly a new patience. The days of thinking about an exit within a short time period are over.
Emerging beverage brands need to return to their early start-up days and return to a truly start-up mentality. That means operators can’t continue to overhire and that all team members need to wear many hats, stay in cheap hotels, and only in travel when needed. Social media strategies need to be pursued in place of more expensive and traditional agency-run marketing plans. Alliances with other beverage brands to share in back-office costs should be considered.
Some companies will simply avoid this new world because they have still shown a strong ability to raise new investment dollars. FRS was able to recently raise a new $23 million and Adina another $14 million. But money for emerging brands is both a blessing and a curse. More often than not in this current economic environment it is a kind of poison that allows brands to overhire and overspend.
What’s more critical in this new environment is to raise fewer dollars, create less dilution for current shareholders, spend wisely, think about the long-term and forget about VitaminWater-type scenarios for now. It’s time to simply run a good business. EBITDA matters again, and that’s not a bad thing.