Beer Marketer's Insights
Reed’s Inc has gone to well again for another round of financing to support turnaround plan, this time via public offering of 6.73 mil shares priced at $2.10 that would yield REED $12.9 mil in net proceeds after expenses. Underwriter also has 45-day option to purchase additional 1 mil shares to cover any overallotments. Deal managed by Roth Capital Partners is anticipated to close next Wed. Much of spending has been going to launch zero-calorie versions of Virgil’s and Reed’s natural soda brands as mgmt team works to get natural-channel leader back on sound footing.
As Wall St analysts had a chance to digest Coca-Cola’s Q4 earnings report and investor call, as well as that of its bottler Coca-Cola European Partners, a few provocative insights emerged in reports they issued last night. As reported yesterday, easing of guidance by KO had precipitated 8% plunge in share prices, unprecedented in a decade; today shares hadn’t recovered as investor apparently reset expectations. That said, not everyone is losing faith in soda giant: Bernstein, for one, is maintaining “outperform” rating on shares, arguing, “Given the violent stock movement, a degree of what we think is sandbagging, and the operational performance still being among the strongest in consumer staples, we think this is a buying opportunity.”
Wells Fargo Wonders, Is KO Still a Growth Co? “We’re left wondering: (1) is KO still truly a “growth” company and (2) will long-term investors (after years of structural headwinds from refranchising) tolerate yet another year of muted EPS growth.” Still, she noted that fact that KO enjoyed any organic growth at all makes it an “outlier” in CPG sector that doesn’t even enjoy that luxury.
Macquarie Breaks Out Global Ventures Components: Monster, Costa, Innocent, Dogadan KO has consolidated some of its growth investments in new Global Ventures segment consisting so far of recently acquired Costa coffee co, Monster Beverage and Innocent and Dogadan brands moved out of Europe/Middle East/Africa segment. With KO itself not yet providing much detail on those components, Macquarie’s Caroline Levy did her own analysis pointing to 2019 revenue contribution of $2.8 bil, compounded of $1.9 bil from Costa, $535 mil from Innocent, $20 mil from Dogadan and $290 mil from Monster via commission she estimates at 50 cents to $1 per case. (She estimates Coke distributes 80% of Monster’s global volume.) All the brands offer margins in 9-10% range except Monster, at 80% thanks to licensing model. KO brass may shed more light on Global Ventures next Fri at Consumer Analysts Group of NY meeting in Boca Raton, Fla.
Could CCEP’s Road Get More Difficult? Caroline also had some interesting observations on Coca-Cola European Partners, wondering whether increased strains on its core supplier might augur more difficult road ahead for European bottler. “We are more cautious on KO as a benign force,” she wrote. “Overall, we still believe the alignment with KO is strong, but KO’s margins/profits are under pressure . . . KO could opt to invest less in its bottlers and/or ask that bottlers help with planned investments to get Costa Coffee off the ground (and possibly Coke energy).” Potential launch of a Coke-branded energy play, of course, has also been a source of friction with its energy partner Monster Beverage, which has taken matter to arbitration.
PepsiCo shares were spiking upward in early trading today despite some easing of its earnings guidance for new year as co raised dividend and new ceo Ramon Laguarta spoke of increasing investment and agility in co while ruling out a refranchising of North American bottling system. In what comprised his first public outline of vision for PEP, Ramon spoke of “lifting and shifting” brands and innovations among geographies, adding frontline resources to boost North American Beverages’ ability to serve small-format stores where innovation is nurtured, and increasing production capacity for thriving Frito-Lay unit whose plants have gotten overstretched. He’ll also continue to pursue “beyond-the-bottle” initiatives via such platforms as SodaStream, Spire, Drinkfinity and Aquafina hydration stations.
In his prepared remarks, Laguarta said he didn’t see any reason to “shed or acquire businesses in any fundamental way,” maintaining continuity with stance of prior ceo Indra Nooyi, who was content to keep acquisitions below $500 mil (tho $3.2 bil SodaStream deal was exception) and resisted pressure from some investors to split up company’s snacks and bevs units. Ramon acknowledged that Power of One strategy seeking synergies from those arms can sometimes “defocus” co, but argued that competitive advantage it yields is apparent from stroll past grocery displays on Super Bowl Sunday. Yoking of two segments also creates opportunities for combined freight system, e-commerce, ability to attract and retain best talent. Asked specifically about Quaker Oats biz, Laguarta responded, “We love our Quaker biz,” which strengthens co in underdeveloped daypart (meaning morning).
As for idea of refranchising bottling system as rival Coca-Cola has done – idea that Nooyi had vociferously resisted until past year or so, when she acknowledged idea was under consideration as part of solution to N Amer woes – Laguarta was emphatic when issue was brought up in q&a. He said he believes NAB’s success depends on factors like having right mix of brands, executing well with both large and small accounts and maintaining flexible supply change, none of those factors related to refranchising. Besides, he added, undertaking refranchising would be very complex. So that seems to put to rest – at least for now – issue that sharply divides PEP from its archrival Coke, which last year completed sweeping refranchising in N Amer. While Nooyi had argued that maintaining integrated system fosters innovation by eliminating resistance that independent bottlers may show to new items, refranchising proponents argue back that having demanding indie partners who can go elsewhere to fill white space makes for strong stimulus to new thinking while also offering the agility needed to reach up-&-down-the-street retail accounts. Coming years may show which of those very different worldviews prevails.
Since elevation last Oct, Laguarta said he’s undertaken deep immersion with his team into PEP’s global activities (he didn’t respond to one analyst’s question about why he hadn’t reached out to them) and “came to realization we have a good company, we can be a great company.” Today’s call was his first public statement since Nooyi’s departure, tho Ramon may have more to say at Consumer Analyst Group of NY meeting in Boca Raton, Fla, next week.
North American Bevs to Step Up Innovation, Add Frontline Resources Laguarta assessed NAB as “attractive business” boasting lotsa leading brands in growing categories. “We believe our operating model is a competitive advantage,” he said, in possible reference to integrated distribution model. But he allowed there have been challenges over past 18 months: new entrants in stronghold categories (read that mainly as Body Armor’s challenge to Gatorade), opportunities to improve brand marketing and consumer engagement, need for increased innovation to address new category entrants. But it’s not like PEP’s been standing still: he painted picture of raft of new or reinvigorated brands: Life WTR, Bubly, Gatorade Zero, new variants of Propel, extensions under Starbucks and Pure Leaf Tea banners, as well as momentum behind restaged Pepsi Zero Sugar. Still, co is making changes to NAB organizational structure and adding frontline resources “to make us more agile and to respond to local competitive opportunities and actions,” he said. Saying it’s sensitive competitive issue, he declined to be more specific about initiative.
Q4 Brought Organic Rev Growth of 4.6%; NAB Sees 2% Gain in Net Revs Results for Q4 and full year received no specific discussion on conference call that was focused on bigger picture, but topline growth “exceeded muted expectations,” per Macquarie’s Caroline Levy, tho easing of eps outlook prompted her concern that “the cost of achieving that growth is increasing.” Net revs for qtr came in flat at $19.52 bil, with operating income off 5% to $2.43 bil. For full year revs rose 2% to $64.66 bil and operating income contracted 2% to $10.11 bil. Organic revs grew by 4.6% however, continuing sequential acceleration thru past year, which came in at 3.7% organic growth overall. In 4th qtr, North American Bevs scored 2% net rev gain to $6.01 bil, with operating profit off 12% to $438 mil; for full year, revs edged up 1% to $21.07 bil and profits sagged 16% to $2.28 bil. Discussion of sector performance included no info on how specific brands or categories fared.
Hard-kombucha producer JuneShine has acquired Ballast Point Brewing’s Scripps Ranch, Calif, facility to serve as springboard for expansion beyond current 2,000-2,500-bbl capacity. Audacious move gives it runway to do 100K bbl, just 6 months after brand launched in San Diego . . . Celsius Holdings has fleshed out its DSD network with additions from Anheuser-Busch InBev, MillerCoors and KDP systems. It’s doubled its ABI partners to 6 with addition of Hensley, Pepin and Tri-City Beverage while attaining statewide coverage in Carolinas via addition of 4 KDP-aligned houses, Carolina Beverage, Piedmont Beverage, Quality Beverage and Choice Beverage USA.
Looks like Argo Tea founder Arsen Avakian is making some headway with newer venture called Cooler Screens that converts cooler doors into dynamic displays. Effort he launched with partners who include former Walgreens ceo Greg Wasson so far has won trial placements at Walgreens stores in Chicago, where co is based, as well as SF and NY, with Seattle suburb Bellevue next on list, Advertising Age reported. Among 15 advertisers recruited to cause are Pepsi (including for Aquafina and Gatorade), Coca-Cola and Red Bull. “Their animated ads appear between digital displays of drinks with prices; some displays include digital tags based on the weather outside, or events such as the Super Bowl,” story explains. At store in NY’s busy Union Square, AdAge observed, “most shoppers did a double-take at the animated offerings, before shrugging and opening the cooler to select their drink. ‘Smart idea,’ remarked one woman.” Recall that Avakian, who came out of tech biz, departed from active role at Argo over past year as co retrenched, turning his focus to Cooler Screens (BBI, Sep 21).
Teamsters put out press release saying “Coke Sales Suffer” in SoCal “Under New Distribution System” and announced call for “investors and industry analysts” tomorrow morning. Reyes Coca-Cola Bottling “has begun implementing a new ‘static routing’ delivery program” in Southern Calif “that is creating significant disruption in the sale and distribution of Coca Cola products according to a recent survey of Coke retailers,” wrote Teamsters. Survey was conducted by Teamsters in metro LA and San Diego starting in Nov 2018. Over a hundred retailers participated and survey “provides valuable insight into the impact the distribution changes are having on Coca-Cola sales and service and raise important questions for investors about how Coke will protect its interests from cost saving strategies of private distributors,” said Teamsters director Greg Nowak. Teamsters represent 13,000 Coca-Cola bottling and distribution employees in North America, “including more than 5,000 working for Reyes Holdings.” Over 1,000 Teamsters work for Reyes Coca-Cola in SoCal, with contracts expiring in 2019 or 2020. “Reyes alternate distribution system . . . has also impacted Teamster jobs” in SoCal, “creating tension ahead of contract negotiations,” said Teamsters’ release.
No comment from Reyes so far to inquiry from our sibling publication Insights Express. Last fall, Consumer Edge Research’s Brett Cooper had observed that “we have seen Reyes underperform or post weaker performance on the Coke business relative to pre-takeover (in California). There are several potential issues here but Reyes has a reputation of not delivering to accounts that don’t meet a minimum drop size given the economics of those stores.” (Interestingly, Cooper also offered this theory: “We wouldn’t be surprised to see Reyes’ long-term intent to combine at least the distribution of Coke and beer (and possibly other products) to improve the efficiencies of the business. Minimum drop sizes of a combined portfolio would expand the reach of the business and benefit brand owners.”) As we’ve noted before, KO’s broader refranchising effort was disruptive move, and disruption occasions upheaval. That seems to have been particularly the case where new franchise partner is newcomer to Coke network rather than simply an existing bottler expanding footprint, as we’ve noted in account of frayed labor relations at Liberty Coca-Cola in NY (BBI, Sep 27) and others have reported on falling out between partners at Florida franchisee (BBI, Mar 15).
There was a time not so many years ago that Coca-Cola barely played in RTD coffee realm, essentially ceding territory to potent Pepsi/Starbucks partnership. These days, tho, soft drink giant is awash in brands at multiple tiers, including licensed Dunkin’ and McCafe brands, not to mention cluster of energy plays from Monster, with recently acquired UK coffee chain Costa likely heading to drawing board as RTD platform for US. So what gives, then, with Far Coast RTD line unveiled at NACS c-store show last fall, presumably as replacement at higher end for Illy brand that Coke discontinued after a decade? By varying accounts Far Coast was due sometime between Jan and Apr, but Costa deal happened shortly after unveiling at NACS and there’s been no word of Far Coast since then. Coke rep delivered answer to us yesterday evening: Far Coast launch has been postponed in US. “We are currently focusing on some exciting innovations with our RTD coffee brands through Dunkin’ and McCafe, as well as expanding our presence in the organic coffee space with our Honest brand in the US.”
That Honest Tea launch is news to us, but rep’s remark suggests that may be among innovation that brand’s team has promised for Natural Products Expo West in early Mar. As reported from recent discussion with cofounder Seth Goldman and gm Clare Verdery (BBI, Feb 1), coffee extension of organic iced tea and juice brand has done well in some parts of Europe, tho the pair had said nothing about US debut. They did promise robust innovation slate at Expo but weren’t ready to provide any details. An Honest coffee line would represent Coke’s first foray into organic coffee.
As for Far Coast, shown at NACS last Oct in prototype form (BBI, Oct 9), it was to be sourced in Japan in brightly colored, 8.8-oz aluminum bottles in unsweetened Signature Blend using Latin American beans, lightly sweetened Single Origin offering using Ethiopian beans and more highly sweetened Café con Leche, at $2.99 price. Recall that Far Coast is brand that’s knocked around Coke’s system for at least a decade, offered as RTD in some overseas markets and providing name for handful of US cafes, including now-closed unit in Atlanta.
Twenty-five years ago the Dietary Supplement Health & Education Act ushered in an era in which the FDA allows cutting-edge ingredients that haven’t been fully proved out as foods to come to market under the supplement designation. With that biz having grown to exceed $40 bil, the agency yesterday promised a thorough rethinking of its approach that will better police “bad actors” offering unsafe or non-efficacious items without squelching pace of innovation. Newly established Dietary Supplement Working Group will seek to devise rapid-response tool that will more quickly alert consumers about problem supplements, improve submission process for new dietary ingredients (NDI) and collaborate with business and academia to evaluate safety of botanical ingredients via recently created Botanical Safety Consortium. Also a focus will be enforcement strategies, with FDA citing efforts over past year to protect consumers from bulk-caffeine products, Rhino male enhancement products and tianeptine-based items that claim to treat opioid addiction. (Agency didn’t list CBD, tho in recent weeks it seems to have launched enforcement effort on that front.) A public hearing to be convened this spring will wrestle with issues like incentives for supplement exclusivity and the scope of permitted supplements. Another focus of potential interest: establishing a product listing regime that increases transparency and makes it easier to take action vs those bad actors.
In statement, FDA’s energetic commissioner Scott Gottlieb, who often announces new agency initiatives under his own signature, said, “We know that most players in this industry act responsibly. But there are opportunities for bad actors to exploit the halo created by quality work of legitimate manufacturers to instead distribute and sell dangerous products that put consumers at risk.” In fact, FDA today issued blizzard of warning letters and advisory letters to supplement marketers offering products that claim to help with Alzheimer’s Disease, saying they required pre-approval from agency and should be marketed as new drugs, not supplements. Of course, drugs only win approval with rigorous scientific backing, while supplements essentially are participating in self-regulating scheme.
Gottlieb made it clear he’s not operating out of any anti-supplement bias. “I’ve personally benefited from the use of dietary supplements and, as a physician, recognize the benefits of certain supplements as a part of a comprehensive care plan,” he said. “It’s clear to me that dietary supplements play an important role in our lives as we strive to stay healthy.”
Announcement drew positive response from Council for Responsible Nutrition, main trade group for supplements and functional foods, which applauded Gottlieb’s commitment “to strengthen the dietary supplement industry and to modernize FDA’s oversight of these products,” noting that it has equal interest in rooting out bad actors. CRN called for increased funding for agency, while urging FDA to move on “clarifying the legal path to market for hemp-derived CBD as a food and as a dietary supplement.”
As for Center for Science in Public Interest, which has long held scathing view of compromises embedded in DSHEA, it offered tempered applause. “It’s encouraging that Commissioner Gottlieb seems open to making changes to the Dietary Supplement Health and Education Act—the deeply flawed law that has long handcuffed the FDA’s regulatory efforts and has produced the sprawling, largely unregulated and often reckless industry we have today,” said CSPI prexy Peter Lurie. “As part of the Commissioner’s initiatives, we strongly support adding a requirement that manufacturers list their products with the FDA, so the agency knows exactly what it’s regulating. It’s clear that the agency needs mandatory recall authority so it can pull tainted supplements off shelves. And DSHEA could be further improved by requiring more meaningful product labeling, with more prominent disclaimers, warnings of drug interactions, and 1-800 numbers for consumers to report adverse events to FDA.” But he was dubious about Gottlieb’s hope of fostering innovation via exclusivity structure that would parallel reward drug makers get for their R&D, saying, “With the supplement industry, any ‘innovation’ is clearly in the marketing realm, and not in the scientific realm. In the absence of properly controlled research designed to establish safety and/or efficacy, exclusivity should not even be on the table.”
Another remnant of the old Cott Corp has exited the company. The Toronto and Tampa-based co, which exited the private-label and copacking businesses in favor of a deeper dive into home & office delivery of water and coffee, said it’s sold its soft drink concentrate production biz and RCI Int’l div to global copacking giant Refresco for $50 mil. Refresco, which earlier purchased Cott’s copacking assets, in turn flipped RCI to a group called RCI Global Beverages Inc. The concentrate biz, which did $80 mil in sales in 2018, further integrates activities at Refresco, which purchased substantial share for its copacking biz. At heart of concentrate biz is plant in Columbus, Ga, that was included in deal. “This transaction is the final step in the transformation of our business . . . consistent with our strategy of accelerating the growth across our platform in water, coffee, tea, extracts and filtration solutions,” said COT ceo Tom Harrington. Announcement didn’t include any info on RC Global Bevs or identify its principals and we haven’t been able to learn much about them so far.
After public rally vs crackdown on CBD items, Maine gov is working with Democratic legislative leaders on emergency bill that would declare that food items containing hemp-derived CBD are not adulterated, as FDA contends . . . As Rocky Mountain High Brands gets ready to relaunch its CBD bevs, it’s fortified its exec team with Doug Gillen, Republic National Distributing wine & spirits vet who’ll manage sell-in as vp of sales. In 20+ years at RNC, he’d risen to regional vp of marketing in territory surrounding his Texas base. RMHB is based in Dallas . . . The rapper Waka Flocka has invested in Ghost Beverage and joined its advisory board, as LA-based co and its founder/ceo Ryan Carter prepare to launch CBD Pink Lemonade, CBD Water, MLK WTR and other bevs.