Although many new drinks are pricey, most come from companies that struggle to make a profit. Like wallflowers, they wait for a suitor to scoop them up the way Coca-Cola did VitaminWater last year for $4.2 billion.
Americans used to keep a straightforward selection of drinks in their refrigerators: milk, orange juice and a 2-liter bottle of soda pop.
Now those shelves are likely to hold a beverage for every mood and dietary need. There are organic energy drinks, orange juice with calcium, lavender-flavored soda pop and vitamin-fortified dog water.
Although many carry Tiffany price tags — $3 for a 16-ounce juice is not unusual — most new drinks come from companies that struggle to make a profit. Like wallflowers, they wait for a suitor to scoop them up the way Coca-Cola did the maker of VitaminWater last year for $4.2 billion.
They primp by shoveling cash into marketing and sales, hoping it will lead to brand strength attractive enough to fetch a high acquisition price.
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Drink entrepreneurs easily tick off the beverage companies bought by big-name manufacturers during the past decade: Izze Beverage, Odwalla, Nantucket Nectars and Naked Juice.
American Beverage Association members employ more than 217,000 people who produce U.S. sales in excess of $111 billion per year.
Yet only about 2 percent of beverage companies ever reach $50 million in sales, investment experts estimate.
“The dirty secret is that very, very few of those brands have that kind of success,” said Gerry Khermouch, who edits the newsletter Beverage Business Insights.
“The other dirty secret is that a lot of these companies are not operated to ever make money.”
The Seattle area is considered a hotbed for new drinks, Khermouch said, “partly because it’s a capital of progressive lifestyles, and that’s where people are open to experiment.”
Homegrown beverages range from Jones Soda to Dry Soda, and bottled-tea company Cha Dao, just-add-water powders like Zipfizz and Phix to Zenmaster, “the first functional, L-theanine fortified natural beverage.”
Drink companies are supported by the area’s plentiful natural-foods stores, beverage distributors and wealthy investors looking for startups to finance.
Investors like beverage companies because they “scale fast, and an exit can come fairly quickly,” said George Southworth, of Stanwood, a longtime investor and executive in retail distribution and manufacturing.
Big manufacturers used to ignore any product with less than a half-billion dollars in potential sales, he said. Now buyers see niche opportunities and want to snatch up companies before they get too big.
That change in philosophy helped Seattle-based soda-pop company Dry Soda raise $1.5 million from angel investors in its first year of business and snag $5.5 million more recently.
The company has yet to turn a profit but is expanding its reach, which investors deem more important. Dry Soda’s four-packs, which retail for about $5.99, are sold by 600 stores in 20 states.
“Any grocery store will put you on the shelf right now, because nobody wants to miss out on the next trend,” said Dry Soda founder Sharelle Klaus.
The hard part is staying there, because stores give new drinks only two or three months to bring in significant sales.
“You need to prove yourself, because there are so many people coming up behind you with the next thing,” Klaus said.
Getting customers to buy a product means having lots of tastings and customers who like what they sample.
Groceries have been bombarded with beverage salespeople begging for more samplings and shelf space.
After suffering heavy losses, including $6.6 million in the first half of 2008, Jones Soda is hiring 30 people this summer to ensure its products are on grocery shelves and being well-merchandised at stores in Seattle, Los Angeles and Chicago.
Metropolitan Market sampled 11 brands types of root beer recently, part of a push in the past couple years to offer unique beverages.
“I’m getting many more requests to have presentations to sample, and customers are wanting to try them,” said Ilga Westberg, culinary and community-events coordinator for the chain.
The competition dazzles even people who own beverage companies.
“We just got a review from a guy who reviewed 700 energy drinks,” said Will Weisman, founder of Phix, a Seattle company that sells a just-add-water energy mix.
Weisman raised a little more than $1 million to launch Phix after selling the local fast-food chain World Wrapps and working at a venture-capital firm.
“Very few energy products have really reached scale,” he said. “They create as much marketing and noise as they can. They’re huge when they take off, but there’s so much competition and so many me-too products.”
In fact, north of Seattle in Mill Creek is another company selling just-add-water energy-drink mixes, and it is one of the few companies that makes money.
Started in 2004, Zipfizz had sales last year of $29 million and was profitable in its second year of business, said CEO Riley Livingston.
He thinks the energy-drink category lacks creativity despite the number of players.
“I was shocked that there are 1,000 energy drinks out there,” Livingston said. “Hooters has an energy drink, and Playboy, and random let’s-just-have-an-energy-drink, and 99 percent of them are the same thing, carbonated sugar water with caffeine.”
There is something to be said for simplicity.
Some drinks disappear because they taste vile after being packed with too many vitamins, minerals, antioxidants and proteins.
“Distributors grouse that these companies aren’t aware of all the factors that almost ensure a product will fail, like a formula that doesn’t taste good,” said Khermouch, the newsletter editor. “It’s hard to get all those nutrients into a drink and have it taste good.”
Just ask anyone who grew up swallowing cod-liver oil for his health.
The current rage for drinks with health benefits stems partly from our historical use of tonics and elixirs, said Michelle Barry, president of Tinderbox, a strategic and consulting division of the food-research firm Hartman Group in Bellevue.
“We’re used to things like smoothies where you put lots of things in, blend it together and it’s really customizable,” Barry said.
People experiment with new drinks because they can try a single serving and not spend much money, she said. “Beverages are portable, and the commitment is relatively low.”
Now that consumers are winnowing down the flood of new drink flavors and ingredients, trends are turning toward packaging. The next wave of drinks will differentiate themselves with pouches, tubes and other delivery, Barry said.
“It’s a cluttered landscape,” she said. “There are only so many flavor combinations and fortified ingredients you can add to something.”
Melissa Allison: 206-464-3312 or firstname.lastname@example.org