Between Coke & A Hard Place - small companies vying for market share in beverage industry

Brandweek, June 22, 1998 by Gerry Khermouch

On a beverage shelf littered with products and locked up with slotting fees, it's become a bitter struggle for innovative new brands to gain a toehold among giants.

Two and a half years ago at age 29, Dave Marcheschi put aside his career as a Chicago mortgage broker to take a flier on a new beverage concept he had come up with: caffeinated artesian water. After a year-long search for a copacker willing to run with the idea, his company, Johnny Beverage, was able to get Water Joe made and out to retail-starting with Midwestern truck stops, college bookstores and other places where the caffeine-needy might be ready for a purer delivery system than coffee or colas. Results were encouraging enough to quickly capture the eye of wholesalers and other industry execs. while spawning about a dozen copycats. While not oblivious to the challenges ahead of him, Marcheschi was confident his better idea would inevitably find its way to consumers.

Talk to Marcheschi today and seeded among references to "SPIFs" (sales promotion incentive funds, or trade incentives), "planograms" (ideal shelf stocking maps), "endcaps" and other industry jargon he has picked up, is an unmistakable vein of frustration and bitterness matching that of independent beverage execs with two or three more decades in the trenches.

"It's a self-fulfilling prophecy," Marcheschi said. "You take a small guy, don't give him an endcap, it's going to come off the shelf and the retailer's going to tell you it's not selling. At Walgreen's, Coke pumps $100 to every store to maintain their planogram. They get SPIFed to maintain their planogram."

By contrast, new brands like Water Joe, without that kind of money to spend, never get a fair chance, Marcheschi said. Not long ago, he had to relinquish Water Joe and his marketing arm, Water Concepts, to another firm, Artesian Investments, which hopes to keep it growing with an imminent line of "smart waters," such as the herb- and mineral-reinforced Recall. Still, Marcheschi isn't so disillusioned as to abandon the beverage segment entirely: he's set up shop as a broker for up-and-coming Jones Soda, from Urban Juice & Soda, Vancouver, and is also developing a direct-shipping alternative to the bottlenecks that have squeezed out innovative brands like Water Joe.

And that pretty much seems to capture the state of the alt-bev industry: a tantalizing sense that it still offers boundless opportunity and low entry barriers, qualified by increasingly stiff challenges in getting wholesalers to carry the product and retailers to put in on their shelves.

"My sense is that there's always room for something exciting, new and different," said John Bello, co-founder of South Beach Beverage, Norwalk, Conn., whose SoBe line of herbally enhanced juices and teas is expected to do well over 2 million cases in volume this year. "If you have that, then there's always a shot, at least at the grass roots level. But it's getting tighter because Coke is putting the squeeze on, making it much harder for niche beverages to find a window to get to consumers."

That is the continuing paradox of so-called "alternative" beverages. As both the wholesale and retail channels consolidate, and as the bigger players increasingly exert their market power to freeze out or underprice smaller competitors, it has gotten tougher for independents to get established and build their businesses. Wholesalers and retailers are well aware that somewhere in the avalanche of new products are a handful of truly unique entries with the potential to energize their business, if not necessarily on the magnitude of a Snapple or Arizona in years past. Yet, they seem to have grown far less tolerant of mistakes from unseasoned entrepreneurs like Marcheschi, and more demanding of risk-reducing slotting allowances and other incentives to stock a new brand. And veteran alt-bev sales execs say it is naive to expect a retailer to do anything at all in the way of merchandising or promotion to help build a promising new brand; some retailers' rhetoric to the contrary, that is left entirely to the manufa cturer and wholesaler.

Such strictures may have the effect of squeezing out truly unique product, ones that thereby offer a particular retailer a chance to differentiate itself against the competition.

"They're so bottom-line-oriented now that I think they're missing out on what consumers are looking for," said Joe Brumfield, an ex-Pepsi exec, now marketing director of Water Concepts, South Barrington, Ill.

Guy Battaglia of High-Grade Beverage, North Brunswick, N.J., helped build upstart breakthrough brands Clearly Canadian and Arizona in New Jersey. Now, as High-Grade looks to build the company's own soft drink brand, Briar's, a trade-name that dates back to 1937, Battaglia still finds it tough to make a dent with retailers conditioned by the Big Boys to getting paid upfront. Slotting fees, he said, "are sort of like an addiction of the chains. It's probably built into their bottom line."

As a result, independent beverage marketers seem to have adopted a more pragmatic approach, offering stripped-down programs and incentives that require little from the retailer in the way of execution, while trying to pay more attention to making their product at least look different from others on the shelf through proprietary bottles, intricate "wrap" labels and exotic ingredients.