In the past, the story might have been about the plucky small beverage brand, started at a kitchen table, with the proposition picked up by a mighty beverage company and propelled into global success.
But COVID-19 has changed the market. Big companies are less interested in picking up wild cards that may or may not deliver, and more interested in solid bets that they can cultivate to their own specification in-house.
Coca-Cola, for example, even started ‘killing the zombies’ pre-COVID, noting the need to streamline its portfolio and focus on the brands that actually deliver. Fast-forward to February 2021 and the portfolio had been cut from 400 to 200 master brands. And it made headlines in January when it sold its 2013 purchase of early coconut water pioneer ZICO back to its founder.
So what’s happening?
“When small, innovative brands came into the market and started eroding the sales of flagship brands, many beverage companies became aggressive in acquiring (or investing in) numerous small brands, hoping to capture some of that growth,” notes Stephen Rannekleiv, Global Strategist – Beverages, at Rabobank.
While it was true that consumers wanted smaller brands they related to, working out which brands consumers would relate to was something of a ‘spray and pray’ approach.
“Very few of the small brands acquired have achieved any meaningful scale, and the bloated brand portfolios made it difficult to provide the brands with real growth potential the focus they need,” said Rannekleiv.”While there have been some undeniable success stories, the acquisitions of smaller brands have yielded fewer gems to date than many had hoped.”
Now, beverage giants are more interested in making sure their efforts are clearly focused.
“There appears to be a growing trend of beverage companies culling numerous brands or selling off large chunks of non-core brands within their portfolio. They are finding that a portfolio with fewer brands, each with a clear and distinctive purpose in the market, can be supported much more effectively than a multitude of brands.”
Innovation is still happening - but beverage companies are launching new products that have been developed in-house and scaling these up to critical mass.
Are beverage giants good at innovation?
But are beverage giants actually any good at in-house innovation? It has often been said that smaller companies are far more nimble and reactive than big companies who – in contrast – tie up innovation with red tape and complicated procedures. Rannekleiv says this is something else that is changing.
“Large companies have generally been slower and less nimble than smaller companies, but I think large companies are looking at how smaller companies operate and trying to learn how to move faster,” he said.
“They seem to be spending less time running new ideas past endless focus groups, and putting more effort into testing ideas in the market. I think you could make the argument that big companies are still not as innovative and nimble as small companies, but the difference in reaction time is decreasing."
As an example, AB InBev says it has cut its new product lead time from around 2 years down to 100 days.
"I also think large companies are trying to become a bit less risk-averse and a bit more creative," continued Rannekleiv. "Where in the past, ‘innovation’ in the large beverage companies seemed focused on a new flavored line extension for an established brand, they now seem to be willing to take a bit more risk.”
Successful new launches from in-house innovatoin include, for example, PepsiCo’s bubly; Mark Anthony Brand’s White Claw, and AB InBev’s Cacti.
The bar is raised for small players
However, this is not to say that beverage giants have completely lost interest in investing in smaller players - it's just the bar has been raised.
“Beverage companies appear to be pulling back on the acquisitions of smaller startups. In our view, this does not mean the days of acquiring small/craft brands have drawn to a close – more deals will get done.
"However, it does mean that beverage companies are being much more selective about which brands they acquire, how they will fit in their portfolio, and how they will support them.
"They have become much more demanding about scalability and growth prospects and more rigorous about where they place investments.”
Partnering with or acquiring startups can still make a lot of sense if the startup can provide something new or proprietary. So where are beverage giants likely to want to place their dollars? Areas that are likely to continue to attract investment include companies that have a truly innovative new product (Diageo taking a majority stake in Seedlip in 2019, for example) or have a particularly strong brand in a priority area (LVMH’s investment in Whistlepig or Pernod Ricard’s investment in ultra-premium rum brand La Hechicera, for example).
And another area that is likely to attract investment is new tech and new routes to market.
“Start-ups that can offer technology or know-how in building out new pathways to the consumers will often attract interest, such as Constellation’s acquisition of Empathy to develop their direct-to-consumer business, or CCEP’s investments in Koi and Teleretail to explore how on-demand delivery and self-driving technology might help transform the consumer experience,” said Rannekleiv.
Retailers are (increasingly) playing a key role
Retailers are playing a more and more dynamic role in the market, both in terms of demand for innovative products and- increasingly - in supply, according to Rabobank.
“They are becoming more aggressive in their private label innovations. Over the last couple of years retailers have definitely stepped up, in terms of the overall private label offering they have within beverages. We see it within alcohol a lot,” said Rannekleiv.
There was an increase in private label launches last year, as retailers saw an opportunity where the branded players were doing less, and they wanted to get some market share.
A few years ago the increase in competition for established brands came from small, innovative startups. Rabobank believes that moving forward, the increase in competition may come from retailers.
