New age dawns as soda giants go alternative

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PepsiCo's purchase of SoBe ushers in a pitched beverage battle as soft-drink giants seeking alternative beverage allies find a dwindling field of viable candidates.

Two of the most attractive are being snapped up: SoBe marketer South Beach Beverage Co. by Pepsi and Snapple Beverage Group by Cadbury/Schweppes. Coca-Cola Co. also had been in the bidding battle for SoBe, which went for an estimated $370 million.

The rush toward alternative beverages comes as carbonated soft-drink sales flattened at $58 billion last year. By contrast, sports-drink sales jumped 13% to $2.5 billion, juices and juice drinks sales rose 10% to $5.2 billion, and ready-to-drink tea sales were up 9% to $3.5 billion, according to Beverage Digest.

"I think we will continue to see moderate growth in soft drinks. But for at least some years to come, we will see dramatic growth in bottled water and these premium non-carb beverages," said John Sicher, editor and publisher of Beverage Digest.

What remains to be seen is how well the big corporations will be able to absorb their scrappy competitors. None is anxious to repeat the mistake of Quaker Oats Co., which owned Snapple in the mid-1990s. Cadbury-Schweppes and Pepsi are hoping to avoid problems by operating their new acquisitions as separate units. .But beverage experts are not certain.

"Just because they've bought [SoBe] doesn't mean they can integrate it," a longtime Pepsi competitor said. "The challenge for Pepsi is making sure that SoBe can get delivered and displayed with the same degree" of success and enthusiasm as it did under its prior owner. He added, "historically, that's been difficult [for large companies] to do."

The quintessential example is Quaker, which bought Snapple for $1.76 billion in 1994 and tried to assimilate the brand into its more staid portfolio, which included Gatorade. The effort to mainstream Snapple ultimately failed, and it was sold less than three years later to Triarc Cos. for $300 million. At Triarc, it was Mike Weinstein, now CEO of Snapple Beverage Group, who managed to restore the drink's distributor network, which had been marginalized under Quaker's ownership."We realized we had to do something really quickly to stem the decline," he said. "We identified some of the areas that we could demonstrate superiority over the past 21/2 years -- new products, creative advertisement and distributor relations."


Back came Wendy Kaufman, the Snapple pitch lady, as well as radio spokesmen Rush Limbaugh and Howard Stern. Mr. Weinstein's team added new products and re-energized beleaguered distributors who had halted Snapple investments when it looked like Quaker would marginalize them.

In the first half of 1997, Snapple's sales slid about 20%. By the end of the year, they'd flattened. But the next, they'd grown 7% -- the first increase since record-setting 1994.

"Mike Weinstein did a fantastic job in regaining trust of the entire distributor network," said Snapple distributor Tony Haralambos, president of Haralambos Beverage Co. in City of Industry, Calif. "He was the guy that made everything happen for Snapple."

Successful enough that even with a $1.45 billion price tag the company became an attractive purchase for Cadbury in September. John Brock, chief operating officer of Cadbury, said "The acquisition of Snapple puts us clearly in the [premium new age beverages segment]. Snapple is the leading brand."

Quaker continues to be a powerful lesson for the No. 2 and No. 3 soft-drink companies, analysts and observers said.

"There are some really basic differences between Pepsi and Cadbury [and Quaker]. They are both very experienced at selling beverages through direct store delivery" vs. a broker system dealing with chain stores and other mass distributors. "Quaker was not," one executive said. "I also think the Quaker-Snapple debacle was a dramatic lesson and will certainly be one that Pepsi and Cadbury keep in mind to ensure the success of their acquisitions."

Mr. Brock said maintaining the current distribution network was one reason Snapple would not be folded into Mott's North America, its juice and applesauce division largely dependent on grocery store business. "We've studied very carefully what Quaker did to understand the mistakes they made," he said. "We don't plan to repeat them."

Some Snapple distributors, however, remain leery of the ownership change, fearful Cadbury will try to shuffle them aside as Quaker did. "We are ill at ease as to what the future may hold, but our hope is that nobody makes the same mistake that Quaker made," a Snapple distributor said. "People don't want history to repeat itself with Snapple as it relates to Cadbury or, I image, to SoBe."


A Pepsi spokesman said the company wants to preserve "SoBe's creative, entrepreneurial culture -- providing [Pepsi's] experience without getting in the way. The key is we've got to give them the freedom and autonomy to sustain their unique culture." SoBe now has no TV ads and no agency of record. It primarily has used underground marketing. Its only ad agency affiliation is with media buying agency Performance Media, Wilton, Conn.

Observers such as Tom Pirko, presidency of beverage consultancy Bevmark, said now that Cadbury and Pepsi have stepped into the alternative beverage category, marketing dollars could flow more freely.

"They want to maintain the integrity of the brand, but they have major resources behind them, so steam should pick up. We should see a lot more advertisements, a lot more promotions. Certainly, we will see a much bigger push in the mass market," he said.


Mr. Brock said he expected that under Cadbury ownership, Snapple would see 4% to 6% annual growth. He said ad spending likely would not increase substantially because the company did not want to market Snapple mainstream.

"Mike and his team have found the right combination of media, promotions and other marketing vehicles -- some of which are very quirky," he said. Snapple advertises on national cable and spot TV and radio as well as using wild postings. Deutsch, New York, is its agency of record. According to Competitive Media Reporting, Snapple was supported by $8 million in measured media in 1999. For the first six months of 2000, Snapple received $6 million in support.

While Cadbury and Pepsi have deeper pockets than the companies they acquired -- and could increase marketing spending -- they risk brand suicide by turning the teen-oriented alternative beverages into something grandmothers would sip, observers said. "One challenge is to be true to the brand. How do you spend money on a brand without compromising its original position," said Gary Hempill, VP of Beverage Marketing Corp.

Although many observers question the longevity of alternative beverages, some Coca-Cola bottlers were disappointed with Pepsi's surprise announcement that it had won SoBe. An executive familiar with Coca-Cola, however, said that even though the world's No. 1 soft-drink company didn't go through with the SoBe deal, "they're plenty busy" investigating other options. Coca-Cola, which already markets Frutopia, Powerade sports drink and Dasani water, is testing a fountain coffee drink, launching regionally an energy drink, KMX. It's also looking at breakfast drinks. But Mr. Pirko questioned the success of Coca-Cola's efforts.


"In this rapidly growing category, two leaders have just been snapped up leaving Coke flatfooted. It doesn't have a great record in terms of creating new brands from scratch," he said. "The brands it has launched haven't set the world on fire. [Mr. Pibb] didn't take down Dr Pepper. It didn't take down Squirt."

A spokesman for Coca-Cola, which bid with investment company J.W. Childs Associates, said, "We concluded that the price paid by our competitor considerably exceeds the value of those brands to our company and our [bottling] system. This does not mean that we will forego competing in that beverage category. To the contrary, we are committed to competing in all non-alcoholic beverage categories, but we do so only where we can achieve a return on our investment."

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