Beverage Business INSIGHTS
Published 90 X a year Vol 12, No 57 Jun 9, 2015
Publisher: Benj Steinman Editor: Gerry Khermouch Senior Editor: Jim Sullivan
Legal vet of hundreds of capital transactions for early-stage food and bevcos offered financing clinic at last week’s BevNet conference in NY, exhorting listeners to opt for convertible financing if they can in initial round and to go with LLC corporate structure.
At issue in presentation by Nick Giannuzzi, founder of The Giannuzzi Group, was how to build strong foundation for your co without giving away rights inadvertently, getting overly diluted or finding yourself evicted from your own co. “It’s too late to think about this when you’re about to go down to 49% with the next round,” he warned. Of course, cos operating in desperate straits may have no choice but to give away rights, and even successful ones can expect plenty of dark days, he warned. “Every single entrepreneur who gets there (to exit) has to suffer,” he declared.
Giannuzzi is familiar figure in bevs, running 10-lawyer firm based in NY’s Meatpacking District that over past 10 years has focused exclusively on food/bevcos – 180 clients in total. This year co will likely do 120-130 rounds of financing. First client, he reminded audience, back when he was half the staff, was Vitaminwater marketer Glaceau. (Nick’s also investor in restaurants like STK and Bagatelle via The One Group, where he’s board member.)
Given need for feet on street, sampling, etc, bevs is capital-intensive biz in which founders generally must undertake a round of financing virtually every year unless they have a rich benefactor, Nick reminded. That constant demand is “ultimate challenge for the founder, because finding money is hard, finding people who believe in you is hard, finding people who believe in your concept is hard.” Even when you do, there are lotsa pitfalls to avoid.
First round, perhaps to raise $300K to $1 mil to fund first production run, typically goes friend-and-family route. Entrepreneurs confront 3 choices there. First, used often in tech sector, is convertible note round – say, $500K on terms where money loaned to co converts to next round of financing, generally at 20-25% discount. Advantage of convertible is “you don’t really have to deal with valuation, at a time your valuation is terrible because you haven’t sold anything yet . . . it’s one of the ways to kick that can down the road,” Giannuzzi offered. Some prospective investors reject convertible notes as way too speculative, he warned, but if anyone bites, it’s great. Failing that, founders should consider common equity round. To Nick, that’s much better choice than 3d option: preferred equity, which effectively gives investor downside protection. That means, if co needs to be sold at lower valuation, “they get their money back first.”
“My position is, if there is any way to do a convertible note on good terms, that can often be the right choice,” Nick exhorted. That flies in face of some lawyers’ view that, if you’re dealing with friends and family in first round, why not sell preferred? The trouble comes, Giannuzzi warned, when new investors want their round to be preferred, and superior to prior investors’. “Every time you give preferred, new investors say they want their B to be superior to A,” to point where, as rounds accumulate, “by time you’re done stacking all these preferred on top of each other, you have a board of 18 people and all kinds of blocking rights and other rights,” Nick said. “That’s why giving friends and family preferred sets a horrible precedent – I’ve almost never seen an exception to every other set of investors demanding preferred shares.” For those who go convertible note route, next round, maybe for $1 mil, is likely to involve common shares.
Problem with preferred is compounded in current climate where multinationals buy into promising cos earlier and earlier, “eating into rounds 4 or 5,” in turn pushing private-equity funds to start funding round 3 or round 2. That means you’re still small, untested co, not likely to get a great valuation, but now sophisticated funds are coming in writing $850K checks for 2 board seats, 16 blocking rights, preferred shares – all in round 2. That creates “really tough decision: Do you take the money at that cost?” Nick said he spends hours each day discussing issue with clients, but “it’s a person-for-person decision. Some of my founders will not be answerable to anyone, will fight for as long as they can to maintain full control of their company.” They’ll fight “like hell to get to round 4 or 5″ until a really great PE firm comes along with $10 mil and demands some concessions. This, of course, is for cos doing very well; otherwise, money may be hard to find on any terms.
Giannuzzi also waded into issue of fundamental corporate structure. Should you start out as corporation or limited liability co (LLC)? Tho in some industries it’s hard to find a buyer if you’re not incorporated, in food/bev “I’ve always advised clients to start as an LLC,” Nick offered. That offers 2 advantages: First, if you grow your co and instead of selling want to distribute your profits upward, you have a single layer of taxation vs corporation with 2 layers and “an absolute mess.” And 2d, LLC confers certain advantages with respect to retention of employees, consultants, celebrity investor/endorsers, etc. Unlike a corp, an LLC can award profits interest, rather than stock options, and recipients can get capital gains tax treatment. Of Giannuzzi Group’s 180 clients, probably 150-160 are LLCs. As for often-expressed fear that at some future time co will have to convert to corporate status, “in all our deals, only twice did we do a deal where somebody said you have to convert your LLC to a corporation,” Nick reassured.
Another issue pertains to mgmt control: derived from partnership law, not corporation law, LLC makes shareholders key, with general partner making all decision even if there are 100 limited partners, Giannuzzi said. Power can be put in a single person or, more likely, a mgmt board that decides everything. At start, agreement is put in place “that puts you in charge of your company – we call it our ‘god agreement,’” that all employees must sign acknowledging they have no rights at all. All other members are merely “along for the ride,” he said.
Technical aspects aside, Nick acknowledged during Q&A that it’s partly power game: “Are you hottest girl at the dance? You need to feel the market out . . . You need to be realistic with yourself.” As with another BevNet speaker, Sherbrooke Capital’s John Giannuzzi (BBI, Jun 4), Nick warned founders not to always reach for highest valuation possible. “That’s not always so smart. It’s better sometimes to bring it down a little bit to give away less rights,” he said. You may end up weighing several term sheets from prospective investors – the highest, say, at $27 mil valuation but demanding lots of rights. “Maybe the guy with the $20 million valuation will actually let you run your biz,” Nick suggested.
WAT-AAH!, one of the fastest-growing brands of functional bottled water, announced today a marketing and long-term equity partnership with pop superstar Ariana Grande. In her first endorsement deal, the multiplatinum recording artist will join WAT-AAH! as an equity holder and partner.
“Living a healthy lifestyle is so important to me, and this is one of the reasons I chose to partner with WAT-AAH!,” Ariana said. “My fans are my everything and, because of this, I could only endorse something I believe in. Also, I love drinking water and I want to inspire my fans to do the same. Now as a partner in the company, I am excited to share WAT-AAH! with everyone!”
Ariana will be the face of WAT-AAH!’s newest marketing strategy, “OWN YOUR FUTURE,” which highlights healthy hydration as a core part of empowering kids and teens to take charge of their health and future. The multi-million dollar advertising campaign will be handled by WAT-AAH!’s agency of record Berlin Cameron United, the former ad agency for Coca-Cola, VitaminWater and Dasani.
“Kids today respond to messages and people that are authentic and genuine. This is why we partnered with Ariana,” said Rose Cameron CEO/Founder of WAT-AAH!. “To us, Ariana perfectly symbolizes ‘OWN YOUR FUTURE.’ She is entirely her own creation. Her determination, creativity, business savvy, and mastery of social media has landed her at the top of her profession inspiring millions of kids and teens worldwide.”
WAT-AAH! is a line of functional water available in both still and sparkling varieties and is free of sugar or sweeteners. Since its founding in 2008, WAT-AAH! has experienced a compound average annual growth rate of over 220 percent. The brand’s success can be attributed to its timely mission of championing children’s health, including the annual Move Your Body initiative and Taking Back the Streets campaign, both in support of the First Lady Michelle Obama’s health agenda.
Editors’ Note: Photos are available via the Associated Press Photo Network and on the Internet at Feature Photo Service’s link through http://www.newscom.com
WAT-AAH! is a brand of water targeted to kids and teens. Since 2008, WAT-AAH!’s mission has been to make water undeniably cool and desirable among kids and teens. With its iconic logo, a boy screaming “Drink WAT-AAH!,” the brand has successfully competed against sodas and sugary drinks for kids’ attention and is leading them to embrace a healthy and active lifestyle. WAT-AAH! has been successful in the marketplace, ranking among the top 10 in its category. WAT-AAH! continues to reach millions of kids and teens through its distribution in schools and major supermarkets including: Kroger and its banners (Dillons, Fred Meyer, Fry’s, King Soopers, QFC, Ralph’s and Smith’s), Walmart Neighborhood Markets, AHOLD (Stop & Shop, Giant-Landover, Giant-Carlisle and Martin’s), Delhaize America (Hannaford and Sweetbay), Wegmans, Harris Teeter, Ingles, ACME, Shaw’s, Giant Eagle, Albertsons, ShopRite, Whole Foods Markets and many others. To learn more, visit wat-aah.com.
ABOUT ARIANA GRANDE:
ARIANA GRANDE first landed at the top with her first full-length album for Republic Records, Yours Truly, which included the double-platinum hit “The Way.” The album debuted at #1 on the Billboard Top 200, Billboard Digital Albums Chart, and iTunes Overall Albums Chart. The first single from her sophomore album, “Problem” featuring Iggy Azalea, saw her become the “youngest woman to debut with over 400K sold first-week”. The platinum smash debuted at #1 in 65 countries, topping the iTunes Overall Top Songs and Pop Songs charts for four weeks. In 2014, she also became the first woman in history and the first artist since Michael Jackson to simultaneously have three songs in the Top 6 of the Digital Songs Chart. Grande has also been named “Best New Artist” at the American Music Awards in 2013, “Favorite Breakout Artist” at the People’s Choice Awards 2014, the “Young Influencer Award” at the iHeartRadio Music Awards, as well as “Choice Female Artist” and “Choice Single” for “Problem” at the 2014 Teen Choice Awards.
By: Jeffrey Klineman
Premium product. It’s an argument that has worked for craft beer, high-pressure processed juices, vodka, bottled water and RTD teas.
It’s worked for Starbucks over your corner coffee shop, for Cape Cod Potato Chips over Lay’s, and it’s starting to work for Shake Shack as an alternative to McDonald’s as well.
Why can’t it work for sports drinks?
That’s the argument that the renowned BodyArmor team – primarily Fuze founder Lance Collins and Vitaminwater co-founder Mike Repole – has begun making after nearly three years of detours through the back roads of the beverage cooler. Now, the company is urging consumers to use BodyArmor to “Upgrade Your Sports Drink,” according to its new tagline.
“They upgrade all sports equipment,” says Collins. “Uniforms, equipment, sneakers, pads, bats. They upgrade compression shirts, gloves, all that stuff has changed, but sports drinks haven’t. We feel like isotonic consumers have been duped and they’re still drinking antiquated products at every turn.”
In other words, Gatorade (and its long-beleaguered runner up, Powerade) has had its run over the past 40 years. The BodyArmor argument is that there are better ingredients and branding that will appeal to consumers and better (for retailers, anyway) pricing that can be brought to the table.
Hence, after three years of fighting to be called something other than a sports drink, Collins and Repole are redefining their product – as, well, a sports drink, but a premium one. They are betting prodigious sums that athletes will look at BodyArmor as a better, more natural version, more functional version of Gatorade, and pay about $1.99 for a functional indulgence in the same way that a beer lover might trade up to a Sam Adams over a Budweiser or a juice lover might have gone for a Naked O.J. over a Minute Maid.
It’s a shift in strategy that seems to resonate, however late in the game it may have arrived.
“It’s a relevant tagline,” notes Ken Sadowsky, a beverage investor who backed Repole as a Vitaminwater distributor and a director at Glaceau, but did not invest in BodyArmor. “There’s an opportunity for a better sports drink.”
While there are other products that are looking in that direction – Kill Cliff, which has used an internet-based sales model to draw investment from Sherbrooke Capital, for example, while GNC licensed a high-middle-low strategy to Shadow Beverage not long ago – such an opportunity would have been unimaginable about a year ago, when BodyArmor was flailing about for an identity.
Repole says he knows that Gatorade drinkers will be ready to move to a new brand because he was able to attract some of them with Vitaminwater, even as that brand was working in white space.
“The one brand that Vitaminwater got users from while not going after them directly was Gatorade,” he says.
But if Vitaminwater drew from category invention, for BodyArmor, its early years of avoiding the sports drink category will always be questioned. After all, the brand was, at base, an isotonic, albeit one that trumpets its potassium content (largely derived from a 10 percent coconut water base) over the sodium, and one that trumpeted a mix of amino acids, antioxidants, tea, and other ingredients as giving it extra functionality.
Even early on, athletes were considered a key to the marketing mix, particularly after Repole signed on as an investor in early 2012, about nine months after the product’s first road show, during the spring of 2011. But despite the investors’ deep pockets (they’ve expressed a willingness to spend $100 million to make it work) and longstanding relationships with distributors, many of whom they had made rich through their previous enterprises, despite the signing of high profile endorsers – and there were many, including early signups like outfielder Mike Trout and tight end Rob Gronkowski – consumers struggled to make sense of the brand.
“It’s turned several corners,” says Jerry Reda, the COO of Big Geyser, which distributes the product in New York. “Before, it was too complicated. Nobody knew what a ‘super drink’ was.”
Whereas previously the company tried plays suggesting it was for the “everyday athlete” like a stockbroker, now, it’s for the elite athlete, a move it codified by selling a 10 percent stake to basketball star Kobe Bryant.
With the refined message, “It’s the easiest sell in the world against Gatorade,” Reda says. At a gym or an athletic event – or at a presentation to retailers, “all you have to do is tell the guys, do you really want to put all of those chemicals, artificial flavors, that sodium into your body?”
Recently, the brand is starting to move in key wholesale accounts like Big Geyser and others, which have confirmed assertions by Repole and Collins that BodyArmor sales have doubled – or more – over the previous year. According to one IRI reading, the brand had sold $25 million at retail as of May – right before the key summer season for sports drinks.
That might not seem like much when compared with Gatorade’s $5 billion stranglehold on the category, but already BodyArmor is the third best-selling isotonic, and it’s only sold in 25 states. There are 25 more to go, and the brand is now in a position where it has worked out many of its kinks.
And at the start, there were kinks galore.
Early on, Collins’ and Repole’s ballyhooed return to the beverage business was turning into a bally-flop. The brand wasn’t selling, it tasted lousy, and massive amounts of free product were being given away to entice retailers to carry it and consumers to try it.
“If you could make mistakes, they made every one,” says Kevin Watterson, the president of G. Housen, a distributor in Vermont and New Hampshire that was one of the first to take the product. He lists the flaws: the product was way overpriced, coming in at between $2.49 and $2.99 a bottle; the bottle itself had an overwrap that meant the label had to be torn to get it open. The extra ingredients, Watterson said, meant “you had trouble swallowing it.”
In the past two years, several key changes have happened to the product, and to the focus, that seem to have righted the ship: the flavors and SKUs have been rationalized by the removal of extraneous ingredients that were holding back the taste; the bottle itself has been improved – and can now be opened without the assistance of either a pocketknife or a burst of rage, and the price has come down to a suggested $1.99, with 2-for-$3 and 4-for-$5 deep discounts designed to bring consumers on board.
Collins argues that the technical problems, while the source of much snickering within the trade, were the same kinds of developmental speed bumps that are faced by entrepreneurial products that are introduced under a less-powerful microscope than the one the brand’s famous owners attracted.
“When you start a brand, you never know its DNA exactly,” Collins said. “When you launch it, and you put it in retailers, you’re very cognizant of who your customer is through demographics, sampling, and social media, eventually you get an idea of who is drinking your product and who the target is.”
The brand started to turn the corner when Repole came on board, according to Collins. His deep pockets and strategic vision have started to take the lead in terms of the company’s marketing and sales strategy.
“Mike Repole totally opened my eyes as to where we should position it in the store,” Collins said. “I’m doing a lot of the formulas and the innovation, and Mike does sales and marketing and social media and athlete outreach. We have to agree on most stuff, but Michael to me is a marketing genius.”
“I met him when he was 22 years old, and I was his mentor,” he adds. “He’s now become mine.”
After selling off one post-Vitaminwater investment, Pirate’s Booty, and shutting down another one, the restaurant line Energy Kitchen, the ever-pugnacious Repole sounds like he’s energized by finally having a target to take down.
“In the sports drinks category, the number one player has been the same player since 1965,” Repole said. “There’s only two players in the category and nobody has challenged them head-to-head. If I was going to come back in, it was going to have to be for an unbelievable opportunity.”
As with Vitaminwater, many of the brand’s sales are going through channels that might not show up on IRI data, through those up-and-down the street accounts, the small convenience stores and delis that were at the center of the brand’s growth.
That’s the heart of Repole’s strategy for BodyArmor as well. Outside of New York, the brand has avoided most grocery accounts to date to avoid being lined up against deeply discounted Gatorade and PowerAde shelf sets. Instead, it’s shooting for convenience, where a six-SKU shelf can be influential and promotions are for smaller quantities. As it spreads out, it looks to natural sets for grocery – at least initially – and it’s already in the middle of a Costco road show as well.
“We’re picking our spots in convenience now,” Watterson said. “Places that can sell a $1.99 isotonic. And colleges, high schools, and the ‘bull ring’ around them have been our number-one focus for the past eight months.”
The change in category focus by the leadership team started about eight months ago, when Collins filed to trademark the phrase “Upgrade Your Sports Drink.” The brand started focusing on isotonic shelves in convenience, making a youth-focused argument, but one that also included gatekeepers to the family pantry, as well.
Perhaps not coincidentally, shortly after Christmas, the company settled a lawsuit with sports apparel maker Under Armour, a company that has also succeeded by offering consumers a product that sells at a premium to another iconic-but-long-in-the-tooth brand associated with Michael Jordan, Nike.
In March, the brand announced the Bryant investment – one that gave it increased visibility and access to a slightly older generation of players and fans than the ones that will be captured by the rest of its public faces, who include rising stars like James Harden, Richard Sherman, Kevin Love, Buster Posey and Andrew Luck.
“The Peyton Mannings, the Derek Jeters, Gatorade is all they know,” Repole says. “The younger athletes, they not only know more about things like Gatorade and Powerade, they ask questions about what they put in their bodies, whether it’s helping them.”
Standing in the way is one of the great marketing and product successes of the past half-century. Gatorade controls the leagues – it has been the official sports drink of the NBA since 1984, of the NFL, Major League Baseball, the NHL, you name it. It gave Bill Parcells a shower in 1985. It encouraged the world to “Be Like Mike” in 1991.
“Gatorade is the 600 lb. gorilla,” Sadowsky said. “Even if it was outed as not being that good for you, it wouldn’t be outed in the way that people are looking at [CSDs] right now.”
Still, if you’re asking for a way to ‘out’ the old school of isotonic, you couldn’t ask for a better opportunity than the one that was handed to BodyArmor in June, during the NBA finals. Led by Bryant, BodyArmor joined Gatorade in briefly “trolling” cramped superstar LeBron James as he grimaced on the sidelines of the first game, unable to help his Miami Heat teammates avoid a loss.
Gatorade’s social media team had already ridden donuts on Powerade’s lawn in telling the world that “the person cramping wasn’t our client. Our athletes can take the heat.”
But as Gatorade fired away at Powerade – it apologized the next day – BodyArmor’s social media team posted a picture of its own that seemed to depict James drinking a Gatorade. Bryant then put up a picture of BodyArmor on an Instragram social media feed and unleashed a rant:
It was quite a broadside from a brand that had, until recently, spent so much of its existence telling the world – and this magazine – that it wasn’t even a sports drink, no way, it was something called a SuperDrink.
But a strategy has emerged. Of course, BodyArmor has found its focus in the task of trying to take on what is arguably the strongest brand this side of Coke. The opportunity? That the upgrade trend and the healthier ingredient trend have not yet converged on the sports drink category, and with a disciplined guerilla sales effort, their combination just might work to establish a major new brand.
It’s David vs. Goliath, maybe, but David’s got a lot of money in his sling.
“We’ve spent a lot of money,” Collins said. “When we were presenting to distributors and we had $25 million in the pocket, we said we were going to have to raise another $25 million. But Gatorade spends more money on the NFL than we will in three, four, five years – and that’s just one customer. Yeah, we’re spending, but we’ve got to be more nimble, we have to be faster. How do you devour a whale? One bite at a time.”