How a Start-Up Can Succeed in a Mature Category
Published by David Spotts,
There are a lot of reasons not to try to break into the soda industry right now.
Soda, or Carbonated Soft Drinks (CSD), is dominated by huge multinationals like Coca Cola — only the most recognized consumer brand in the world. Their distribution systems make CSD items available in virtually every retail format, in every country in the world, and have cost efficiencies that emerging brands cannot achieve. At the same time, consumers have formed increasingly negative perceptions of soda, fueled by media attention about its negative impact on health. It is no surprise that the category is in a steady, multi-decade decline. With this backdrop, it's clear why very few new CSD brands have achieved success in the last twenty years.
And yet the positive attributes of the CSD category are attractive. CSD has immense scale — $74 billion in annual retail sales in the US alone — and soda is purchased by 96 percent of US households. If someone could figure out how to get skeptical consumers excited about a new brand, the upside could be tremendous.
I was one of those consumers. In 2000, I realized that despite living what I believed was a health-conscious lifestyle, I was consuming over 200 grams of added sugar per day through ostensibly healthy products like energy bars and juice smoothies. My wife and I eliminated sugar from our diet and became daily users of the natural sweetener stevia, occasionally using it to make homemade ginger ale. When I saw Zevia, a new zero calorie soda, on the shelf at my local Whole Foods, I knew the brand could be a game changer.
I had spent my career building emerging brands in the natural and organic consumer space, first leading sales and marketing for Kashi cereal, then founding SPINS, a market research firm for the natural products industry. I ran SPINS for eight years, tracking sales of over 300,000 natural packaged goods items for clients ranging from General Mills to startups, helping them understand sales and consumer trends in their categories. My time at both brands made clear that a healthy alternative's best chance for success lies in keeping the product familiar, which allows you to educate consumers quickly and cost-effectively. Most purchasing decisions in packaged goods are made at the shelf, so it is critical for shoppers to easily identify how a new product fits into their diet.
Zevia's flavors were familiar soda favorites, such as Cola, Ginger Ale and Lemon/Lime, not novel concoctions like Blueberry/Pomegranate/Acai. The packaging was a classic 12-ounce aluminum can and the price point, while premium at about $1.00 per can, was still accessible. The key differentiator from conventional diet soda was stevia, the sweetener.
Stevia is 200 times as sweet as sugar, but has no calories and no effect on blood sugar, so it offers the perfect alternative sweetener for those looking to avoid both sugar and artificial sweeteners. Though stevia was newer in the US, its global growth was explosive. Stevia had been grown and used for many years in its native South America before the FDA reclassified it from a "dietary supplement" to a "sweetener" in 2008. European, Latin American and Asian countries also have approved it.
Excited about the opportunity, I bought the brand in the fall of 2010, became CEO, and our team immediately invested significant resources into understanding who was buying Zevia, and why. I think our data-based approach can help any small start-up achieve a greater chance of success, even in a mature category.
First, we learned through data from a leading supermarket chain that a significant portion of consumers — over 30% — were buying multiple 6-packs of Zevia per shopping trip. Zevia was often a planned purchase, not an impulse buy. This led us to focus on distributing and merchandising the product on grocery shelves, instead of in refrigerated coolers like other successful brands such as Snapple and Vitamin Water. The result was a more cost-efficient distribution system, which avoided the resource-intensive teams of "feet on the street" servicing the product and shipped instead to centralized warehouses.
Second, we surveyed consumers to understand what was appealing about Zevia. Whereas our marketing initially focused on Zevia being 100% natural, we found that familiarity with the absence of negatives was the key driver. Soda is a category focused around enjoyment, yet consumers told us their enjoyment was tempered by what they viewed as "bad stuff" in the sodas they drank. We repositioned the brand as fun, accessible, and guilt-free — "The Smarter Soda."
We also learned that several key consumer groups were attracted to Zevia's promise of zero calories with no artificial sweeteners, most notably people with diabetes, those seeking to lose weight, and moms. We made moms our focus because they were more likely to share their discovery of Zevia with friends and family, more likely to make purchasing decisions for the household, and willing to spend more for healthy products.
Finally, we learned that customers who bought Zevia were making it an incremental purchase — adding to their total shopping bill, instead of substituting it for something else on their list. We made that a core part of our message to retailers, many of whom are disenchanted with the thin margins they make on traditional soda. Across a range of retail channels, intense competition has all but squeezed the profit out of the category; a store may generate a gross margin of 10 percent or less on conventional soft drinks, compared with 25 percent or more on upscale products like Zevia. Once they heard our research, more retailers were willing to stock our products, even if we didn't have the name recognition of the industry giants.
Over the past two years, we have aggressively grown the brand, becoming the leading soda brand in natural products stores like Whole Foods, then expanding into conventional supermarket chains such as Kroger and Safeway, followed by mass merchandisers like Target and other retail formats.
By definition, building an emerging brand is a high-risk proposition. We have mitigated those risks through careful planning, an iterative "test and learn" approach, and focused research. Economies of scale are clearly important — and we're headed there — but we believe that an authentic brand offering a compelling new solution can compete, and win, against category leaders.
