SOARING TO NEW HEIGHTS: 2015 s BREAKOUT BRANDS

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1 SOARING TO NEW HEIGHTS: 2015 s BREAKOUT BRANDS

2 SOARING TO NEW HEIGHTS: 2015 s BREAKOUT BRANDS $100M in Y1 sales. This lofty goal has been uttered countless times in the hallways, cubicles, and strategic planning meetings of today s packaged food and beverage companies. Daunting as this goal may seem to many emerging leaders, we cannot discount the importance of demonstrating to investors that a company is capable of producing rapid organic growth, not just capable of rapidly acquiring it. By sneaking up on the market, under the radar, premium businesses often are market disruptors, capable of overturning categories or launching new segments seemingly out of nowhere. The majority of these premium businesses have traditionally begun in the natural channel and then have spread deliberately and steadily into conventional channels. While each brand ultimately travels on its own path in the market, most innovation launches fit well onto one of the innovation growth-curve archetypes in today s food and beverage marketplace. In 2013, we wrote about the emergence of a unique growth curve in the packaged food and beverage sector. We call it the Skate Ramp (Fig. 1). It is sneaky. It requires patience and persistence. But it works in the end. Figure 1. Skate Ramp Innovation Growth Curve It was the Skate Ramp that launched Chobani to stardom as many in the industry sat back and wondered: how could no one have seen this coming? The answer is simple: because, back in 2006, CPG companies weren t looking at the growth dynamics of early-stage food companies selling below $25M. They left this to VC/PE firms. Why? There are two basic reasons: The gold standard launch model for packaged food and beverage companies orients to a swift, high ACV market share grab-and-hold, whether large or small. The focus is on attaining large Y1 revenues through line extensions and then sustaining stable velocities that maintain shelf presence with customers. It is a model designed for incremental innovations easily copied by a competitor. In this model, a plateau or a mildly inclining slope (i.e., low single-digit %) are considered successful. The emphasis is on scale, not growth. Exponential growth from low initial scale requires a level of sneakiness and patience inimical to the core management culture of most major CPG firms. 2016, The Hartman Group, Inc. All rights reserved. 2

3 We believe that the entrenched brand-driven go-to-market launch model just described has lulled the industry into complacency in the face of the continuing threat of product-driven early-stage companies sneaking up on the market via the Skate Ramp. Here are three brand examples (illustrative purposes only) that meet our criteria, based on their performance through mid These are the top performers by dollar growth in each category present in our breakout brand analysis. 1 Búcha Kombucha $2.2M 353% CAGR Unit sales 52 week periods ending Búcha kombucha is the seventh largest brand (by $ in xaoc) of the kombucha category, which has grown from $5M in 2012 to $31M in The brand provides products with high-quality organic ingredients with emerging flavors. The brand further sets itself apart from other kombucha brands by having much less of a vinegar tang, putting it in a unique position of being more accessible to the sweet-loving US palate while still providing non-traditional flavors and negligible sugar/calorie content. Additionally, its feminine, bright, flavor-focused packaging is far less medicinal in nature compared to other kombucha brands, such as the more masculine, dark, wide-shouldered bottle of Brew Dr.* The potential effect on the shelf is that búcha presents a product whose flavor is the primary focus, and health and wellness is secondary, though just as potent as competitors. *Brew Dr. is also amongst 2015 s breakout brands. It is comparable in dollar size to búcha in the mainstream marketplace but had slightly softer growth in the past four years. Natural/specialty data would be needed to get the full comparison between these two kombucha brands. 1 We define breakout brands as brands a) selling between $1M and $100M that b) have constant YoY unit growth and c) sustained strong shelf velocities within low levels of distribution (i.e., experience strong, organic growth). Data cited throughout is based on xaoc AC Nielsen sales data, week ending July 4, 2015; all analysis is by The Hartman Group. Annual revenues cited here do not include natural/specialty channel sales and represent less than actual total annual revenue for each brand. 2 AC Nielsen, xaoc 52 week ending July 4, Hartman Analysis. 2016, The Hartman Group, Inc. All rights reserved. 3

4 Beanfields Fever-Tree $1.8M 153% CAGR Unit Sales 52 week periods ending Beanfields is an excellent example of the continually expanding alternative-carb chip category. In essence, Beanfields is the contemporary urban version of Doritos, but it has the potential to be contextualized as a separate recognizable food product. It advertises a clever span of key ingredients, such as a progressive macronutrient position of having minimal carbohydrates, moderate fat content and significant protein content all because of the inherent content of the snacks and not through processed additives. The other attributes present include fiber content and non-gmo as well as gluten- and corn-free. However, much like búcha, Beanfields hedges against the potential trail downside of its emerging attributes with something more palatable: traditional, well-known flavors that you could find even from Doritos. Snacks have grown 12% from 2012 to 2015, but the whole fruit/veggie chip category is doing far better, having grown 53% over the same period. 3 Similar brands that are also on the breakout brand list include Way Better, Late July and Calbee. $8.1M 161% CAGR Unit Sales 52 week periods ending Alongside the gin renaissance, this UK brand is renovating the worn-out category of tonic water. A few other brands are doing something similar, such as Q Drinks and others present in the natural/ specialty channel, but Fever-Tree is the only one of the category amongst the breakout brands of The generational tendency to reject the libations of their parents has set gin up for a comeback, as enough time has elapsed for parental stigma to fade. In the US, gin is seeing a premiumization of the category where premium gins are growing while non-premium and legacy brands are declining. A stroll down Whole Foods alcohol section reveals multiple local gins. Fever-Tree has reinvented tonic water by introducing varietal quinine, which shifts the focus of the product back to the botanical roots of the category. By adding these premium and natural ingredients, Fever-Tree is selling a premium experience where consumers are encouraged to trade up in both the alcohol and the mixer used. 3 Whole fruit/veggie chip: AC Nielsen, xaoc 52 week ending July Hartman Analysis. Snacks: Euromonitor, accessed December Hartman Analysis of sweet and savory snacks. 2016, The Hartman Group, Inc. All rights reserved. 4

5 Brands like these matter because they represent a growing threat posed by the upmarket food/beverage ecosystem in the US. The threat is not simply about a loss of $ market share. It is about steadily redefining what mainstream quality standards will become in decades to come. Brands like these are increasingly backed by venture capitalists, private equity, seasoned natural foods entrepreneurs and former CPG executives as well as by savvy merchandisers at national and regional retailers. In other words, it is an experienced, diverse group of stakeholders, not just some fringe consumers working in rented community kitchens. We are not predicting all these brands will remain on the Skate Ramp. Sometimes, brands do fall off either as they tap out demand or because of go-to-market errors. Nevertheless, their current success is tied to very clear symbolic attributes on the rise in modern food culture. ABOUT THE HARTMAN GROUP For over 25 years, The Hartman Group has been a recognized thought leader on demand-side trends in the food industry. We are 100 percent focused on the food and beverage marketplace. Our expertise ranges from how the smallest nuances of product design affect your product s ability to grow to devising portfolio strategies that maximize sustainable, demand-led growth. We have advised some of the world s largest food and beverage companies on issues of portfolio management, brand renovation, consumer insights and innovation. Our approach is always highly customized to each client s strategic interests and corporate culture. We never force-fit stock solutions, as we realize there are many paths to growth. We look forward to helping you find yours. The Hartman Group, Inc Richards Road, ste. 200 Bellevue, WA O F , The Hartman Group, Inc. All rights reserved. 5