SPECIAL REPORT: Maintaining Authenticity When Purchasing Fast-Growing Brands

05 Dec 2016 --- PepsiCo and Dr Pepper Snapple have both recently made significant purchases of fast-growing brands that sell healthier drinks but observers believe the two drinks giants could become unstuck if they tamper with their new booty. Acquisitions are always fraught with difficulty – whether it be integrating new staff; maintaining financial pledges promised to shareholders or potential culture clashes – and PepsiCo’s purchase of KeVita for around $200m and Dr Pepper Snapple’s $1.7bn purchase of Bai Brands could throw up potential hazards.

Speaking to FoodIngredientsFirst, Andy Nairn, Founding Partner of advertising agency Lucky Generals, said that PepsiCo would be “wise” not to ditch what has made keVita a success in the first place.

He said: “This kind of thing tends to come down to the post-purchase approach of the brand's new owners. If they are wise, they will understand that the brand's perceived authenticity is one of the things that makes it special (presumably that's one of the reasons they're acquiring it in the first place).”

“So they will take care not to kill the golden goose and focus on translating its appeal onto a bigger stage, instead. Consumers care more about behavior than ownership so as long as PepsiCo act well, they should be OK."

California-based KeVita makes more than 20 flavors of probiotic drinks, which are certified organic, gluten-free, non-GMO and vegan, and fermented tea beverage kombucha.

Its portfolio of drinks has between five and 45 calories and most of its flavors have no sugar but are sweetened with stevia.

For PepsiCo, the acquisition will clearly tap into the long-standing trend of consumers wanting healthier drinks (as well as help bolster PepsiCo's high-profile pledge to ensure that two-thirds of its global beverage volume contains 100 calories or fewer from added sugar, per 12-oz serving by 2025), but there is a clear disconnect between the two companies which could jar with some consumers.

KeVita is a company which wears its health credentials on its sleeves and is being acquired by PepsiCo, a company whose staple products are soda pop and potato chips and is a punchbag for health campaigners, who argue it is the cause of rising obesity and other health concerns.

However, PepsiCo has made it clear that keVita will operate as a separate entity and carry on making its drinks in California (it will operate within PepsiCo’s premium nutrition business, which also includes juice smoothie brand Naked Juice and juice maker IZZE).

But there is little doubt that PepsiCo – which previously bought a stake in KeVita in 2013 – will have some involvement in its new purchase, not least using its extensive distribution network to push the brand’s access to retail markets.

KeVita CEO Bill Moses said: “Joining the PepsiCo family will give us an opportunity to extend KeVita's trend-forward beverages to a broader audience, while staying committed to our core values." "We're looking forward to more consumers experiencing the KeVita brand and to leveraging PepsiCo's marketing and distribution capabilities."

Observers point out that the deal (like the Dr Pepper Snapple one) is reminiscent of Coca-Cola’s purchase of UK smoothie maker Innocent, a deal which saw a corporate leviathan purchasing a stake in 2009 then full ownership in 2013 of a funky upstart which was accused of selling out on its ethical ideals for cash.

While the incongruity between PepsiCo and KeVita is not quite as pronounced, as Narin points out: “This deal is very reminiscent of Coca Cola's acquisition of Innocent Smoothies. At the time, there was much angst about whether this would damage the brand's credibility, but there seems to have been little negative impact since then.”

Coca-Cola’s acquisition of Innocent did indeed attract many negative headlines, but it weathered the storm partly through keeping an arms’ length relationship with Innocent and partly through adhering to Innocent’s ethical ideals, such as its promise to give 10 percent of profits to charity.

While PepsiCo, under chief executive Indra Nooyi, has largely been successful in its acquisitions, its purchases over the years have not always been without problems.

For instance, after buying UK smoothie-maker PJ Smoothies in 2005, it then repositioned the brand, slashed its price, before scrapping the brand altogether to focus on its more established Tropicana brand to front its attack into the smoothie market and take on, amongst others, Innocent.

While the failure of PJ Smoothies was attributed to rising costs of raw ingredients and flagging sales, there is also an argument that PepsiCo overly tinkered with the brand, a repeat of which it is likely to want to avoid with KeVita.

Acquiring KeVita outright marks a departure for PepsiCo, which tends to make investments in startups but is cautious about buying startups outright as it believes such businesses can be overpriced.

Speaking to The Street earlier this year, PepsiCo Chief Financial Officer Hugh Johnston said: “The truth is, we look at almost everything that’s out there, but obviously we buy very, very few things.”

Speaking this year, Nooyi said: "We have yet to find that gem of a company – there is nothing out there at the moment.”

The PJ Smoothies acquisition aside, PepsiCo has a history of largely making a success of acquisitions, albeit many of these have been bigger in value than the KeVita deal.

Along with its deal with snack maker Frito Lay in 1963, there has also been the purchase of Tropicana 18 years ago for $3.3bn; Quaker Oats for $13.5bn in 2000 and, more recently, Russian dairy products and fruit-juice maker Wimm-Bill-Dann for about $5.4 billion in 2010.

Dr Pepper Snapple, meanwhile, will be confronted with similar challenges to PepsiCo, whether it be keeping staff happy or ensuring that it does not tinker with a brand which has proved a big hit in the US in just seven years since its inception.

Like PepsiCo’s purchase of KeVita, by buying Bai it lessens Dr Pepper Snapple’s reliance on traditional sodas, which account for around 80 percent of its yearly sales.

Bai Brands, which counts singer Justin Timberlake as an investor, promotes its drinks as containing five calories, antioxidants and no artificial sweeteners.

Its portfolio of drinks span water, fizzy drinks, coconut water and premium ready-to-drink teas, and its brands includes Bai, Bai Bubbles and Cocofusion.

Dr Pepper Snapple, whose brands include Dr Pepper soda, A&W root beer and Canada Dry ginger sales, said it expects Bai to make around $425m in sales in 2017.

Similar to PepsiCo, buying Bai Brands marks a strategy shift for Dr Pepper Snapple, which instead of making acquisitions has focused on growing the portfolio of brands that it distributed but doesn’t own, such as Vita coconut water and Fiji bottled water.

The two companies had already been working together, with Dr Pepper Snapple becoming an investor in Bai Brands last year and has been a distribution partner of Bai's.

Yet being acquired is a whole different ball game, a fact that Bai Brands fonder Ben Weiss is acutely aware of .

He said: “The platform couldn’t get everywhere it was supposed to go unless it was wholly owned,” he said. But it’s a delicate balance — the brand’s own development process had required independence, while access to the DPSG network had given it the opportunity to prove its value to the system.”

While both PepsiCo and Dr Pepper Snapple are shifting their portfolios to keep up with changing consumer tastes, they will be minded not to interfere too much with these two companies they have acquired.

Both KeVita and Bai Brands have built their brands on the back of being a counterpoint to large corporate giants such as PepsiCo and Dr Pepper Snapple: consumers like them partly because theyare cool, funky, relevant and independent. By being acquired, they have lost their independence, it remains to be seen whether they can remain cool, funky and relevant under their new owners.

By John Reynolds

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