Coke learns big lessons from small startups

FoodBusinessNews

by Monica Watrous

Coca-Cola’s V.E.B. unit has invested in and partnered with such brands as Honest Tea, fairlife ultra-filtered milk and Suja Juice.

ANAHEIM, CALIF. — Nearly a decade ago, the Coca-Cola Co. found itself at a crossroads. The Atlanta-based beverage company, along with the rest of the carbonated soft drink category, had come under fire for the negative health consequences of sugar consumption. That is when the company launched its Venturing and Emerging Brands (V.E.B.) unit to identify and partner with disruptive startups in the beverage category.

“When we started V.E.B. in 2007, we certainly were challenged on innovation and finding new growth in areas that were unfamiliar to us,” said  Matthew Mitchell, vice-president of portfolio strategy and ventures for V.E.B., during a March 11 panel discussion at Natural Products Expo West in Anaheim. “We talk about acquisitions and deals, but for us this was about behaving in a relationship. We knew that this was important for us to go out and not only buy brands but to invest in people because they were helping us change that dialogue.”

Coca-Cola has since invested in and partnered with such brands as Honest Tea, Suja Juice, Zico coconut water and fairlife ultra-filtered milk. Mr. Mitchell said the missions and values of the brands have influenced Coca-Cola’s business model.

Coca-Cola acquired Honest Tea in 2011 after an initial 40% investment in 2008.

Seth Goldman, co-founder of Honest Tea, said: “When we did the deal, Muhtar Kent, the c.e.o. of Coke, said, ‘At the end of the deal, if Honest Tea becomes more like Coca-Cola and we don’t become more like Honest Tea, then we failed.’”

Coca-Cola acquired Honest Tea in 2011 after an initial 40% investment in 2008. Mr. Goldman said the partnership has opened new doors for his organic beverage brand, including recent distribution in Wendy’s and Chick-fil-A restaurants.

“There isn’t anything we have done with the brand that we wouldn’t have done independently, and quite frankly wouldn’t be able to do without Coke, whether it’s getting into Wendy’s or Chick-fil-A with fair trade organic product… or upgrading to fair trade sugar in our (plastic-bottle teas),” Mr. Goldman said. “That decision came out of Atlanta, and for me, that means our DNA has penetrated.”

For Jeff Church, co-founder and chief executive officer of Suja Juice, which last year received a minority investment from Coca-Cola, the partnership is a step towards making his company’s organic cold-pressed juice beverages more affordable and accessible to mainstream consumers.

Suja Juice, Coca-Cola
Suja Juice received a minority investment from Coca-Cola last year.

“For us, when we felt we had proof of concept for conventional channels, we really wanted to go, and in order to do that, we had to make sure our cost structure was right, and we had to make sure we had proper funding to do that because we’re not going to win the day with an $8 bottle of juice,” Mr. Church said. “It’s got to be a product where the quality and integrity is there, but the price delta between our products and traditional products is not that high, and the way to do that is to partner with someone who can help us with that.”

Suja Juice leverages Coca-Cola’s scale, distribution and access to cost structure while retaining its entrepreneurial spirit and speed to market, Mr. Church said. Honest Tea also has maintained control over all major decisions, Mr. Goldman said.

“(We had) a three-year runway to demonstrate that we could scale the business the right way and do it with integrity,” he said. “By the time we got to the three-year point where Coke had the option to buy the rest of the company, they said this is working and bought the company.”

V.E.B. also invested in Zico coconut water.

Coca-Cola’s primary objective through V.E.B. is to seek and develop the next billion-dollar brand. The business unit tracks startups through four phases of growth: experimentation, proof of concept, pain of growth, and scale to win.  V.E.B. also analyzes consumer trends to predict how the beverage marketplace will evolve over the next five to 10 years.

“For me, the exciting part is not only have we shifted the way we’re looking at the brands, but we’re looking at how we operate,” Mr. Mitchell said. “Much more at the street level … (We have become) cognizant of segmentation and cognizant that what people buy in the store on one street may be very different than what we’re buying five blocks away. How we market that, how we divide our products in each one of those stores is very important.

“That’s not easy for us. That’s a long road for us, quite frankly.”

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