PepsiCo – Hard Mtn Dew Enters Alcohol Segment, Exits
Juice Business – 29 September 2021
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Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Ricardo Vazquez (RV)
Former Director, Retail Sales at PepsiCo Inc
Agenda:
1. PepsiCo's (NASDAQ: PEP) beverage portfolio overview
2. Mountain Dew’s entrance into the alcohol segment
3. Hard Mtn Dew’s distribution partnership
4. Likely strategic rationale for PepsiCo’s exit from the juice business
Contents
Q: Could you give an overview of the non-alcoholic beverage industry’s growth and the categories driving it?4
Q: What’s happening in the regular soft drinks and juice industries? Are consumers wanting less sugar? How
4
are some large players thinking about the traditional beverage categories?
Q: How would you compare the big beverage players’ strategic direction pre-coronavirus to during
coronavirus, where some perhaps decided to reposition their business models to be even more selective
around innovation or the categories they operate in? How has coronavirus impacted categories such as coffee
5
or energy?
Q: Could you discuss players losing the opportunity cost of exiting some of the adjacent categories,
considering your comments on preserving the core?
Q: Could you give an overview of Pepsi’s performance during the pandemic and the necessary decisions it
made to preserve its market share gain? Could you compare the competitive advantages between Pepsi and
Coca-Cola, the two big players?
Q: How did channel optimisation work when shifting between convenience and retail grocery, while
undergoing a large SKU rationalisation? Could you discuss the channel optics? I understand that
5
5
convenience provides the best pricing opportunity. How does that play out in a situation where large
quantities are having to be serviced sometimes in environments with high promotional activity?
6
Q: You mentioned SKU rationalisation and some of the businesses that PepsiCo has decided to exit within its
juice portfolio, as well as highlighting milk as an example and the pressure it has on margins. What pricing
elasticity do other juices have in the convenience channel? Does it make sense to perform SKU
rationalisation on the retail grocery side, while keeping the higher-price-point product on the convenience
side? Should a player fully exit the whole business instead of just picking and choosing which channels the
product is supplied to?
6
Q: Why did Pepsi decide to cut the juice business, instead of going through a process it’s been through before
7
with SKU rationalisation?
Q: Would you say any other categories within Pepsi’s portfolio are also less of a strategic fit?
7
Q: Could you expand on the DSD [direct store delivery] model vs warehouse, the challenges of stocking that
product and the contracts with retailers? Could you discuss the distribution landscape and network, as well
as the contracts that are playing into bottling systems’ complexity in the US? Why or how does that play into
Pepsi and Coke’s strong control over the non-alcoholic beverages market?
7
Q: What is Coke’s ability to innovate vs Pepsi’s? You highlighted Coke’s sports drinks, partnership with
Dunkin’ Donuts and coffee as some of its weaknesses. Which player has innovated much more efficiently?
Does that involve buying smaller brands or internally building something and scaling it?
Q: What share of the overall non-alcoholic beverage market do Pepsi and Coke have vs Dr Pepper or an up-
and-coming name?
Q: What are your thoughts on Pepsi’s entrance into alcoholic beverages? You noted that coffee and energy
drinks are driving growth. Is the company even performing successfully enough in these high-growth
categories to transition into alcoholic beverages?
8
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Q: Could you discuss market share dynamics within energy drinks? Are there new entrants every day? What
are some challenges in this market? Could you expand on Pepsi’s partnership with Bang?
9
Q: Why do big brands such as Pepsi and Coke try to partner with companies such as Bang and Monster
respectively, rather than buy them outright or support their own brands to be in the category?
9
Q: Could you break down how the Pepsi-Starbucks partnership dynamic works? It seems that Pepsi is reliant
9
on Starbucks’ brand, while Starbucks is perhaps reliant on Pepsi’s production capabilities.
Q: The Pepsi-Starbucks partnership is structured as more of a distribution agreement and Starbucks seems
to have a strong hold in the RTD [ready-to-drink] coffee market. Could there be a risk of Starbucks creating
its own distribution channel? What is Starbucks’ ability to switch gears and jump to someone else?
9
Q: What benefits or challenges do you expect around Pepsi’s foray into alcoholic beverages?
Q: How crowded is the alcoholic beverages market? Is it oversaturated? Why hasn’t there been a stronger
push into alcoholic beverages from Coke or Pepsi, given their balance sheets, cash flows and distribution
capabilities?
Q: What are your thoughts on White Claw and well-established incumbents in the alcoholic beverages
market? What’s the risk of them losing share?
Q: What are you noticing with private label? Some big retail grocers are doing private label for anything
from chicken to Pepsi. What might that be for coffee? Does private label pose any risk to Pepsi in the
categories it operates in?
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Q: How has consolidation around players such as 7-Eleven impacted overall pricing flexibility or elasticity
for Pepsi, Coke or any other players heavily in convenience or retail? How does that impact a player’s ability
to raise prices? Convenience seems to be a lower-volume but higher-price-point dynamic.
11
Q: What is the opportunity for some convenience stores to make a large acquisition of a branded product or
beverage? Pepsi exited the juice business, but it could have provided significant opportunities for a
convenience player with a strong private label to incorporate a branded product into its store locations
nationwide.
11
Q: Can you discuss ingredient sourcing and flavours? What sustainable practices do consumers want? How
are some big players thinking about sustainability when plastic is ending up in rivers? Is this a big issue? Are
companies taking this seriously or will they perhaps do a 50-page slide deck but nothing more? What are
your thoughts on sustainability as it relates to the big beverage players?
12
Q: What are your thoughts on some global trends, such as Coke launching its hard seltzer internationally
before in the US? Could you discuss the dynamic of using international markets to test a product before
bringing it back to the US? Why would a firm do this?
Q: What demand or normalisation are you noticing in foodservice? Are we still well below pre-coronavirus
levels? How would you assess volume?
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Q: Can you discuss the water category? I believe Nestlé sold off its business to a domestic US company. Is
this a significant area for opportunity? How do some beverage companies consider this part of the category?
Is it just a volume play?
13
Q: How are distribution trends developing across the US? I know you’re more familiar with the south, but
have counterparts in the northeast noticed certain trends that eventually make their way to the south or vice
versa? How does that dynamic play out across category assortments or merchandising?
13
Q: Do investors commonly overlook anything when assessing the viability of Pepsi, Coke or the overall
beverage market? What do many investors fail to consider? What do consumers generally overlook about the
13
industry that they should know?
PepsiCo – Hard Mtn Dew Enters Alcohol Segment, Exits
Juice Business
Transcription begins at 00:00:04 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled PepsiCo – Hard Mtn Dew Enters Alcohol Segment,
Exits Juice Business. I’m Nyree Hinton, and I’ll be facilitating today’s Interview with Mr Ricardo Vazquez,
former Director of Retail Sales at PepsiCo Inc.
Ricardo, before we get started with today’s Interview, please state I agree or I disagree to the following
statement: You understand the definition of material and non-public information and agree not to disclose
any such information, or any other information which is confidential, during this Interview.
RV: I agree.
NH: Can you start by giving an introduction to your background and the various roles you’ve held in the
industry?
RV: I spent three years from 2018 to 2021 at PepsiCo, or to the end of 2020, running both the north Texas
operations and then I was a Retail Director in the south division covering the southern five states from
Louisiana to Florida, both large- and small-format key accounts, regional and national. I had a team of senior
CAMs that managed the day-to-day business there. Before that, I was actually with Coca-Cola for 10 years. My
last three with them was also a Retail Director, both in the small-format and the large-format capacities in
south Texas and north Texas. Before that, I was actually in the wine and spirits business with a company called
Republic National, just a District Sales Manager handling fine wine.
[00:01:40]
Q: Could you give an overview of the non-alcoholic beverage industry’s growth and the categories driving it?
RV: Really, it’s two categories that I’m keeping a profile on, coffee and energy. Both are growing significantly.
You can see it on IRI, and within that you’ve seen maybe a consolidation of different brands to help that
growth.
[00:02:23]
Q: What’s happening in the regular soft drinks and juice industries? Are consumers wanting less sugar? How
are some large players thinking about the traditional beverage categories?
RV: In the CSD category, traditionally the growth has come from innovation, innovation through flavours,
and that’s been the game for probably the two biggest players through the pandemic, that have both taken a
step back to consolidate resources and focus on the core. I think innovation really started shifting, and growth
through innovation shifted, over to maybe some packages, looking at different vessels, both in the aluminium
and PET containers to see if they can capture different occasions. Also, a shift to take-home across all
categories, but it really impacted the CSD category through the pandemic, shifting from single-serve to take-
home, and being able to capture that convenience package between a 12-pack, a 15-pack, and then of course
your higher-margin products through your PET plastic vessels.
Private and confidential 4
[00:03:55]
Q: How would you compare the big beverage players’ strategic direction pre-coronavirus to during
coronavirus, where some perhaps decided to reposition their business models to be even more selective
around innovation or the categories they operate in? How has coronavirus impacted categories such as coffee
or energy?
RV: Pre-COVID, it was all about assortment, increasing assortment, giving consumers options and getting
and placing that long tail and getting the exposure in small-format in the cold vault and large-format on the
warm shelf and having the full line of that brand/category. That was really the way to growth and trying to
minimise cannibalisation of the core as much as possible, but expanding into the flavour. Then, of course, the
zero-sugar movement and capturing the flavours within the zero-sugar movement was the name of the game.
When the pandemic occurred, supply chain issues forced really a focus to the core to make sure that the 90%
of the business was still in stock and you were allocating the aluminium cans that, during the middle of that
pandemic, it’s common knowledge that there was a shortage on cans. Then that shifted over to plastic and
certain things that were being produced abroad that really forced, if you want to call it the long tail to be
chopped. The long tail is the flavours/one-percenters that all combined maybe add up to the growth of the
year. What I saw is that by focusing on the core early, you were still able to capture the growth by being in
stock and not losing the sale to the competitor or to a different retailer.
[00:06:23]
Q: Could you discuss players losing the opportunity cost of exiting some of the adjacent categories,
considering your comments on preserving the core?
RV: The opportunity cost is, will they try and continue? As we focus on OPEX of these categories, some
greater than others, they were growing at the time, they were growing pre-pandemic. A good example of that is
the milk category. I’ve never personally been in the milk category distribution side of it, but it is heavy OPEX,
refrigerated vehicles, a lot of potential waste, short expiration windows. The single-serve had completely
declined during the pandemic, naturally with less folks on the road, less impulse buying in convenience stores,
and that has come roaring back with the single-serve milk category, so that’s an example of potentially having
a short-term vision of a trend that was not continuing.
[00:07:40]
Q: Could you give an overview of Pepsi’s performance during the pandemic and the necessary decisions it
made to preserve its market share gain? Could you compare the competitive advantages between Pepsi and
Coca-Cola, the two big players?
RV: One thing that comes to mind, I guess the pandemic hit in March, it was pre-summer, the standard
distribution curve was really picking up in the summer months on isotonics, sports drinks, and that’s right
when the shutdown occurred. In the sports drink category, there are a significant amount of flavours and
expansion and brand extensions that Pepsi carried that had to be looked at early on. Actually, early on in the
pandemic, it was understood that the pandemic was going to impact the supply chain, so I was a big proponent
of SKU rationalisation early, understanding through data what the core really was. We had an idea, maybe the
core was too extended and we needed to focus on even trimming the core further down to ensure 90% of
consumers were being hydrated, I guess, if you want to call it that way, with their flavour of choice. I thought
Pepsi handled that very well. It was a tough decision to make, but the SKU rationalisation process was early
enough. There were still out-of-stocks. Some of those sets are fairly large in the convenience end, large-format,
so they had to be changed mid-pandemic in coordination with the category managers of those retailers. That
Private and confidential 5
early shift put them at an advantage.
Between the two main players, it’s been a while since I’ve been on the operations side of the Coca-Cola
Company, but I’d say that the competitive advantage that Pepsi holds is just the diversification of categories. If
you take a look at the brands and the categories that they play in, Pepsi is much more diversified than Coke
was when I was there. Highly dependent on COD, to no surprise on the Coke side with that line-up, with some
emerging categories. Powerade was trying to make its name. Eventually, after I left, they acquired Bodyarmor,
obviously trying to diversify further, and then you’ve got coffee, which is a fast-growing category. They had
Dunkin’ Donuts. Pepsi has Starbucks. They shouldn’t even be in the same conversation with the power of
Starbucks and market share they hold. I think as far as weathering the pandemic, just having the multiple
brands and different categories, different occasions, I feel that Pepsi was, in my opinion, better prepared for
the pandemic.
[00:11:16]
Q: How did channel optimisation work when shifting between convenience and retail grocery, while
undergoing a large SKU rationalisation? Could you discuss the channel optics? I understand that convenience
provides the best pricing opportunity. How does that play out in a situation where large quantities are having
to be serviced sometimes in environments with high promotional activity?
RV: I was actually right in the middle of that with my key account team on the retail side before transitioning
out of Pepsi. The number one priority was to assess the productivity of each promotion to make sure that we
weren’t running through product, increasing the velocity unnecessarily. There was a natural increase in
velocity on the large-format side, and a natural decrease on the small-format side. Promotional frequency, that
frequency had to be re-evaluated. Out of price increases, scheduled price increases occurred and that was due
to the shift. I guess the shift went from small-format to large-format. To me, it was obvious, but I want to
make sure that was clear, a significant move from small-format to large-format, and large-format tends to run
on lower margins due to the add frequencies and pantry loading that occurs. That was naturally occurring, and
there was an increase in traffic naturally as well. Typically, you use promotions to drive that, and there was
less of a need. Then, if you take the higher-margin channel, which is small-format, and you take, I’m just going
to throw some numbers out there, 10-20% of a reduction in business, then you need to offset that through
promotion reductions on the other side.
[00:13:32]
Q: You mentioned SKU rationalisation and some of the businesses that PepsiCo has decided to exit within its
juice portfolio, as well as highlighting milk as an example and the pressure it has on margins. What pricing
elasticity do other juices have in the convenience channel? Does it make sense to perform SKU rationalisation
on the retail grocery side, while keeping the higher-price-point product on the convenience side? Should a
player fully exit the whole business instead of just picking and choosing which channels the product is
supplied to?
RV: In my opinion, I think SKU rationalisation is the way to go. To completely exit a category is a risky
endeavour. You go to any small-format chain, you’re going to have at least half a door dedicated, depending on
the set, but at least half a door dedicated to juice. As long as there’s demand, there will be a supply. You run
the risk of becoming obsolete, I think. One of the examples that I can think of is when Coke sold off Odwalla.
That’s a premium, natural juice that requires refrigeration, same as Naked on the Pepsi side. There are other
complexities to it, but yes, absolutely, my opinion is to rationalise SKUs, reduce the set until it’s no longer a
relevant category as a whole.
Private and confidential 6
[00:15:24]
Q: Why did Pepsi decide to cut the juice business, instead of going through a process it’s been through before
with SKU rationalisation?
RV: The way the business was set up, the juice business was partially warehouse, but delivered by a lot of the
foodservice companies, like McLane, Hallmark, Compass, and they run on much tighter markups due to their
vast portfolio beyond just beverages. They’re trying to increase cases per stop, and sometimes beverages are
just incremental margin for them. You’re competing against yourself in a certain way when the alternate route
to market, we’ll call them, these foodservice distributors, are actually undercutting your DSD side of the
business, potentially, running separate contracts. There was an effort to consolidate the approach. I don’t
know if that was ever completed. Then, of course, when you look at the DSD side and the complexity of
maintaining these products refrigerated to the point of delivery, and it has to be guaranteed and audited, the
temperatures have to be audited, that requires quite a bit of additional labour, additional assets, capital
investments to make sure, it’s all beyond just putting a box in a truck and delivering it. I was not there and not
privy to the behind-the-scenes information, but that’s my opinion. Those would be the two biggest challenges
that were faced.
[00:17:18]
Q: Would you say any other categories within Pepsi’s portfolio are also less of a strategic fit?
RV: Good question. Protein, across both companies, seems to be a declining category. That’s very specialised.
It started out in the speciality retail channel with the vitamin shops and the nutrition shops, and then it
became an RTD play. It’s been growing, but I don’t know if it’s growing enough to merit its space on a truck,
long-term. I would say the protein category, across both companies, being such a niche market. Then juice is
right up there. I could have easily stated the obvious on it. Glass products tend to be challenging as well, the
imports, more on the Coke side than the Pepsi side. Pepsi has only got a few glass products.
[00:18:41]
Q: Could you expand on the DSD [direct store delivery] model vs warehouse, the challenges of stocking that
product and the contracts with retailers? Could you discuss the distribution landscape and network, as well as
the contracts that are playing into bottling systems’ complexity in the US? Why or how does that play into
Pepsi and Coke’s strong control over the non-alcoholic beverages market?
RV: Contractually, between DSD and warehouse, warehouse has always been challenging because when there
is an emerging brand, an emerging category, and you don’t have the distribution density, either internally,
self-distributed, or through distribution partners. Some of these retailers require 100% coverage and
guarantee that you can service every single one of their stores. Typically, foodservice companies, while their
delivery frequencies are lower, they have broad coverage, nationwide for the most part, and so there’s an
advantage there. There are pricing advantages that then they can take all the way to the retailer. By the time
you try to convert that over to DSD, financially, you could be upside down. If it’s in a bottling situation, by the
time it’s bottled, delivered, and the cost to deliver, sometimes you’d find yourself at a higher total cost than the
warehouse price could be, depending on a lot of different variables. You could find yourself in that situation,
which is why some brands stay warehouse forever. They were born in warehouse, so they grew in warehouse
and it just doesn’t make financial sense to move them over because the margins are too tight to shift them over
to DSD, provide the DSD service, which is higher frequencies, merchandising at the store level, guarantee of
product quality. Those are all things that are inherent to DSD, that aren’t with warehouse. Sometimes, it just
really boils down to the financials, where those contracts don’t make sense, and they stay in one side or the
other.
Private and confidential 7
NH: How have Coke and Pepsi taken advantage of the discrepancies between the models and leveraged them
to their advantage?
RV: Between the two companies, I think the warehouse vs DSD is similar, the challenges are similar outside of
a timing opportunity and a competitive brand, where you’re able to start a brand off DSD. That would be the
only advantage. I can’t think of a single instance where it’s actually came down to that, between DSD vs
warehouse. It’s usually an internal problem within the organisation.
[00:22:26]
Q: What is Coke’s ability to innovate vs Pepsi’s? You highlighted Coke’s sports drinks, partnership with
Dunkin’ Donuts and coffee as some of its weaknesses. Which player has innovated much more efficiently?
Does that involve buying smaller brands or internally building something and scaling it?
RV: That’s a great question. During my time, and actually when I was at Pepsi it hit me that Pepsi appears to
self-innovate. They incubate certain ideas and categories and a brand emerges from scratch, vs Coke, it just,
from where I sat, appeared to purchase brands. They purchased Bodyarmor, they bought Dunkin’ Donuts, they
bought Smartwater and the Glacéau Vitamin Water line. On the flip side, from the outside in, it appeared
Bubly was not purchased, it was self-innovated and produced in a category, that sparkling category that was
on fire when it was developed. I know there were one or two others that don’t come to mind now. They were,
like I said, created vs purchased.
[00:24:04]
Q: What share of the overall non-alcoholic beverage market do Pepsi and Coke have vs Dr Pepper or an up-
and-coming name?
RV: It depends greatly on the state, and even parts of the state. I spent most of my career in Texas, part of it in
Florida and those southern states. It’s been years since I looked at it, but I would probably, gosh, it’s been
years since I’ve looked, but I would probably put KO, on the CSD side, at a 50% share. Dr Pepper, DPSG, or
KDP now, somewhere around 15-20% in the south, and then the remaining 25-30%, give or take five points on
the other guys, would be Pepsi, PepsiCo CSD.
[00:25:18]
Q: What are your thoughts on Pepsi’s entrance into alcoholic beverages? You noted that coffee and energy
drinks are driving growth. Is the company even performing successfully enough in these high-growth
categories to transition into alcoholic beverages?
RV: I would say so. I think the market share that they hold with their Starbucks line is strong. Actually, so
strong that I think, based on market visits, I can see that Starbucks is having supply challenges in-store.
They’ve got a strong market share. On the energy drinks side, Pepsi has got the Rockstar and then they had
their partnership with Bang. I don’t know if they’re keeping up with the category, but they’re definitely, I
would say, being successful, either innovating, as well within the Mountain Dew Rise line, to try to catch up
with the category. They can’t be far off by now.
Private and confidential 8
[00:26:48]
Q: Could you discuss market share dynamics within energy drinks? Are there new entrants every day? What
are some challenges in this market? Could you expand on Pepsi’s partnership with Bang?
RV: I was at Pepsi during the Bang partnership, so I can probably speak high-level. I believe there is no
ownership. It is a true partnership from which certain channels were excluded. That is probably one topic I
can’t get too far into, on the Bang piece, because I was there at that time. I would prefer not to get into too
many details.
[00:28:22]
Q: Why do big brands such as Pepsi and Coke try to partner with companies such as Bang and Monster
respectively, rather than buy them outright or support their own brands to be in the category?
RV: I think Bang did something unique where they were one of the first brands, and we’ve seen others since
then, I can share a few, but they were able to capture a group of people via social media and really create a
following of a brand beyond the point of purchase. Bang, they were more of a brand builder. I think there was
brand equity coming over vs a product. It’s easy to innovate a product, but hard to create a movement, if you
want to call it that, and I think that’s what Bang was able to bring to the table, along with innovative
functionality in the beverage. That would take years to duplicate. Also, they took a different approach, where
they don’t really have a core. The approach was, what was it called? It was an explosion of colours and
flavours. That’s what they wanted to see on every shelf. There were no shelf progressions. You didn’t lead with
a certain package. It didn’t matter which one you put on the hinge or the handle. It was impulse-buy chaos, to
a certain extent. Typical merchandising standard would require two facings, and Bang really came with the
idea of having one facing so that you create more assortment and provide choice, and folks just gravitate
towards that, and a lot of LTOs, so just keeping things fresh for the new generation. I can’t think of another
brand that has been successful in that aspect. Typical energy contracts, if you think of Monster and Rockstar, I
don’t know those details, but I know they were long-term, potentially with small pieces of equity and very
difficult exit clauses, with no opportunity to bring in another energy brand. I believe that the Bang was a
shorter-term agreement vs a 15-20-year partnership.
[00:31:49]
Q: Could you break down how the Pepsi-Starbucks partnership dynamic works? It seems that Pepsi is reliant
on Starbucks’ brand, while Starbucks is perhaps reliant on Pepsi’s production capabilities.
RV: For all intents and purposes, Starbucks is its own company. I don’t know if they are on paper, but they
have their own team and sales structure that allows them to focus on the brand, while I think Pepsi focuses
more on the distribution and execution of contracts and agreements. There’s some carry-over on the key
accounts side, from a strategic side, but it’s usually partnered heavily with Starbucks. I would consider them
almost its own strategic entity that vertically integrates with the PepsiCo system.
[00:32:59]
Q: The Pepsi-Starbucks partnership is structured as more of a distribution agreement and Starbucks seems to
have a strong hold in the RTD [ready-to-drink] coffee market. Could there be a risk of Starbucks creating its
own distribution channel? What is Starbucks’ ability to switch gears and jump to someone else?
RV: I don’t know. What I do know is that the cost of doing DSD is increasing every day, and the margin
requirements continue to increase as labour shortages and cost of labour go up. I think any company that is
Private and confidential 9
currently latched on, not owned by, but partnered up, is probably looking at more effective ways of
distribution, not just Starbucks.
[00:34:05]
Q: What benefits or challenges do you expect around Pepsi’s foray into alcoholic beverages?
RV: It’s actually been intriguing as I read. I’m learning more on reading, but I believe that the opportunity
that, I think Mountain Dew is doing it, maybe Coke is doing it in another country, the Coke flavour, I believe
the intent there is to be able to… As you think about the seltzer, that’s evolved. The opportunity is coming in
with the flavour of Mountain Dew and the flavour of Coke, along with the brand equity. I think that’s where I
would be focusing if I were them, and where I think they’ll take it. I think Bang entered the hard seltzer, so to
be able to mimic the flavour profile that folks enjoyed non-alcoholically. As the younger generation enters into
the drinking age, I think they’re trying to capture that. Mountain Dew has a huge affinity, more so than, I
think, Coca-Cola, but they’re both trying to capture that in an alcoholic option.
[00:35:42]
Q: How crowded is the alcoholic beverages market? Is it oversaturated? Why hasn’t there been a stronger
push into alcoholic beverages from Coke or Pepsi, given their balance sheets, cash flows and distribution
capabilities?
RV: I’ve wondered that myself. I think Topo Chico was a test for Coke when they acquired the brand rights for
that, given the natural growth of seltzers. I’m not on the alcoholic side, but I’ve seen some massive share
numbers coming from Topo Chico. Really making a splash in that category. That shows the ability for them to
take the brand. Then, of course, Topo Chico is known for the bubbliness, far beyond any other sparkling water.
If you ever drink a Topo Chico, it is extremely over-carbonated, which drives a lot of people and it’s used for a
lot of mixers. I think they were able to capture that in a can along with the brand, and now they’re taking that
and saying, “We’ve got these other unique taste profiles that we can expand on.” As far as the crowdedness, I
think this is finally true innovation. The way seltzers were, are we going to see a CSD alcohol? There have been
attempts with the Jack and Coke and the Beam and Coke, I believe, but to truly create a hard Coke, I think
that’s finally the true innovation that maybe the alcohol industry is looking for. We’ll find out. Topo Chico was
a test. Bang is trying it. Mountain Dew is interested. I haven’t seen anything on the taste profile of Mountain
Dew, but I think if they nail the flavour right, it could be a whole new ballgame.
[00:37:47]
Q: What are your thoughts on White Claw and well-established incumbents in the alcoholic beverages
market? What’s the risk of them losing share?
RV: I think this crosses a lot of categories, and it’s what I mentioned earlier, when you innovate through
flavours, and yet the consumer changes right in the middle of a pandemic and says, “You know what? I don’t
need the next bubbly gum flavour out there. I like these three, and I want them available everywhere I go.” I
think what we’re seeing now is a consolidation of the core within each seltzer and glass vessel, White Claw
might be losing share, probably to the Topo Chicos of the world. The question becomes, how do you innovate
beyond flavours? It’s a natural progression to innovative categories. I think that’s going to be the key for them
to stick around. We’re saturated. I think we’ve got enough seltzers out there to capture the seltzer appetite, so I
think we’re going to be in a consolidation phase until the next true innovation comes out. My opinion, coming
out of the pandemic, the long-tail strategy could be coming to an end, or we would need to adjust the long-tail
strategy.
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[00:39:23]
Q: What are you noticing with private label? Some big retail grocers are doing private label for anything from
chicken to Pepsi. What might that be for coffee? Does private label pose any risk to Pepsi in the categories it
operates in?
RV: Yes, I think so. If you look at the competitive landscape today, and you look at the 7-Elevens of the world
that have acquired Speedway, Sunoco over the years, and you look at the power of Walmart, that’s the hyper-
mass channel, and then you’ve got the convenience channel literally consolidating into these massive
organisations, both of which have their own private label. Then you take it to the grocery side, not as clear-cut.
You’ve got the Publix in the southeast. You’ve got the H-E-B in Texas. I’m not very familiar with the northeast,
but the grocery channel still has some diversity. Each one of them has their own private label. I think as the
consolidation of these big conglomerates, either through organic growth or through acquisition of other
competitors, it makes their private label that much more impactful. You look at 7-Eleven with their 7-Select,
that used to never be in the Stripes, which was a Sunoco acquisition, and now they’ve changed a lot of those
Stripes to include private label. I think the private label growth will come as these companies become more of
a staple in people’s shopping patterns vs having a couple of different places where you typically shop. Yes,
coffee will be a natural shift, especially if they hit the right profile, if it’s good enough. I’ve talked about the
product being good enough. That’s a private label strategy. Does it taste just enough like Starbucks’
Frappuccino that consumers would pay USD 1 less, or whatever the price architecture looks like?
[00:41:53]
Q: How has consolidation around players such as 7-Eleven impacted overall pricing flexibility or elasticity for
Pepsi, Coke or any other players heavily in convenience or retail? How does that impact a player’s ability to
raise prices? Convenience seems to be a lower-volume but higher-price-point dynamic.
RV: Some of those single-serve prices have been tested. So far, it’s proven to be fairly inelastic, at least for the
big brands and the traditional 20-ounce in CSD and in convenience, while grocery tends to be a little bit more
competitive and add-driven, more commoditised. Depending on who’s on add, especially the next generation
of folks, maybe they go Pepsi one week and go Coke the next. There is some back and forth that I believe is
occurring on the large-format side.
NH: 7-Eleven is getting bigger and pushing out its own private label products. What is that doing for some
incumbents’ promotional activity? Who’s driving the promotional activity conversation on the convenience
side?
RV: On the convenience side it depends who’s the share lead. In the south, for example, in CSD, Coke
traditionally leads the price conversations with the retailers. Pepsi and KDP will follow, depending on the
package and strategy. The category share leader will usually drive the price strategy. In the north, Pepsi has a
bigger share, hold of the share, and they drive the conversation with those retailers. From a private label
pressure, there isn’t much there. I think private label fills a much needed void, which is having a B brand,
having a we’ll call it subpar or good enough CSD, good enough juice, good enough tea and coffee, that fits a
price need, while the brand, the Coke, Pepsi, Starbucks brands hold that inherent premium within that
category. I don’t think private label really drives prices down as much as the competitor drives it up or down.
[00:44:58]
Q: What is the opportunity for some convenience stores to make a large acquisition of a branded product or
beverage? Pepsi exited the juice business, but it could have provided significant opportunities for a
convenience player with a strong private label to incorporate a branded product into its store locations
Private and confidential 11
nationwide.
RV: I think so. I think there are other players that also create a private label that are going to capitalise on that
opportunity. I think some of the more shelf-stable juices will probably quickly jump on. I’m not familiar with
what exactly Pepsi plans to spin off, whether it’s just the Trop chilled or the shelf-stable side as well. I assume
both. I think it’s definitely going to open up the door. That category has been shrinking, space-wise and dollar-
wise. You’ve got to get that sweet spot, I think, with the right assortment vs some of the flavours that have
bordered on we’ll call it the CSD flavours, so you start thinking about the juices that were mixed, like the
watermelon/berry, that started working it’s way into the juice door. That really is geared more towards the
Fantas and the Crushes, and the Minute Maid lemonade flavour profile. There was some noise, I think, within
that juice category. They’ll probably just have to fine-tune it to the traditional orange juice, grapefruit, apple
juice, pineapple. I think there’s going to be some of that done, and then these other blended flavours will work
their way over to the CSD door.
[00:47:02]
Q: Can you discuss ingredient sourcing and flavours? What sustainable practices do consumers want? How
are some big players thinking about sustainability when plastic is ending up in rivers? Is this a big issue? Are
companies taking this seriously or will they perhaps do a 50-page slide deck but nothing more? What are your
thoughts on sustainability as it relates to the big beverage players?
RV: I think it’s priority one. I don’t think they take the issue lightly. I just think the ability to monetise
recycling is really where it stands. I think the northeast has done better at that, and the south needs to be
brought along, as well as innovating packages that are biodegradable. I think they’re further along on that
front vs exiting from plastic as a whole. I think that’s going to require a little bit more from a secondary
industry for the recycling, monetisation of the recycling of PET packages that is not occurring in the south,
which impacts Coca-Cola a little bit more.
[00:48:35]
Q: What are your thoughts on some global trends, such as Coke launching its hard seltzer internationally
before in the US? Could you discuss the dynamic of using international markets to test a product before
bringing it back to the US? Why would a firm do this?
RV: That, I’ve wondered as well. I would say just due to the reluctancy of retailers, almost requiring a proof of
concept before. That’s the only real explanation. We are very disciplined in the category world. Sub-categories
emerge. Bang really came in with a splash and created this functional energy, and then it stemmed out from
there. Before, it was just energy. If you start looking at some of these category managers now within large
retailers, there’s this functional energy, and that was developed overnight, it feels like. I would say it’s proof of
concept. How does it work there? Where does it behave? What category does it live in? What’s the price
architecture? As well as probably, I’m assuming, maybe FDA. That might have been the first thing. From an
FDA perspective, does it require incremental or additional approvals, that maybe overseas it doesn’t? All those
combined are what comes to mind.
[00:50:27]
Q: What demand or normalisation are you noticing in foodservice? Are we still well below pre-coronavirus
levels? How would you assess volume?
RV: Yes, I think we’re seeing a shift from the traditional fountain to bottle and can, naturally. Some of that
was driven by the to-go side of the business vs the eat-in or the dine-in. I think that will continue. Folks are
Private and confidential 12
willing to pay more for the bottle. Spending patterns have changed, where you’re unsure of the fountain side of
it. I think the premium water business will come screaming back. It used to only live in fine dining. I think
folks are going to look for a second option besides tap water when you’re sitting down in fast casual, for
example.
[00:51:36]
Q: Can you discuss the water category? I believe Nestlé sold off its business to a domestic US company. Is this
a significant area for opportunity? How do some beverage companies consider this part of the category? Is it
just a volume play?
RV: It used to. There was an effort to segment the water category from your value to your premium, to your
sparkling, enhanced water, where some of the alkaline waters lived, and sometimes even the vitamin water-
type drinks come in, anything that’s really enhanced. We saw a slowdown in that movement and really just a
push to value. I think there’s an opportunity to revamp that category, and it’s happening because of
consolidation as well of SKUs. There’s been quite a lot of SKU rationalisation on the water side. There’s a huge
alkalinity move right now. Almost every company is testing or branching out into the alkaline water, which
then lives with that enhanced. It’s a crowded door, and it needs some organising. I think there’s opportunity
there for the big players to provide that organisation.
[00:53:08]
Q: How are distribution trends developing across the US? I know you’re more familiar with the south, but
have counterparts in the northeast noticed certain trends that eventually make their way to the south or vice
versa? How does that dynamic play out across category assortments or merchandising?
RV: Yes, I think the trends have gone from the south to the north, with natural population movement, from a
different assortment of CSD products. I think, more so than demographic, it becomes an economic type of play
with different categories. In the CSD category, the can-driven value play vs the plastic PET premium play, and
then other categories that may not do as well in lower socioeconomic areas vs higher in the north. There are
pockets within. One thing, as I’ve found myself speaking with peers, is that you get a little bit of the same
everywhere you go, and it becomes more of a price point discussion.
[00:54:53]
Q: Do investors commonly overlook anything when assessing the viability of Pepsi, Coke or the overall
beverage market? What do many investors fail to consider? What do consumers generally overlook about the
industry that they should know?
RV: I’ve said it on most of the calls with the big players, a lot of the discussion is around share. I think would
just take a harder look at how share is acquired. What is the average price? Is it velocity-driven or price-
driven? Who’s leading those conversations, and the elasticity implications around it, because you can quickly
grow share if you’re willing to make the right investment. I’m sure investors are looking at. Maybe it’s
something I haven’t seen. When I look internally, and I look at quick share growth, I dive a little deeper into
what drives it.
Private and confidential 13
[00:56:08]
NH: I think that’s a good place to end the Interview. Let me just close by saying thank you, Ricardo, for your
time today. We really went through a lot. Thank you, clients, for joining Third Bridge’s Forum Interview. If
you’d like to speak with Ricardo in a private call or meeting, please let your relationship manager know. Have
a good one.
RV: Thank you.
Transcription ends at 00:56:24 of the recorded material
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