US Non-alcoholic Beverages – Innovation & Sustainability
Trends – 26 March 2021
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Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Ken Romanzi (KR)
Former President & CEO at B&G Foods Inc
Agenda:
1. Consumer behaviour patterns and future trends
2. Competitive landscape – innovation market leaders and laggards
3. Materials sourcing and packaging innovation
4. Sustainability pressures including associated costs
Contents
Q: Could you give an overview of the non-alcoholic beverage industry? What are the main categories, drivers
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and top competitors?
Q: How would you say those industry trends have been impacted or altered by coronavirus? How might
consumer behaviour have changed?
4
Q: How do you expect the recovery of on-premise to play out? What do you think about profitability between
away-from-home and at-home products? What do you expect from the on the go convenience channel vs the
take home channel?
4
Q: How resilient do you think the non-alcoholic beverage market would be if there was higher
unemployment? Are there any categories you think are more vulnerable than others?
Q: What are your thoughts on the shift to e-commerce and its industry impact?
Q: Has there been a significant rise in input cost during your time in the industry? How might these higher
costs impact pricing and margins?
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Q: Is the higher caffeine trend healthy for you? Why do you think people want more caffeine in beverages? 6
Q: Do you think industry innovations are going in the caffeine direction, or is there any other type of
innovation likely to take the industry by storm?
Q: How has the competitive landscape evolved over recent years? How has the balance of power shifted
between bigger and smaller brands?
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Q: Why do you think private label is not as big a threat to non-alcoholic beverages as it is to more traditional
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CPGs such as condiments and sauces?
Q: What do you think of the rise of Amazon and how it’s affecting the tight hold on the distribution network
that Coke and Pepsi utilise?
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Q: Could you talk about the marketing landscape and how companies are able to brand products and stay in
touch with consumers?
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Q: What factors do beverage producers consider when choosing how to package an item? Which materials
do they find most cost efficient?
Q: What would you say are the issues with the current model many producers use to manufacture their
products?
Q: Plastic sustainability has been an issue for a long time, but are more companies starting to react to the
issue, or are they still not taking it as seriously as they should? Do you think the industry is still blowing off
the whole notion of sustainable packaging?
Q: How strong would you say consumer and investor pressure is to disclose more information on hot topics
such as sustainability?
Q: What is your M&A outlook? Which categories seem ripe for consolidation?
Q: What are the industry’s most pressing challenges?
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US Non-alcoholic Beverages – Innovation &
Sustainability Trends
Transcription begins at 00:00:01 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview, entitled US Non-alcoholic Beverages – Innovation and
Sustainability Trends. I’m Nyree Hinton and I will be facilitating today’s Interview with Mr Ken Romanzi,
former President and CEO at B&G Foods inc.
Ken, before we get started on today’s Interview please state I agree, or I disagree to the following statement.
You understand the definition of material non-public information and agree not to disclose any such
information or any other information which is confidential during this interview?
KR: I agree.
NH: Thank you, Ken. Could you begin with an introduction of your background and previous roles you’ve held
in the industry?
KR: I was nearly 40 years in the food and beverage industry. I started my career at Frito-Lay in the snack
business in marketing, I then ran marketing for Cadbury Schweppes North America, which was a carbonated
soft drinks business. I went on to lead a division at Nabisco, a large sales organisation at Nabisco. I lead a
couple of private equity backed private ventures, one being a juice company, Roll Upz, which included Naked
Juice, which is now owned by Pepsi. I was Chief Operating Officer for 11 years at Ocean Spray, the largest
product we had there was cranberry juice and various variations thereof and so spent 11 years in the shelf
stable, competing in the shelf stable juice category. The second largest dry category in store, second only to
dried cereal. I also was at WhiteWave, where I was the President of Earthbound Organic Farm, a fresh produce
business and then most recently President and CEO of B&G Foods, a collection of dry grocery and frozen
brands, about 50 brands, a grow through acquisition company, the largest brand being Green Giant, other
brands included Ortega Mexican Food, McCann’s Irish Oatmeal, Cream of Wheat cereal and lots of other
different brands, but no beverages. So, all my career’s been marking, sales and since 1993 general
management, either president of a division, or a company, or CEO.
[00:02:29]
Q: Could you give an overview of the non-alcoholic beverage industry? What are the main categories, drivers
and top competitors?
KR: The industry really has three, maybe four large players, but the three biggest players of course are Coca-
Cola, PepsiCo and then Dr Pepper Keurig, which is the old Dr Pepper 7Up company. They all are very, very
large in carbonated soft drinks. They’ve established large bottled water businesses. They also have juice
businesses. Pepsi has Tropicana and Coke has Minute Maid. Dr Pepper now has the Keurig business, which is
a whole other form of non-alcoholic beverage in the single serve coffee maker business. The other large player
was Nestlé which had a global water business that they recently just sold, so they sold their non value add,
their commodity water business and lots of different regional brands of bottled still water. Nestlé still retained
some of the more premium sparkling water businesses like San Pellegrino and Perrier, so now a privately
owned company is a very large player in bottled water as well. The industry of non-alcoholic, you probably
know better than I, it’s carbonated soft drinks, it’s juices both shelf stable and refrigerated, bottled water’s a
big business, energy drinks and while there’s lots of trends and categories and drivers, over the last 20-30
years, 20 years I’d say, carbonated soft drinks have been in decline and non-carbonated soft drinks have been
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on the increase.
Most recently, the bigger trends are lower no calorie drinks, while they’ve always been rapidly growing they’ve
taken on a whole new growth trajectory and there’s just a plethora of innovation around zero calorie drinks.
Two big trends are sparkling waters, sparkling flavoured waters that don’t have any calories, some not even
sweetened just flavoured with essence to take the edge of the better-for-you trend and now the big increase is,
caffeine is being added to almost everything. So, while Cola’s been in long-term decline, people’s desire for
caffeine and the companies’ innovation engines have now focused on caffeinated non-alcoholic beverages,
many in what is positioned as better-for-you. There was just an article in Food Business News just the other
day that talked about the global caffeinated beverage market valued at over USD 200bn in 2018 and expected
to be growing at a compound annual rate of almost 7% over the next five years and they showed examples of
caffeinated beverages under the Perrier Water name. Ocean Spray with a sparkling water and more
information from Starbucks. The first ever energy drink under the Mountain Dew brand name and Mountain
Dew was one of the original energy drinks, as was Cola, because they were very high in caffeine, but now this is
even higher. On all low calorie, all the better-for-you qualities, whether it be vitamins or no calories or maybe
some juice in it but with lots of caffeine to go along with the better-for-you elements of those beverages.
[00:07:12]
Q: How would you say those industry trends have been impacted or altered by coronavirus? How might
consumer behaviour have changed?
KR: Not dissimilar to a lot of other businesses, from what I understand in the beverage business, I haven’t
been in the business, but from what I understand what happened in COVID was that the take home businesses
did very well, the businesses that people find at retail stores, but the away-from-home consumption in
community stores, sports venues, that declined. Depending on which companies had more or less exposure to
that, they had more or less better or worse results. In terms of the take home non carbonated beverage
business, that was growing double digits all throughout. Cadbury’s were growing double digits all throughout
the COVID time frame and I think just recently some of that has slowed as people now are getting more out
and about and less staying home.
[00:08:23]
Q: How do you expect the recovery of on-premise to play out? What do you think about profitability between
away-from-home and at-home products? What do you expect from the on the go convenience channel vs the
take home channel?
KR: You say, “on the go,” there’s a lot of different segments. If you talk about convenience stores, that would
tend to be more profitable than selling large packages at very discounted prices in grocery stores. Then again,
the other away-from-home is the fountain business and that’s a little bit more, from what I remember, I
believe it’s lower margin, so it all depends on where a particular company’s strength or weakness lies in that
area. I’m not an expert in the recovery but as the economy opens up and as people get more out and about and
people go back to work more, there’ll be a little bit more away-from-home growth and a little less growth in
the at-home consumption, although I’ve been a big believe and when I was at B&G I was saying since last
June, on Mad Money with Jim Cramer, that I believe that long term the trends will play out based on the new
economy and how companies decide where their people will work. If there’s going to be more working from
home post-COVID than pre-COVID, there will be more consumption of products purchased at the grocery
store than the were was pre-COVID and less away-from-home, it’s just by nature. So, for instance, at B&G we
had breakfast products. If people are going to work one day a week or two days a week at home post-COVID vs
pre-COVID, that’s more breakfast at home. People don’t go out for breakfast, they’re staying for work at home,
so those trends should be stronger post-COVID than pre-COVID.
Same thing with beverages, if people, if they’re drinking energy drinks in the morning and pre-COVID they
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were stopping at a convenience store to buy their energy drink but post-COVID they’re going to be stopping
there two times less a week, that will mean better at-home consumption and less away-from-home
consumption post-COVID than pre-COVID. I think the recovery and the trends are going to be driven by what
you read about and how many companies are going to give people a hybrid work environment. I read just in
the past week that both Microsoft and Citibank have announced that they will have a split week. Citibank
specifically said only three days a week in the office, so I think you’ll hear more and more about that. Only
three days a week in the office, that’s pretty significant, so that means two days a week they won’t be eating
lunch or breakfast out on the way to work, or in that little place right by work, or in work, they’ll be doing that
at home and I think that’s a pretty significant trend.
[00:12:11]
Q: How resilient do you think the non-alcoholic beverage market would be if there was higher
unemployment? Are there any categories you think are more vulnerable than others?
KR: I haven’t been in the beverage business in a while, but I don’t remember past recessions or past
unemployment problems being an issue with the non-alcoholic beverage industry. I think it behaves like the
alcohol beverage industry. People drink in good times and in bad times and in the non-alcoholic beverage
business I tend to think that it continues to be strong. If anything, the trends would be if there’s high
unemployment and there’s recession people might go to more value-based offerings. One of your questions is
the brand loyalty. I mean, as a category and again I don’t know the numbers off the top of my head, I used to
know them all by heart but as a category much of the non-alcoholic beverage industry is very high percentage
that’s branded vs private label, so in carbonated soft drinks branding is very high, energy drinks very high,
juice drinks less so, so brands tend to do well even in tough times. The large companies, they certainly are up
to the task of being able to offer great value to consumers and certainly they’re so volume dependent that
they’re going to make sure that if there’s a problem with consumers’ purchasing power, the big soft drink
companies have a way of being able to offer some terrific low-price high-value options.
[00:14:18]
Q: What are your thoughts on the shift to e-commerce and its industry impact?
KR: I’m not as familiar since e-commerce has just taken off so much since I was in the industry, but I think
it’s growing, if you read the reports from the beverage industry, they’re doing more and more business. It’s
crazy shipping around a case of soda but I know we have a favourite brand of sparking juice water that we get
from the San Pellegrino name and we get a case a month and it gets delivered to our home. We love it and you
see more and more people doing that, particularly since so much beverage consumption is pretty regular. It’s
almost like toilet paper and toothpaste, you kind of get that case a month and you know that you’re going to go
through it.
[00:15:17]
Q: Has there been a significant rise in input cost during your time in the industry? How might these higher
costs impact pricing and margins?
KR: The biggest impact that I saw in the last few years in cost was in 2017 when, in H2 there were a couple of
hurricanes as well as the holidays approaching and there were runaway increases in freight and that certainly
would be a big impact on beverage businesses, given that beverages are so heavy. That was a huge impact.
That’s come back down a little bit over the last couple of years but it’s rising back up again, given the pressure
on the supply chains across the globe, it’s coming back up again given the recovery in the economy and people
getting back to some level of normalcy. The other thing that I understand that’s going on, again with the
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recovery, is a lot of the commodities are up, I don’t know about sugar, but I’d imagine that that’s up and that’s
a big influence on the carbonated beverage industry and I’m sure, since so much of this is still in metals, I’m
sure that metals are up as well. I’m looking at a picture of all those new brands in the carbonated, in the
caffeine business and most of them are in, about two-thirds are in cans and one-third are in plastic bottles. So,
I think the freight and metal, aluminium pricing and polypropylene pricing in the non-alcoholic beverages,
those are huge drivers of cost and then of course sugar, although less so these days given the rise of sugar-free
and low and no calorie drinks.
I don’t know about those commodities, but my guess is that polypropylene and metal is up and I know this
year freight is, coming into 2021, freight is on the rise again.
NH: Could you elaborate on this trend of consumers shifting away from less healthy items and into better-for-
you or health and wellness? Where does the US non-alcohol beverage industry stand on this point? Could you
elaborate on the trend of sugar reduction?
KR: This has been a long-term trend. It started out with the rise of diet drinks in the ’80s with Diet Coke and
continued that rise but the shelf stable juice category has been under attack for decades and then slow decline
given the calorie content of 100%, something that’s either 100% juice or sweetened with other sweeteners. In
the carbonated soft drink business, the full calories has been under attack for a while, so there’s been wave
after wave of innovation in low calorie and the most recent wave seems to be just sparkling water with some
type of juice or flavouring in it and now, on top of that, getting your caffeine that way too. The industry
continues to innovate in ways along the long-term trends of health and wellnesses exhibited by, it used to just
be absence of calories, now it’s absence of calories but with the addition of other good things like vitamins,
maybe a splash of juice and now caffeine which a lot of people wanted and actually think it’s not bad for you.
[00:19:47]
Q: Is the higher caffeine trend healthy for you? Why do you think people want more caffeine in beverages?
KR: First of all and again I don’t know the numbers off the top of my head, but I believe the three largest
liquid consumption categories in the world are coffee, tea and cola. So, for thousands of years the Eastern
world has been drinking tea. For maybe a little less than that but not much, the world has been drinking coffee
and I used to joke that, I used to ask people, I’ll ask you, what do you think the first energy drink was in non-
alcoholic beverages?
NH: When I think energy drinks, I think Monster.
KR: Right. So most people would say Monster or Red Bull, when in fact while that was marketed as an energy
drink, the first energy drink was Coca-Cola because it had caffeine in it and Mountain Dew. When I was head
of marketing for Schweppes and Sunkist and Sunkist orange soda was loaded with caffeine. So, caffeine has
been coming through in non-alcoholic beverages for a long time and you’re now just seeing it being added to a
whole bunch of different offerings. New coffee offerings but also new juice offerings and now water offerings.
You just saw Bubly water, which was just a sparkling water with essence, no flavours, no calories, no artificial
anything and now you can get that with caffeine. I’m now looking at a Perrier Energize product that has
caffeine. As I mentioned before, Ocean Spray came out with a sparkling water with a little juice and caffeine,
so as well as a straight up energy drink, Mountain Dew Rise, that doesn’t look like it’s trying to communicate
anything in terms of healthfulness, it’s all about caffeine. Obviously, humankind has been powered by caffeine
in a lot of different ways and we’re just now seeing the natural regeneration of it.
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[00:22:39]
Q: Do you think industry innovations are going in the caffeine direction, or is there any other type of
innovation likely to take the industry by storm?
KR: I don’t know. I think the two biggest strains of innovation I’m seeing is sparkling waters that contain no
added sugars and are free from any artificial flavours, preservatives and sweeteners, that’s one big trend and
that has been a trend for a while. I’d also say caffeine is another trend in some of those type drinks and then
other variants as well.
[00:23:30]
Q: How has the competitive landscape evolved over recent years? How has the balance of power shifted
between bigger and smaller brands?
KR: I’m not that up-to-date on all the market shares, but the biggest players are still the biggest players and
while there’s a lot of up starts, there’s not a lot of barriers to entry to get into the beverage business. You and I
could start one tomorrow. There is a barrier to scaling because the distribution networks in the top three non-
alcoholic companies, Coke, Pepsi and Dr Pepper, if you don’t get into one of those systems it’s very, very hard
to scale a business. So, you have to get into one of those systems, so it’s very, very hard for the balance of
power to shift and quite frankly, anybody that gains any significant amount of traction seems to be purchased
by one of those three big companies. In my opinion, no up start is going to topple Coke, Pepsi or Dr Pepper.
It’s most likely they’re going to ultimately become a part of one of those three companies. The one exception to
that seems to be Red Bull, they remain independent but they certainly having toppled those companies, they
certainly gave them a run for their money and established a whole new category, which they’ve responded to.
NH: Are there no anti-trust concerns in this industry, due to the play book of buying any type of competitor?
KR: Yes, it’s always fascinating to me about how they carve up the market and as an outsider looking in there
doesn’t seem to be any trust concerns.
NH: Ken, I think you cut out for a second.
KR: I was just saying, outside looking in there doesn’t seem to be any trust concerns. It’s fascinating how they
can define the category and how the big players are continually serial acquirers of smaller growing businesses.
[00:26:44]
Q: Why do you think private label is not as big a threat to non-alcoholic beverages as it is to more traditional
CPGs such as condiments and sauces?
KR: I think it’s a combination of years of the category being driven by marketing, coupled with the fact that
the distribution centre system is such a key driver of brand presence and brand strength, so it’s marketing and
distribution, those are really the two drivers.
[00:27:31]
Q: What do you think of the rise of Amazon and how it’s affecting the tight hold on the distribution network
that Coke and Pepsi utilise?
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KR: I don’t know enough about Amazon’s development in that area. I don’t think they’re as developed in
beverages as they might be in other areas. It certainly puts a threat in their system, although that’s just
another customer of theirs. I don’t know for a fact, but my guess is that they’re embracing Amazon as a
customer and figuring out a way to get the products to them as efficiently as they possibly can. The direct store
system is not a cheap system, it’s a very highly effective system. I grew up in Frito-Lay system from where it
was all store or delivered and snacks and so it’s very high effectiveness but it’s also high cost. So, while it’s
going to cost the big guys money to go through the Amazon system, they’re going to also save a lot of money by
not going through their system.
[00:29:02]
Q: Could you talk about the marketing landscape and how companies are able to brand products and stay in
touch with consumers?
KR: Again, I’ve been away from it for a long time, but the franchise soft drinks companies always had very
high margin. They spent at very high marketing rates and today that’s shifting in terms of how they spend
their money but they still spend a lot more money than your average food processor. So, a lot of the driver of
the brand activity was the margin (audio distorts 29.55) that the beverage business is able to enjoy in having a
higher percentage. I don’t know what the number is, but if you looked at the marketing spend, there’s a
percentage of sales in those companies, they’re going to be much higher than your food industry average. The
margins are higher, the spend is higher and therefore they’re able to maintain the brand power. Again, coupled
with the distribution system. You can be the best brand in the world, but if you can’t get it on the shelves it’s
not going to succeed, and while you could say you’ll do all your business through Amazon and still not, the
majority of the business is not done through Amazon.
[00:30:48]
Q: What factors do beverage producers consider when choosing how to package an item? Which materials do
they find most cost efficient?
KR: A lot of it’s just driven by their manufacturing capability of the bottling network. It’s hard to introduce a
new material, although there is a lot of work going on on sustainability. There’s recent advertising that shows a
Coke person, a Pepsi person and a Dr Pepper driver advertising the recyclability of the packaging, encouraging
people to recycle so I think plastic bottles and cans are here for a long time. While there might be a lot of
innovation on the fringe, the clearly, the system, there’s so much of an asset base that’s putting stuff in cans
and in plastic bottles that it’s hard, I don’t see that changing any time in the near future in a demonstrative
way.
[00:32:23]
Q: What would you say are the issues with the current model many producers use to manufacture their
products?
KR: The bigger issue is people’s concern about sustainability and plastic bottles seem to have more of a bad
rep than cans do, but I think sustainability of packaging is just a big issue that all the companies are wrestling
with, as proved by the advertising I just mentioned to you that just start airing this past month, where
obviously the big three pooled their money together, as an industry, to talk about the need and the capability
of recycling the packages that they produce and distribute.
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[00:33:30]
Q: Plastic sustainability has been an issue for a long time, but are more companies starting to react to the
issue, or are they still not taking it as seriously as they should? Do you think the industry is still blowing off the
whole notion of sustainable packaging?
KR: I don’t know if I’d say the industry is blowing off the issue, as evidenced again by trying to show how
recyclable everything is. I think they’re working feverishly as in industry to make sure that the packaging is as
sustainable as possible. It seems to me that I see them being more sensitive now than they ever have before.
That doesn’t necessarily mean that plastic bottles are going to go away tomorrow.
[00:35:47]
Q: How strong would you say consumer and investor pressure is to disclose more information on hot topics
such as sustainability?
KR: There’s a lot of pressure in the whole ESG area, so companies are being rated and reviewed based on their
need to develop ESG policies as well as living by them.
[00:36:26]
Q: What is your M&A outlook? Which categories seem ripe for consolidation?
KR: When you say categories for consolidation, all of the categories are consolidated. I told you, there are only
three big players in non-alcoholic beverages. If you add Nestlé, it’s a fourth but they just sold off their water
business, but if it was lower margin and they’re focused on a more premium higher margin, brands like Perrier
and San Pellegrino, so I think you’ve already got consolidation. I think the bigger question might be what up
and coming businesses or brands are doing well that might be in the sights of the big three to acquire. I don’t
know what that might be. If you look at the announcements, I don’t know who made the last acquisition but I
think Pepsi made the last acquisition of a brand. If Monster is still, I know there was a lot of back and forth
legalese between Monster and Coke.
[00:38:10]
Q: What are the industry’s most pressing challenges?
KR: I think you hit on it. Sustainability, the big one. Commodity costs. I think those would be two of the big
ones.
NH: What is your outlook for the US non-alcoholic beverage industry? What are the best- and worst-case
scenarios over the next six months?
KR: I’m not close enough to know exactly but I think that the biggest thing they’re wrestling with is now the
shift back between at-home consumption and away-from-home consumption and how do they manage
through that. I think the innovation is strong, that can provide some growth, so I think this will still continue
to be a growing category, I don’t know how much. In total they may not grow as much as they did last year,
given all the consumption that was at home, but I don’t know. I’m sure a review of what the beverage
companies outlook are saying would be a little bit more accurate than what my outlook would be. When you
look at the big businesses, I’m looking at the big businesses, so Monster is still independent, that’s still
independent, that’s a publicly trading company. Red Bull is still Red Bull. So when you look at big candidates
that would make a big difference in terms of M&A, those are certainly two that I would think would ultimately
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be targets of consolidation.
[00:40:17]
NH: Let me close by saying thank you, Ken, for your input. Clients, if you would like to speak to Ken in a
private call or meeting, please let your relationship manager know. Thank you again for joining Third Bridge
Forum's Interview today, this now concludes our meeting. Goodbye.
Transcription ends at 00:40:26 of recorded material
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