Summary
- The acquisition of SodaStream suggests that M&A in the beverage space is heating up – LaCroix is the crown jewel brand in the fast-growing sparkling water segment.
- National Beverage’s strategic repositioning is still misunderstood and underrated – it has been in the works for years, now largely complete.
- I am not convinced “Big Cola” can enter high growth markets with virgin brands so easily – I see the Monster Beverage story as a template.
- I see +$2 Billion sales potential for LaCroix – other analysts don’t because they are looking at the sparkling segment with hindsight vs. what it is becoming.
- I predict that National Beverage will be Acquired within 18 months.
[timeless]
Q2 hedge fund letters, conference, scoops etc
As was discussed in the interview, the SodaStream (SODA) Acquisition by Pepsi (PEP) clearly puts a spotlight on LaCroix’s (FIZZ) strategic value, as it is the “crown jewel” market leader in the rapidly growing sparkling water segment. I believe that M&A in the space will be kicking into high gear – none of the major beverage companies will want to be left behind, nursing core brands that a growing number of consumers view as in-part responsible for a massive health crisis.
National Beverage – A health-focused beverage company, with LaCroix leading the charge
Over a period of years, CEO Caporella has transformed National Beverage into a wellness-oriented company that has led the charge towards more healthful beverages. It is amazing that few people understand this. But then again, the vast majority of investors don’t seem to bother with reading annual reports. I have read all of National Beverage’s SEC filings released since year 2000. Here Caporella is way back in 2014, outlining his vision for what was to come (remember this quote – I am going to refer back to it at the end of this article):
Opportunity is more prolific than at any time in the recent past, while time is frugal with her charity… While actual time may be limited certainly – this present time is especially perfect for National Beverage to lead the transformation within the soft drink industry. Our discipline to place the long-range interests of shareholders ahead of short-term gains, our flexibility of speed to market and our creativity that leads the industry, places us at the forefront to innovate the gravitating ‘crossover’ consumer. We are sincerely committed to the health and wellness consumer and plan to expedite our innovation across all of our brands.
For those who are not familiar with the “crossover” concept, it is the term Caporella used to describe the way cola beverage drinkers are “crossing over” to healthy LaCroix sparkling water.
LaCroix – Creativity plus consumer engagement creates an organic growth phenomenon
Though Caporella’s strategy was calculated, a large part of the magic of the LaCroix brand is that its development has been spontaneous and consumer driven. To a significant degree, consumers have themselves created or added to the brand identity – LaCroix is the brand that people reach for when they want to be healthier and improve their lives.
LaCroix brand power continues to be validated by hard data
Earlier this year, scanner data showed LaCroix accounting for 73% of category volume growth in the Los Angeles market, where it moved into the market-leading position in sparkling water. I find this to be incredible! LaCroix’s strength continues to be backed up by recent scanner data, in spite of the onslaught of discounting resulting from Pepsi’s Bubly strategy (my opinion of which to be described later). As was stated recently in Bevnet:
Both sparkling (18.6 percent) and still (11.6 percent) flavored waters also enjoyed robust sales in July. National Beverage led the way with 29.8 percent growth in sales in the four-week period against an average price decrease of -3.0 percent. LaCroix saw sales of its flavored water jump 34.1 percent and its dollar share of the sparkling water category rise 19.1 percent as well. PepsiCo’s unflavored seltzer line Bubly, launched earlier this year, also indicated it may be gathering momentum by posting a 4.3 percent increase in dollar share.
“Pump-priming” can juice short-term sales growth, but it is a lousy method for creating a great brand
I have called industry contacts and other analysts in an attempt to better understand Pepsi’s Bubly strategy. What I am hearing is that Pepsi has spent a fortune on shelf space – something any huge beverage conglomerate can do. They have then used this space to sell heavily discounted Bubly product. Certainly, this is a technique that can engineer rapid sales growth over the short term – all it requires is enough money, which a multinational like Pepsi clearly has. Yet, there is a reason most large beverage makers don’t attempt to use this strategy very often – the track record for such efforts has been horrendous.
The problem is, pump-priming techniques generate low quality growth that relies upon artificial stimulus – subsidized shelf space and discounting. It is not profitable, organic, consumer driven growth. One contact went so far as to suggest that beverage retailers have been burned by the Bubly sales strategy – the upfront slotting fees likely did not make up for the loss of sales resulting from the deep discounting. If this turns out to be true, it will be even more difficult (and costly) for Bubly to hold onto this space in the future.
Is Bubly style “pump-priming” a valid way to develop a great brand?
I don’t think so. My sense is that when Pepsi pulls back with these “pump priming” techniques, consumers will lose interest – just as they mostly have with Big Cola’s supposed “Monster Beverage Killer” energy drinks.
Anyone recall the, “Big Cola is going to crush Monster Energy” meme from 2005-2006?
At that time, Hansen Natural (Then the maker of Monster Energy Drink) was heavily shorted – “everyone” believed that Big Cola would come into the energy space and eat Monster’s lunch. Well, it didn’t happen. Big Cola would have been far smarter to acquire 100% of Monster at that time, even at a substantial premium. Similarly, such an acquisition would have been an incredible move by Nestle or another international competitor. Today we have firms like Hangzhou Wahaha Group, which I believe would benefit greatly from entering the US market with a leading brand.
LaCroix’s growth runway is still enormous
What defines “sparkling” will grow as the segment takes market share from conventional, less healthy beverages in what are now considered completely unrelated market segments. I see LaCroix taking share not just from cola and other sparkling brands, but also energy, cocktail mixers, bottled (flat) water, and even beer.
I am seeing evidence that LaCroix is making headway in the cocktail mixer market, an area where brands such as FeverTree have had explosive market share (and share price) growth. Here are a few interesting examples taken from Instagram:
I thought the above was fascinating – A popular bar is using LaCroix Curate cans for their custom cocktails. The phenomenon of mixing LaCroix with wine has been huge for years. It is my wife’s favorite drink:
Lately, Knox has enjoyed making her spritzes with Aperitivo Cappelletti, an amaro similar to Campari, plus rosé wine and LaCroix Pamplemousse. The light, fruity version marries two of everyone’s favorite happy- hour orders.
Beer – loaded with carbs in a world moving towards low carb
While there are numerous low carb (some would say low flavor) beers, many of the varieties that have grown market share in recent years are high in both carbs and calories. Evidence-based health guru P.D. Mangan (who I follow on twitter and recommend highly) recently stated:
While stated with humor, there is a great deal of truth in this statement. Some time ago, I noticed that my favorite IPA contains 17g of carbs and well over 220 calories per 12oz serving. Compare this to a gin and Lacroix key-lime (my new preferred drink) – zero carbs, 97 calories (from the gin), and quite frankly it tastes better. It is also much better than traditional mixers, which usually contain either sugar or artificial ingredients. While I am not sure if National Beverage would consider entering the “hard sparkling” market directly (I think it would be a massive hit), the cocktail mixer space is a significant market that LaCroix is just now breaking into in a serious way.
Even without alcohol, sparkling water will take market share from beer
Somewhat amazingly, Millennials are drinking less alcohol than prior generations, and specifically less conventional beer. If they are not reaching for a can of beer or another type of alcoholic beverage, sparkling water will be a key alternative.
Consider this excerpt from a recent Business Insider article titled, “Millennials’ drinking habits are causing a crisis for America’s most iconic beer brands – and now they’re banking on nonalcoholic drinks to survive”:
On Thursday, Anheuser-Busch InBev, the beer giant that makes Budweiser and Bud Light, announced that revenue in the United States dropped by 3.1% in the second quarter as its two main brands continued to lose market share. Beer is being hit hard by a shift in drinking habits among millennials, who are increasingly opting for wine and spirits. As a result, beer lost 10% of its market share to wine and hard liquor from 2006 to 2016. Beer penetration fell by 1 percentage point in the US market from 2016 to 2017, while both wine and spirits were unmoved, according to Nielsen data.
Here is another fascinating excerpt, this time describing the acquisition of a LaCroix distributorship by longtime Chicago beer distributor:
As beer sales have been flat or declining in recent years, Lakeshore has increased its nonalcoholic beverage offerings, Hand said. And LaCroix is king of the sparkling waters. ‘It’s probably one of the hottest brands there is,” Hand said. “It’s very beneficial to us, strategically.
In my view, if you put the above pieces together it is clear that National Beverage would be a slam dunk acquisition for Anheuser-Busch InBev (BUD). It is a non-alcoholic brand famously popular with Millennials, yet also well known for pairing with spirits or wine in replacement of conventional beer or other cocktails. I think it is a perfect fit for Anheizer-Busch (Thought I am less sure it would be for National Beverage).
Energy/Coffee/LaCroix – I see huge market potential
I have long thought that coffee/naturally caffeinated versions of LaCroix could potentially break open vast parts of the cola/energy drink space to LaCroix that have to this point been out of reach – those consumers who truly need their daily caffeine fix and look for it in their beverages.
People who believe National Beverage “won’t go here” have not been paying attention to the brand’s track record of innovation. Indeed, (as my friend investor Brant Burns recently reminded me) a prototype of such a product was displayed in the 2015 annual report. If you are able to read the upper right corner of the package in the image below, you will notice that it says, “Natural Energy – Green Coffee Extract – Sparkling Water”
Given LaCroix’s tremendous brand appeal to millennials and the growth in coffee consumption (as documented here in a recent Keurig-Dr. Pepper presentation), I believe this type of product could become a smash hit – It could potentially lay the groundwork for an entirely new LaCroix sub-brand, with its own flavor varieties. One thing you should make note of when reading the Keurig-Dr. Pepper presentation – Water and Coffee are seen as the key growth trends. What if LaCroix combined them, as the 2015 prototype suggests?
Bottom line
I believe there is a clear path for the LaCroix brand to achieve several billion dollars in annual sales – and perhaps much more, once international potential is factored in.
I am certain many will argue vehemently against my projections. That is fine with me. The fact is, my National Beverage and LaCroix-focused articles have faced a wall of skeptics for the past six years – I first started writing on the stock when it was trading in the low teens, back in 2012. Back then, some thought I was crazy to think the stock would ever breach $20 per share. In the comments of my 2015 article, some argued that I had no idea how to evaluate a growth stock. I was supposedly a fool, because I was interested in how the market actually discounts information over time, not textbook financial theory. That was when the stock was trading for around $22 per share – right before National Beverage started an epic runup in share price.
I believe that National Beverage will be acquired within 18 months
The imperative of larger companies to move into the fast growing, healthy sparkling segment will accelerate – massively. I see no better, more sure way to do this than by acquiring the clear customer favorite and market leader. The notion that throwing money at slotting fees and deep discounting can create a great brand will be proven to be a farce. To use an analogy, it is a quick, unsustainable sugar high vs. a sustained release of energy. All such strategies do is leave an opening for a far-sighted competitor to pull ahead and build an insurmountable lead.
Regardless of the logic, the above is still just my opinion. Indeed, investors often ask me, “do you think that CEO Caporella (who is also the controlling shareholder with a 73% ownership) will ever sell? It is a good question. The answer brings me back to when I first started developing my understanding of the company’s (at the time) new growth strategy in natural, no-sugar beverages. Here is Caporella’s quote from the 2014 annual report, once again:
Opportunity is more prolific than at any time in the recent past, while time is frugal with her charity… While actual time may be limited certainly – this present time is especially perfect for National Beverage to lead the transformation within the soft drink industry. Our discipline to place the long-range interests of shareholders ahead of short-term gains, our flexibility of speed to market and our creativity that leads the industry, places us at the forefront to innovate the gravitating ‘crossover’ consumer. We are sincerely committed to the health and wellness consumer and plan to expedite our innovation across all of our brands.
A theme I have picked up on in Caporella’s writing is the juxtaposition of the enormous opportunity he foresaw in repositioning the company into healthy beverages, vs. the reality of a finite period of time. Corporations can continue indefinitely. Consequently, I realized that Caporella is sharing his personal circumstance, or balancing act. While I can only guess the state of balance at the current moment, years have passed since this (and other similar statements) were written. The “balance” (given time’s finite nature for the individual) has clearly shifted in one direction vs. the other.
My view is that Caporella’s objective is to push LaCroix and National Beverage as far as he can, and at the right moment, pass the baton to an owner that can maximize the LaCroix brand’s global potential. As the majority shareholder and CEO, only Caporella will be able to define this moment.
Regardless, I stick by my earlier prediction – I see the company being acquired within 18 months
Disclosure: I am/we are long FIZZ.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: N.A.S. Capital LLC is a specialized asset manager focused on underfollowed and undiscovered small cap stocks, special situations, and opportunistic investing strategies in quality companies. Our objective is to maximize return while minimizing risk, with a focus on absolute returns. N.A.S. Capital LLC reserves the right to make investment decisions regarding any security without further notification except where such notification is required by law.
