Sports Nutrition Companies! Beverages Are Likely Not Your “Blue Ocean”
As competition continues to rise in the sports nutrition CPG industry, brands have been looking more and more into less crowded categories. Starting in early 2016, I began to notice an increased number of small and medium-size brands in the sports nutrition industry launching either standalone or product extension large-format ready-to-drink (RTD) beverages. In 2016, I was light on beverage industry experience but I had worked on ancillary projects for functional foods (pancakes, bars, etc.) companies and completed a number of due diligence projects for sports nutrition brands wanting to get into beverages.
Despite a few opportunities, I didn’t engage with a sports nutrition brand past the due diligence projects because those reports showed that they weren’t a good match based on items that I will speak about below. That changed in late 2016 when I started working with a beverage portfolio company on several different projects that lasted about 15 months. That gave me deep insights into the world of functional beverages and one that I have used on numerous projects over the last two years.
So, why do sports nutrition brands look to beverage for opportunity? Firstly, the brand owners believe they can make a “better” product than the mass brands (Red Bull, Monster, and Rockstar) available in retailers nationwide. To be honest, they are likely correct but that is the case in pretty much any consumer category. A better mousetrap is always there but that usually comes with restraints and challenges from longstanding market behaviors. Secondly, the brand owners see the impressive gross margins. This is usually true, as long as the brand owner pumps their brakes on adding every nutracuetical ingredient in the world. Finally, the brand owners see less competitors than the nutritional supplement industry and they see an access point to a more mainstream consumer base. Compared to the proliferation in the nutritional supplement industry, clearly, this statement is true.
Despite all these true statements, why is the beverage industry success still a mirage for sports nutrition brand owners?
Reason #1 — Blow Up that Organizational Chart
Sports nutrition brands are usually marketing companies that happen to sell a health product. In that type of organization, you can be light on many of administrative areas. In my experience, even 8-figure brands have little to no employees in the operational and financial areas of the company. This will be exposed very quickly when you start contract manufacturing, moving around, and selling beverages to FDMC channels. When you get into beverages, you will be faced with the following:
- Increased complexity of your supply-chain — This will include an increased number of suppliers and manufacturers.
- Increased complexity of logistics — This will include an increased number of distributors, warehouses, and LTL/FTL truck scheduling
- Increased complexity of accounting — This will include an increased number of transactions, promotions, and cost layers from above complexities.
Reason #2 — Your Sales Team Sucks
Lets be honest, those bros that sell a few bottles of pre-workout here and there to the local supplement stores are not going to work. You don’t have the right sales team! You might have a National Sales Director and a VP of Sales that are killing it and you think, “anything I launch these guys will sell it for me” but this couldn’t be more wrong! Firstly, the beverage category can’t successfully be sold in your normal “safe” retail or etail customers because they can’t buy in a large enough quantity to justify logistical costs to offer a reasonable retail price. The customers you do want to attract are usually in FDMC channels. The problem is, your sales team likely doesn’t have the experience to connect and negotiate with these types of channel partners. If they do connect on a “hail mary” pass, you will likely be competing for shelf space with competitors much (MUCH!) larger than you. Because of that, you will lose your ass on the first account contracts. When you get to the negotiation table with the buyers in those categories you will likely not understand the different internal/external direct/indirect costs that go into pricing. These include slotting, scan downs, POS materials, damages, inbound logistics in, promotions, marketing (direct and indirect), etc. These “below the gross sales margin” items will quickly eat away at your proposed pricing model and leave you paying them every time something is sold.
Reason #3 — You’ll Need To Love Beer
In the nutritional supplement industry, there is basically two national distribution partners. Anything outside of that, you cover with direct to consumer and direct accounts. In the same regard, the beverage industry is covered by four major national distribution partners. The first issue is that you likely won’t have access to those national distributors for an initial period of time. The second issue is that direct to consumer and direct accounts are less available to cover the rest. Beverage is about cutting the final mile down to get the product as close to the accounts as possible. To do that, the beverage industry has 100s of small distributors that support the beer industry and smaller non-alcoholic beverage brands. The problem is, you don’t know the first thing about those complex web of distributors in the beverage category. Unlike traditional capsules, powders, and pills, the per item weight is massive, especially when you look at it from a ratio of sales price to weight. That makes for an extremely messy logistical situation. These small distributors could handle a whole state or just a part of one county in a state. That not only leaves you will a supply chain mess but also adds huge cost layers, as you will have to beef up sales and operational employees.
Conclusion
I agree the category looks attractive! That being said, 99% of you reading this article will not have the right brand or organizational structure to pull off this category and compete with the likes of Red Bull, Monster Energy, or CytoSport. To compound this article hopefully hitting home, I didn’t even touch on how this category might not fit your branding position or dilute your flagship product equity with core customers. The oceans might seem blue but this category will simply show itself as a mirage for most of you!
