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00:00The whole beverage category is atomized.
00:04At the end of the day, there's almost so much real estate in that grocery store that you go shopping
00:08down.
00:08Dave Berwick is now CEO of higher-end fruit-infused sparkling water maker Spindrift.
00:16After serving as CEO of Pete's Coffee and Boston Beer and spending 20 years at Pepsi.
00:22All those brands have to prove themselves to those retailers who own those shelves that they're worthy of being on
00:28that shelf.
00:28So again, it's what makes the category really challenging.
00:31For me, it's what I love about the category because nothing worth doing in life is really easy.
00:37And this is not easy.
00:40If it's hard to succeed in the carbonated water business, why are so many companies going into it?
00:49Part of the answer is that it is easy to get a foot in the door.
00:52Adam Wagley is co-founder and CEO of Butterfly, a venture investment firm focused on all areas of the food
00:59industry.
01:00It's become a lot easier, a lot lower barriers to entry to creating these brands than ever before because the
01:06infrastructure around creating these brands has enabled that, you know, in the last 10 years that we've kind of gotten
01:12into this space.
01:13This used to work in the past is you'd have to kind of do everything yourself from scratch, from kind
01:19of developing the brand to developing the formulation, maybe even getting into manufacturing, finding out how to get your product
01:27placed, et cetera.
01:28Today, there are many different outsource businesses that support this ecosystem.
01:33So you can, in fact, go to a co-manufacturer who can actually make the product.
01:38They can formulate it for you.
01:40They'll usually work with a packaging company that can help you put the packaging together.
01:45And then you can go to outsource marketing organizations that can tell you how to launch a brand online or,
01:51you know, from a social media standpoint and kind of get going in those kind of formats, if you will.
01:57So there's this sort of infrastructure of companies that we call enablers here at Butterfly that actually support the different
02:04infrastructure that a founder or CEO needs to go create a business from scratch.
02:09The bubbly water business is part of a global beverage market that sold over a trillion dollars worth of soft
02:15drinks last year.
02:17More than a third of that was sodas, ubiquitous Cokes, Pepsis and their brethren.
02:21But those soda sales have come down 27 percent over the last two decades, giving up market share to various
02:28forms of water, which now account for over a quarter of all beverage sales.
02:32Carbonated water is only a modest share of that, but it is growing noticeably faster than its peers in the
02:38U.S.
02:39Among the driving factors, a desire for healthier alternatives to soda.
02:44That's what led Nicole Bernard Dawes to launch her product, Nixie.
02:48While the snack aisle and the produce aisle, even the dairy aisle, were getting more and more healthier organic products,
02:55the beverage aisle was still filled with sugar and plastic and almost no certified organic products.
03:03I really saw an opportunity. And I also really felt it was important to have zero sugar because I, you
03:09know, I think liquid sugar is just not a healthy thing for anybody.
03:12We knew we wanted to be a healthy beverage brand. Like that's our mission. That's who we are.
03:17We started with sparkling water, which, you know, we felt was one of the cleanest.
03:21We felt it really defined kind of what we were trying to achieve.
03:24And then after we got that out into the market, we started working on a zero sugar soda.
03:29Zero sugar is still one of the largest drivers of even conventional beverage for the conventional soda brand.
03:35Zero sugar is their biggest part of the growth for their business.
03:39And I think that also was exciting to me because, you know, with you when you have a category that
03:44large, you know, there's a segment of the population not being served by the products that are the number one
03:49or number two products.
03:50You're hearing the term modern soda a lot. And if you went into a grocery store, you know, a few
03:56years ago, you might have two or three feet for this, this new type of soda.
04:02And now you're going in and you're seeing, you know, chains like Walmart expanding from two feet to eight or
04:0712 feet.
04:08That growth of the bubbly water segment makes more attractive a business that's easy to get into in the first
04:13place, a form of making it up on volume.
04:17It's a great business, which is why I do it. I mean, I I love big categories because, you know,
04:23think about if you're talking about $10 billion category, you don't have to be a significant part of that to
04:27be a significant business.
04:29What is the opportunity you see for Spindrift?
04:31When we came in about a year and a half ago, it was about a $300 million business will be
04:35close to a half a billion dollar business at the end of this year.
04:38So after two years, and I think there's a clear path to a billion dollars and beyond for this brand.
04:43The sparkling beverage business is still growing 25 to 30 percent as more people come in.
04:49And when they do come in, they get to try our brand, which we think is better than others.
04:53And we like that. But we're also looking at other adjacent categories.
04:59We can take sort of that core equity with Spindrift is, which is real squeezed fruit.
05:03How do we take that real squeezed fruit and bring it to other categories?
05:07So most recently, we've launched a non carbonated tea product that we were really excited about.
05:12So between the core business of sparkling water, adjacent seeds like tea, we've also launched a soda, a healthier, better
05:19for you soda product that can get us to a billion dollars.
05:23It's a growing business segment, but that doesn't mean it's easy to carve out a niche for any particular product,
05:28much less succeed over the long term.
05:31The concern, though, is there are many out there and to try to figure out for us as investors which
05:36companies are going to last and make it and really created something special.
05:41We've got to really be picky about what we get behind because many can kind of get in business now
05:45to also scale and get to a substantial level will require a lot more than that.
05:52What about price? Where do you want your product to exist in the spectrum on price?
05:58We definitely want to exist in the high end. As we know, it's been much talked about.
06:01We have a K shaped economy right now. We serve that upper K.
06:05We want to bring everybody in, but you want to be in the premium segment.
06:09I think you want to focus on gross margin improvement so you can because that's really the oxygen of our
06:15business.
06:15So when we sell at a premium price point, we can we can improve our gross margin, then reinvest to
06:20grow to grow the brand.
06:22Also, interestingly, like within the health and wellness space where we play, we're seeing more and more low and middle
06:28income households actually trading up to premium brands when it comes to health and wellness.
06:31And there are very specific ways of measuring even day to day how successful a company is, including how it's
06:39doing in the water competition wars.
06:41Velocity is how many units of your product you sell in each store each week. And I think velocity is
06:48the truest measure of success.
06:49You know, you can't fake velocity. You can't cheat velocity. It's if a customer is coming in and buying your
06:54product and then they're coming back again next week and buying it again.
06:57You know, you can tell the health and success of a brand. And, you know, it's like it's how we
07:03gauge new products.
07:04It's how we gauge new chains. And I think it's very important for brands to watch their velocity closely and
07:11make sure that your velocity is where you want it to be.
07:15And if it's not, that you're learning why and fixing it as quickly as possible.
07:20Looking at sales, obviously, are we selling in, you know, to our to our retail customers?
07:24So to Walmart and to Costco and to Target and all those folks, we get a look at that every
07:28day with what those with how the orders are building up.
07:31We also want to look at syndicated data. Right now, we only have about eight percent of households that buy
07:36us during the course of a year.
07:38And that's pretty low. But that's that's a good thing, because that means there's a lot more places we can
07:43go with this with this brand.
07:44So we'll look at that. We also look at things like trial.
07:48How many people are trying our product and what's the repeat purchase? That's another really important one.
07:52Everybody will try anything at any given time.
07:55But the real measure is how many people come back to your product for the second time and the third
08:00time.
08:01So we also we also look at that.
08:02It's a growing segment with an awful lot of competitors. But can it be a good investment?
08:08Wagley finds that the very factor that lowers the barriers to entry may be the key to investing.
08:14One third of what we do at Butterfly is investing in consumer brands.
08:18And we think we're good at picking them and finding winners and making it work.
08:22But two thirds of what we do is investing in those enablers.
08:26It allows us to not have to take the brand risk. Right.
08:28We can just say, OK, we're going to bet behind hydration and the flavors that go into hydration.
08:33And so let's go find a flavor company that powers all these different hydration brands.
08:38And we don't have to sit here and determine which hydration brands going to win.
08:41So if we can go against the packaging companies that supply this hydration businesses, I think it's a great idea.
08:48Flavoring again is a big flavors essence.
08:51Ingredients in general are another area where we play and find amazing companies that are supplying those different sort of
08:58vendors.
08:59And then finally, a huge ecosystem that we spend a lot of time on is co-manufacturing.
09:03So a lot of manufacturing has been outsourced to these companies that are very professional at doing it and can
09:09do it for big brands, small brands.
09:11Finally, I'd say there's also the distribution and logistics of moving these beverages around, which are really interesting players, both
09:20national distributors, but also regional distributors that might specialize in certain channels.
09:25Those so-called enablers may be good investments, but those at the center of the business believe there's no real
09:31substitute for doing it yourself.
09:33I've always talked about how you want to start sort of with this product truth.
09:37What's the truth about your product that's really special? For us, it's real squeezed fruit.
09:41It's been around since 2010, and it's really ridden the wave of consumers gravitating toward healthier, better for you beverages
09:48that happen to be refreshing and have a nice, has a nice flavor profile.
09:53In most businesses, saturation is a bad thing. Success usually comes from scarcity.
09:59And when it comes to carbonated water, the fact is that many of the brands will likely fail.
10:05But those devoted to the business believe deeply that in the end, despite the odds, there's room even for all
10:11those versions on your grocery shelf, provided they have the right taste.
10:16The reality is that most things fail.
10:19You know, 80% of new products will fail just because just being, just showing up at the party doesn't
10:24make you interesting or relevant necessarily.
10:28Taste always comes first because if a product doesn't taste delicious, it doesn't matter how meaningful your mission is or
10:35how important all of the, the backstory of your brand.
10:37If people don't love the way they taste, they're not going to come back again and again to buy it.
10:41It's happening there.
10:41If people don't like this, we won't suggestсте where you're doing.
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