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The Next Big Thing: How Coke’s Venturing & Emerging Brands Team Stays a Step Ahead of Tomorrow’s Thirsts

By:  Jay Moye Mar 6, 2013
Tags & Topics:
Venturing & Emerging Brands

There’s a good chance that an entrepreneur is behind at least one beverage in your fridge today, and an even better chance that one is dreaming up what will be your drink of choice a few years from now.

Coke’s Venturing & Emerging Brands (VEB) team was created in 2007 with an ambitious mission: to identify and build the company’s next generation of billion-dollar brands in North America. Part venture capitalists, part brand incubators and part industry forecasters, the team invests in and builds groundbreaking beverages that satisfy unmet consumer needs – from NOS energy and FUZE enhanced juice drinks, to Honest Tea and Zico coconut water, to Core Power milk-based protein drinks and illy issimo ready-to-drink coffee beverages.

We caught up with Deryck van Rensburg, president of VEB, and Matthew Mitchell, director of business development, to learn more about the team’s mission to stay ahead of the consumer curve and inject entrepreneurial energy into a 126-year-old enterprise.

What have you learned over the last six years?

DVR: Many things. First, the sheer scale and intensity of entrepreneurial innovation taking place in our industry has opened our eyes. Based on past experiences, we estimate that as much as one-third of our industry’s growth in North America over the next five to 10 years could come from disruptive brands in categories that do not exist today. At a global company like Coca-Cola, we rightly tend to focus on building our core brands in our core channels. However, we can’t ignore the small, entrepreneurial brands popping up in unconventional outlets – such as health and beauty spas, natural food stores, gyms, yoga studios and other places our red trucks don’t visit.

We’ve also learned to be patient. New brands need several years of attention and nurturing. In the past, if a new product didn’t meet our business plan expectations in its second year, we’d exit. Building a billion-dollar brand is a marathon, not a sprint. For example, it took glaceau vitaminwater seven years to get to $75 million in revenue, which is in our view the minimum needed to justify distribution on our scale.

How is VEB different from corporate venture capital groups?

MM: Corporate VC teams are traditionally separate, standalone organizations that invest in companies without creating a long-term roadmap to ownership. They are looking to gain insights into broader innovation platform. Coke’s senior leadership purposefully created VEB within the North America operating unit – to ensure P&L accountability, milestones and deliverables. We are not just investing in brands to learn or generate a return; we are placing bets that they will be our next billion-dollar brands.

Describe the process VEB goes through when seeking and investing in new brands. How do you decide where you want to play?

DVR: It’s an amalgamation of science, art and serendipity… and a blend of consumer research and market intelligence. It starts with an insight of what consumers are looking for, as well as a point of view about where they will likely be in the future. The most important part of the process is networking with cultural leaders, wellness experts and early-adopter consumers. We spend a lot of our time outside the office at conferences, expos and tradeshows such as Natural Products ExpoWest, and meeting with distributors, retailers and entrepreneurs. Because you can’t detect what’s new and next by studying third-party research reports; you have to be out in the market.

What does VEB look for in an investment opportunity?

MM: We identify brands that have achieved approximately $10 million in revenue. Only 3 percent of all beverage brands reach this “proof of concept” phase. By investing in a brand at this point, we minimize much of the initial risk and partner with a team that has ironed out its launch challenges, refined its marketing mix and brand positioning, and developed a loyal consumer base. When the time is right, we then introduce our expertise and capabilities – distribution, procurement, R&D, marketing insights and more – while preserving the brand’s entrepreneurial instinct and flair.

We also carefully evaluate how a brand has grown, keeping our eye on those that understand the value of “going deep before going wide” by targeting specific regions, channels or customer segments versus trying to be everywhere at once. Zico is a great example. They quickly realized hot yoga enthusiasts in the New York area were passionate about all-natural hydration, so they focused their sales efforts to these consumers, creating a legion of passionately loyal ambassadors. Deep down, all of us want to discover new, innovative brands. There is a social cachet associated with introducing a new beverage to friends and family. You have to allow time for that natural bonding process to develop; otherwise, you’re doing a disservice to the brand.

Does every VEB investment have a component of risk?

DVR: In essence, yes, because we are investing in areas that are, by definition, still unproven in the mainstream. We place multiple small bets at a time, with moderate risk spread across our investment portfolio. We can’t predict with certainty which brands will work, but chances are we’ll hit a homerun with at least a few. And you only need one to make the rest pay out in aggregate.

MM: We manage our risk through a multistage investment model. Once a brand has reached the proof of concept stage we discussed earlier, we initially make a minority investment and grow together, gradually increasing our ownership stake as the brand achieves certain milestones that demonstrate a good long-term fit.

How many brands are you reviewing at a given time?

MM: We take a look at 150 to 200 brands each year. We quickly turn down a lot of them because they’re either too risky, too small or don’t meet our long-term consumer vision. Once we identify an interesting brand, we build a relationship with the founder, assess the brand’s potential and evaluate partnership opportunities. At any given point, we are actively watching 25 brands that meet our criteria, and from those 25, we are in active discussions with two or three.

Can you describe the VEB culture and the impact it has made on Coca-Cola as a whole?

DVR: Our team is hopefully helping to bring a slightly more entrepreneurial lens to the organization. We are becoming a more ambidextrous company capable of managing big and small brands together. Deep down, everyone at Coke wants to be more entrepreneurial… to be more proactive, to take more intelligent risks, to be more outwardly focused. Entrepreneurs understand that Plan A rarely works. Knowing how to pivot, course-correct and leverage your networks and resources when things don’t go as expected is a valuable skill everyone should develop.

MM: Our team of 15 “intrapraneurs” bridges the gap from the big company to the small company. We’re small on purpose because we want to mirror the entrepreneurial brands we represent. Over the last six years, we’ve helped our colleagues understand that there are mindful, methodical approaches to introducing a new brand, and that gaining consumer adoption takes time. Additionally, I think we’ve helped the organization understand that there are greater sources of growth in the beverage industry and new ways for all of our brands to engage retailers as our competitive and channel landscape continues to expand.

How has Coke’s role within the entrepreneurial community evolved?

MM: The emerging brand space is very relationship-oriented. Getting to know the entrepreneurs, small distributors, specialty retailers, venture capitalists, consultants and more is incredibly important. The trust and credibility we’ve built within this ecosystem has been critical to our success. We share learnings and engage in conversations about innovation and entrepreneurship through our dedicated LinkedIn Group, Twitter handle, Facebook page and YouTube channel. We believe in helping these companies succeed. Because if they succeed, then we have more reasons to partner with them. Five or six years ago, when we walked up to a booth at a natural products tradeshow and said, “We’re from Coke,” we attracted a few confused looks. Now we get high-fives.

What have been your greatest successes, to date?

DVR: From a purely financial standpoint, the acquisition of FUZE and NOS has been a great success. We expect our FUZE business to be a very significant contributor to our business in North America going forward. And NOS was just a little nugget of a business when we acquired it and has become a successful energy brand with a lot of growth still ahead.

Honest Tea, on the other hand, put us on the map with the entrepreneurial community. Because by investing in Honest Tea, we got Seth Goldman. Seth is such a credible, high-integrity entrepreneur. When other entrepreneurs are considering a strategic partnership with Coca-Cola, they call Seth to find out what it’s really like to work with us. And he can talk not just about our three-year “courtship,” but also about the two years of “marriage” since we completed the acquisition. The fact that he wanted to stay at Coke speaks volumes, because all entrepreneurs fear losing their identity the minute they hitch their small wagon to a big company. They worry about their decisions getting overruled and their culture and ethos morphing into a larger enterprise. We’ve demonstrated that the mouse and the elephant can coexist.

Looking at the current VEB portfolio, and the opportunity ahead, what most excites you?

DVR: We’ve picked some good ones so far. We expect brands like FUZE, Honest Tea and Zico to be very successful in the years ahead. Through our venture partnership with Select Milk Producers, Core Power is fascinating, too, because value-added dairy nutrition is a complete white space for us, with no competing businesses or cannibalization. We make a point to pick not just interesting brands in interesting categories, but also those we think have platform capabilities that can straddle multiple sectors. With Core Power, we see much more than a post-workout recovery drink. We now have a platform to create and market value-added dairy beverages through the FairLife dairy venture. Similarly, we believe Honest Tea is more than just tea; we see it as a trademark that is capable of competing in multiple categories.

What does success look like for VEB?

MM: Reaching a point where we’re no longer surprised by what’s happening in the beverage industry. By identifying trends early on, we are reducing our total overall investment costs. Coke’s 2007 acquisition of glaceau vitaminwater was a powerful transaction for the company, but it begged the question, “What if we could have identified the opportunity three or four years earlier?”

DVR: Our role ends when one of our brands graduates into the core business unit. FUZE and NOS were first, and Honest Tea and Zico will likely be next. To use a pro baseball analogy, we see ourselves as a farm system. We help brands get from the minor leagues to the major leagues. We don’t want to hold on to a brand forever... our job is to stay focused on what’s new and next.

Check back tomorrow for an interview with Seth Goldman of Honest Tea and Steve Jones of Core Power to learn how VEB is taking their respective brands to the next level while preserving their entrepreneurial character.