Beverage Industry Continues To Invest Outside Traditional Products To Fuel Future Growth

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Includes: CELH, DPS-OLD, KO, NSRGY, PEP
by: Altitrade Partners

Summary

Big beverage appears to be watching the new calorie-burning category very closely.

Nestle's new product will most likely be only as good as the science behind it.

The beverage industry is asking, "Why stop at zero calories?"

The calorie-burning beverage category got a boost last week when it was announced that Nestle, S.A. (OTCPK:NSRGY) has plans to develop a new beverage with fat-burning properties. The announcement came as a result of Nestle's own internal marketing research, which shows that consumers are gravitating, more and more, towards foods and beverages with health benefits.

The giant international food & beverage company has employed a team of eight scientists to develop a beverage that, if successful, would stimulate the raising of a body's metabolism in the same way that moderate exercise does, Bloomberg News Service reports. It is expected that the product will be in development for at least two years.

We think this news validates the idea that the next potentially big trend in the beverage industry will be calorie-burning, or negative-calorie drinks. If nothing else, it shows that one of the largest global giants in the food & beverage industry believes that a market exists for this type of functional beverage. Actually, when you think about where we have been and where we are going in terms of beverage development, it's just a natural progression to move from lower calorie and zero calorie beverages to negative-calorie drinks. The beverage industry is now beginning to ask the question "Why stop at zero calories?"

It will be interesting to see if Nestle's move, into this category, will be followed by similar moves on the part of Coca-Cola (NYSE:KO), PepsiCo (NYSE:PEP) and Dr Pepper Snapple Group (NYSE:DPS-OLD).

There has been growing concern in the C-suites of these companies over the slowing sales of traditional soft drinks that contain high-fructose corn syrup and other ingredients. Increasingly, these traditional beverages, the foundation of many big beverage portfolios, are now coming under scrutiny by consumers, and regulators, who are concerned about the health effects of these products.

At the same time, there has been tremendous growth in the non-traditional beverage category, including such products as enhanced waters, specialty teas, energy drinks, coconut waters, sports drinks and functional products that target a variety of consumer interests including relaxation, mental focus, digestive health, hangover recovery, relief from stiff bones and joints, etc. The size and scope of the functional beverage market has been estimated to be approximately $60 billion, according to Euromonitor.

This is not Nestle's first foray into the calorie-burning beverage category. The company had a joint venture with Coca-Cola in 2007 to market a calorie-burning beverage called Enviga. The product ran into strong opposition from the nonprofit Center for Science in the Public Interest, a consumer watchdog and advocate group, that challenged whether or not the marketing claims made by Coca-Cola and Nestle were both verifiable and certifiable.

Subsequent investigations into the product's assertions yielded the conclusion that the Enviga product did not have substantial proof, on a scientific basis, to validate its marketing claims of being a calorie-burning beverage. An agreement between Coca-Cola and Nestle, along with 27 State Attorney Generals, was eventually reached to resolve the dispute over false advertising, promotion and marketing. The two companies also agreed to pay a total of $650,000 in fines to settle the matter.

It's nice to know that despite their previous setback, Nestle (OTCPK:NSRGY) continues to work on the development of a calorie-burning beverage. It seems to show their confidence that the calorie-burning, or negative-calorie beverage category does have a promising future.

What most people don't know is that the Enviga product was not the first calorie-burning beverage to be introduced into the marketplace. That honor belongs to a small company in South Florida called Celsius Holdings, Inc., formally Elite-FX.

The launch of Celsius, the world's first and only calorie-burning beverage, came in 2005, almost two years before the introduction of Coca-Cola and Nestle's Enviga product. What set the Celsius product apart, and ultimately differentiated the product from Enviga, was the fact that prior to bringing the product to market, the company conducted clinical studies to validate the efficacy of its calorie-burning properties.

Celsius Holdings, Inc. (OTCPK:CELH) is the only company known to have conducted seven scientific studies (six of which have been published in peer-review journals) in an effort to verify and certify their advertising and marketing claims. In addition, the National Advertising Division of the Better Business Bureau has performed an in-depth review of all of the clinical studies done on Celsius beverages, and has found that the claims made by Celsius are, in fact, accurate.

The importance of these clinical studies cannot be emphasized enough. The scientific evidence to support the advertising and marketing claims by Celsius also helped the company to prevail in the California Courts when a class-action lawsuit was brought by a disgruntled consumer.

We believe that it is exactly the kind of publicity that we saw last week in Nestle's announcement that could act as a catalyst to finally create awareness of Celsius Holdings, Inc. and their products.

Here is a company that not only has been successful in a new beverage category, which they pioneered, but they have accomplished something that two of the most prominent beverage industry giants could not do effectively, and yet nobody knows about them.

We wrote an in-depth, 22-page report, on Celsius Holdings, Inc. and new consumer beverage trends back in March of this year, which covers the history of the company, the changing demographics and consumer trends of the beverage industry, and what industry players must do to not only survive, but thrive and grow in the future.

As pointed out in the report, many of the new beverage brands to come along in the last ten years, were not developed by big beverage companies, but by small beverage entrepreneurs. These smaller, newer, brands then grew in popularity and were subsequently acquired by big beverage and integrated into their product portfolios. Executives of the beverage industry point out that as much of one-third of the future growth in the beverage industry will come from these so-called "disruptive brands".

The ramifications for investors appears to be that many of the most exciting, and profitable, investment opportunities may come from smaller, lesser known brands that are attracting the attention, not only of consumers, but also of the big beverage companies.

Following these new beverage trends, and the products behind them, requires keeping a close watch on many of the smaller entrepreneurial type companies that have not only developed exciting new products, but have demonstrated success in their branding and marketing to consumers.

It is within these smaller companies where the impact of a newly-created and successful brand will be most keenly felt. The contribution, of a fast-growing brand, to a small company's top-line could be meaningful, whereas it would barely be noticeable on the financial statements of a beverage industry behemoth.

With revenues through the first nine months of FY 2014 amounting to just over $10 million, we are of the opinion that the progress being made by Celsius is being watched closely by beverage industry executives.

We know that Coca-Cola's Venture and Emerging Brand unit requires that a smaller boutique brand have at least $10 million in sales before they will merit VEB's consideration and attention as a possible future business opportunity.

The beverage industry landscape is littered with small entrepreneurial companies that have failed, but the likelihood of success increases exponentially if a smaller brand can carve out a unique and exciting new niche, where they can attract a consumer following, and experience enough "sell-through" to carry the brand across the chasm.

While it may still be too early to ascertain the long-term appeal of calorie-burning or negative-calorie beverages to consumers, preliminary results compiled from Amazon's web site regarding reviews of Celsius products show that many of those consumers who try the products like them; for taste, for increased energy and for better stamina during exercise and workouts.

While Celsius has yet to reach the mainstream consumer, Nestle's reemergence in the calorie-burning space, makes it hard to argue that the marketing executives over in Switzerland don't see the future value of this beverage category. As the Bloomberg article points out "You can't be 100 percent certain of the outcome. It's expensive. If anyone is to explore it, it would be a company like Nestle."

We will continue watching this space very closely for any additional insights, updates or new developments. It will be interesting to see the reaction to this news, if any, by the big beverage giants Coca-Cola, PepsiCo and Dr. Pepper-Snapple Group.

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Disclosure: The author is long CELH.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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