National Beverage Corporation (NASDAQ:FIZZ) is a collection of brands you've never heard of, one you've probably forgotten about, and La Croix. At one time, the company was on the front edge of the sparkling water revolution, and this lifted the company's revenues, earnings, and market cap for years. However, National Beverage faces several headwinds that make it very unlikely they can continue to trade near their 52-week high for much longer. This stock is extremely likely to lose its value as the company's chief product (La Croix) loses its market share.
A Random Collection of Brands
National Beverage's website extols a wide variety of brands and their 2019 Annual Report praises their small, vertically integrated structure that allows them to craft unique formulas to meet customers changing tastes.
"We craft a substantial portion of our flavors and concentrates. By controlling our own formulas throughout our bottling network, we are able to produce beverages in accordance with uniform quality standards while innovating flavors to meet changing consumer preferences. We believe the combination of a Company-owned bottling network, together with uniform standards for packaging, formulations and customer service, provides us with a strategic advantage in servicing national retailers and mass-merchandisers."
However, the retail reality does not match the claims made in the annual report. The reality is that, with the exception of La Croix, National Beverage is a collection of largely unknown brands that can't possibly add much to the bottom line.
Below is a list of their brands. I looked for them at Vons and Kroeger websites, and then I looked on Amazon. Most were not sold, or were not particularly popular.
| Brands | Vons | Kroeger | Amazon | Amazon Rank and Category |
| Rip It Energy Drink | N | N | Y | 2508 Ranked Energy Drink |
| Shasta Soda | N | N | Y | 1379 Ranked Soft Drink |
| Rita | N | N | N | |
| Ohana | N | N | Y | 4544 Ranked Soft Drink |
| Mr. Pure | N | N | N | |
| Nicola | N | N | N | |
| La Croix Curate | N | N | Y | 53 Ranked Sparkling Juice |
| Faygo Soda | N | N | Y | 632 Ranked Soft Drink |
| EverFresh Premier Varietals | N | N | N | |
| Everfresh | N | N | N | |
| Crystal Bay | N | N | N | |
| Clear Fruit | N | N | Y | 175 Ranked Drinking Water |
| La Croix | Y | Y | Y | 13 Ranked Sparkling Drinking Water |
I have never seen most of these brands in stores, or even heard of most of them. I do remember Shasta from when I was a kid. My grandmother bought it, and kept it in the back fridge, because it was "cheaper than Coke and almost as good". However, I don't remember seeing it anywhere in more than 30 years.
La Croix is definitely the crown jewel of the corporate portfolio, and it seems to have some troubles in its future.
(Source: Target.com)
A Brief History
According to an expose in Bloomberg Businessweek, National Beverage Corporation was formed by Nick Caporella in 1985 to purchase the Shasta line of sodas. In 1996, the company acquired La Croix, the brand that would one day become so successful for the company.
The La Croix brand was purchased out of the bankruptcy of Winterbrook Beverage Group. The Seattle-based company had purchased the water brand from a failing La Crosse, Wisconsin, brewer, G. Heilman Brewing, in 1992.
In time, Caporella took a real interest in the La Croix brand. He helped to move it to cans from bottles, expanded the number of flavors, and added more carbonation to give it a "bite" that would compete with mineral waters, like Perrier. National got behind the brand and used La Croix to promote the early adoption of "healthy" soda alternatives, as soda sales began to fall with concerns about diabetes and overall health (in the mid-2000s).
This was aided by a small group of National Beverage executives who conceived of marketing the drink to diet soda drinkers. They also broadened the marketing to companies like Target and Whole Foods, where they gained popularity. Beginning in 2013, the sales of the La Croix brand began to have double-digit yearly sales gains.
As the brand took off, Nick Caporella became more and more involved in every aspect of the brand. Soon, some of the very executives that had made the La Croix brand a success became irritated and left for competitors. A BevNet Article in January 2016 entitled, National Exodus, discussed the flow of critical people out of the company.
Even though the company is publicly traded, Caporella controls 74% of the stock, and thus is totally in control of the company and its direction. While he has allowed his son to take over day to day control, he remains as CEO and Chairman, and according to Bloomberg remains in total control of all things La Croix. He apparently continues to handle many items for the company including writing the letters in the annual reports, and most of the press releases for the company. This can be seen if one looks at the website, portions of which are powered by Wordpress blogging software, which is strange to say the least.
Financials
At first glance, National Beverage's financial history looks fairly good. Powered largely by the popularity of La Croix, the company's revenues, earnings, and book value have all grown consistently.
| Fiscal Year (Ends in April) | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 |
| Revenue Per Share | 14.30 | 13.84 | 13.93 | 15.17 | 17.76 | 20.94 | 21.75 |
| Earnings Per Share | 1.01 | .93 | 1.06 | 1.31 | 2.3 | 3.21 | 3.02 |
| Book Value Per Share | 1.62 | 2.39 | 3.29 | 4.53 | 5.38 | 7.22 | 7.22 |
As you can see, the revenue per share, earnings per share, and book value per share have all moved up nicely. This has been done while the company has accumulated almost no long-term debt. (They do seem to occasionally use debt, but do not usually carry LTD year to year).
In this time, they have also had a consistently high rate of Return on Shareholder Equity. The average for the last 5 years is over 38%, which would be considered good by pretty much everyone.
So, where are the problems?
Headwinds
The problems are growing. While the company was ahead of the game in the healthy "soda alternative" waters market for years, they are no longer alone. Major players are gunning for a piece of this market. Most notably, PepsiCo (PEP) has turned their attention to this lucrative market and they have been taking market share. In 2018, Pepsi launched Bubly brand sparkling water. In 2019, they featured Michael Buble in a humorous Super Bowl spot raising brand awareness. In the first year, the company sold more than $170 million in Bubly water. According to Beverage Digest (as reported in AdAge), sales grew by 155% in the first half of 2019, taking Bubly's share of the market to 6.6% in less than 18 months.
As of November 2019, La Croix still controlled 15% of the $3 billion per year sparkling water market. However, unlike Pepsi's Bubly growth, sales of La Croix fell by 10% in the first half of 2019. AdAge reports that industry publication Beverage Digest expects Bubly to become Pepsi's next $1 billion brand, and to surpass La Croix by 2021. This is even more concerning when considering the fact that the sparkling water market is expected to double in the next 5 years. At one time, La Croix was far and away the dominate force in sparkling water, but as that market grows, their market share is actually shrinking. Unless turned around, it seems likely that their cash cow (La Croix) will continue to fade away.
What makes this transition harder is the fundamental differences in how large businesses like Pepsi operate and the boutique manner in which National Beverage seems to operate. In the annual report, National Beverage lists among its strategic advantages, the fact that most of their distribution is done by their retail partners.
"Under the warehouse distribution system, products are shipped from our production facilities to the retailer’s centralized distribution centers and then distributed by the retailer to each of its store locations with other goods."
They deliver product to the regional warehouses for the grocery stores, or retail stores, and those companies move the product from there to the on-shelf displays. National only carries out distribution to retail for limited stores and "convenience locations". While this likely does save them money in terms of payroll, it seems to be a miscalculation. The large beverage producers like Pepsi have networks that distribute directly to the stores. The Pepsi products you see on shelves were likely stocked by employees of Pepsi or a Pepsi related company. National's dependence on the retailers reduces their ability to be sure their brands are stocked and current on shelves. Their decision to use the retailer's distribution means that they are just another product that has to find its way to the shelves, rather than the product, or products, that a company representative is responsible for.
With National Beverage now having to compete for sparkling water shelf space with the likes of Pepsi and Coke (KO), having to depend on the retailer to fulfill distribution is not an advantage. It is decidedly a disadvantage. This is made worse when combined with the limited scope of the National Beverage product offerings. As I demonstrated at the beginning of this article, the only product National Beverage has in many stores is the La Croix brand. This makes it very difficult to leverage their way into prominent shelf space against a company like Pepsi that has over 22 "Billion Dollar Brands" across many sections of the store (sodas, waters, chips, breakfast foods, and more).
(Source:Target.com)
To make matters more difficult, many of these giant companies are willing to take market share through carpet bombing the airwaves with marketing. National Beverage does almost no marketing. Rather they rely on social media and buzz. Again, they claim this as a benefit in the annual report. However, it is actually a vulnerability that leaves them open to competition from the corporate behemoths.
Companies like Pepsi will do what is needed to win market share, as they know they have the financial staying power to survive. They will make deals with retailers to ensure product placement and will engage in price wars to undercut La Croix. Bloomberg reports that even while La Croix began to lose market share, they would not change tactics.
"The Caporellas maintained that LaCroix was beyond reproach. 'The arrogance level reached an all-time high,' says a former employee. 'They’d say, ‘We’re LaCroix. They need us more than we need them.’" (Bloomberg)
In 2018, Whole Foods asked National to at least match the discounts being offered by their competitors, in order to justify prominent shelf placement. When they refused, Whole Foods reduced their displays and replaced them with those of their competitors.
La Croix's loss of market share was likely sped up by a lawsuit which claimed they were using chemicals under the "natural foods" slogan. While Natural eventually won the suit, their sales (especially to millennials) fell sharply in this time. Coming out of this lawsuit would have been a perfect time to really ratchet up the marketing. However, other than a shareholder letter on the investors page, there does not appear to be any increase in marketing efforts.
When asked what they look for in water products, 61% of respondents said, "Best Price". National Beverage does not seem to understand this. They are consistently on the higher end of price points for water. As of this writing, Amazon is currently selling a Bubly 18 pack of 12 ounce cans for $7.61 (or approximately $.035 per ounce). The cheapest La Croix I could find on the site was more than twice that per ounce. This may at least partly explain why Amazon currently shows that Bubly has taken the top spot in sparkling waters, and the highest ranked La Croix was 13.
I love sparkling water. I drink it constantly. While La Croix is good, I cannot state that they are worth the premium. Several other brands like Solei are consistently cheaper, and as good. Considering that 61% of people are deciding on water purchases based on price, I believe that La Croix must begin to adjust their price point, and begin to spend on advertising. If they fail to do those things, they will slowly but surely bleed market share to companies like Pepsi.
The Future
National Beverage does have one major benefit in their corner. They see the overall trend in the beverage market is moving toward healthy alternatives. To meet this end, they have developed some interesting choices to help people find healthy soda alternatives. The shareholder letter in the Annual Report discusses two such new products. Shasta Sparkling Water is designed to give Shasta soda tastes without the chemicals or sweeteners. Likewise, NiCola by La Croix is designed to give soda lovers the soda taste without the chemicals, calories, and sweeteners. Both of these seem to be good ideas. I would try one or both, if I could locate them. But I couldn't, anywhere. They are not easily available. The quality of the ideas and the products is meaningless if consumers can't easily locate the products.
If National Beverage Corporation can truly expand their brand presence in stores, that would be a tremendous benefit. They do have products like juices, non-carbonated waters, and soda alternatives that are similar to products in demand in the world. However, their products are not visible, locatable, or known. At this moment, the lion's share of their business is dependent on sales of La Croix, and while this has been a hugely profitable asset for them in the last decade, there are real concerns on the horizon.
La Croix is losing market share to new players in the market, and at a rapid rate. National Beverage's unwillingness to change, to expand marketing, or to rethink price are all liabilities to the business going forward.
The fact that the company is closely held by one man means change cannot and will not happen without his acceptance that it is necessary. At this moment, it does not seem that he is willing to do that. Because he owns 74% of the stock, no outsider or activist investor is likely to be able to force change upon him or the company. In addition, no hostile takeover can succeed. The company is largely stuck. In the short term, that may not seem like a huge problem as the numbers have largely held up. However, without major changes in strategy, it is all but guaranteed that La Croix will lose its top spot to Pepsi in sales of sparkling waters. The National Beverage share of the market is shrinking and looks to continue down that path.
Can We Invest?
At the moment, National Beverage's numbers don't look bad. They have had several years of growth, and at $58, they are trading within two dollars of their 52-week high. Their current forward PE of 23.58 is higher than the 10-year average of 21.43, but lower than the 26.34 average of the last 5 years. So, are they a good investment?
I would say no. The numbers are okay at the moment. However, cracks are beginning to show. As stated above, they are losing market share to bigger and stronger companies. The quarterly results for for Q1 2019 and Q2 2019 both showed lower comparable revenues and profits over the same quarters a year before.
The fact that the company is in the total control of one man means that change is unlikely. It is my belief that without change, the company will lose a dramatic percentage of the sparkling water market share that they have so far enjoyed. According to AdAge, this market shift is underway and could result in them losing the top spot within a year.
Because National Beverage's financial house is built predominately on the foundation of La Croix sales, the continued decay of this asset's popularity and sales will undermine the entire company.
While a push to expand the sales of the other brands in the portfolio could be a huge help in broadening National's overall financial health and stability, these moves do not currently appear to be in the works, nor do the changes in marketing, pricing, and distribution that could help to reinforce the La Croix brand.
While it is possible that changes could be made to help the long-term prospects of the La Croix brand, they do not appear to be happening now. While the stock price and numbers remain somewhat stable, it seems less likely that changes will be made. It may in fact be that only a major shift in La Croix sales will force the leadership to adjust, and by then it may be too late.
At this point, the strong numbers appear to hide the deterioration of the company's key brand. Without changes I believe the company's financial results will deteriorate over the next 3-5 years, and with it the stock price will fall.
I would avoid investing in this company, and put your money in companies with a broader financial foundation.
Good Luck and Good Investing
Price Targets
12 Months: $45-$55
24-36 months: $20-$30
