The Breeze With Beverage Digest
The Breeze With Beverage Digest
Episode 11: Five Big Beverage Bets for 2024
In today's episode, Beverage Digest Editor & Publisher Duane Stanford and industry expert John Sicher tackle five predictions for the upcoming year that range from alcohol to acquisitions. They dive into some of the year's most intriguing themes and, as always, ask the most important question: what does this mean?
Hello and welcome again to Breeze with with Beverage Digest. I'm your host Duane Stanford. This is where we bring you into the kinds of industry conversations that we have here every day at Beverage Digest. We dissect what's happening, connect the dots and ask the most important question what does this mean? I'd like to say hello to John Sicher, a regular contributor to the Breeze. He's a former editor and publisher of Beverage Digest and he has since remained active in the industry as a consultant. John hello.
John Sicher:Duane, good to be with you again.
Duane Stanford:So I would ask you, I would ask John, who he likes in Sunday Super Bowl. But I actually already know he and I have a little low stakes wager on the game. He's got Kansas City, I have San Francisco. John, are you worried? Your net worth is going to take a little bit. Will it hit this Sunday?
John Sicher:Duane, let me just say this to you You're probably the best Beverage journalist I know, but did you last win a football bet from me, before or after the introduction of New Coke?
Duane Stanford:Let me think I may have had the cheaps last year, so we'll see what happens this year. I think we have a flip flop going on this year, so it should be a close game. It should be a good game.
John Sicher:So, so. So let me ask you this question. Let's add one more component to the scoring, so I will predict Chiefs 21,. 49ers 14,. Mentions of Taylor Swift 122.
Duane Stanford:Yeah, I don't think I'll take that bet. I think you might be right, At least about the Taylor Swift portion of it. I don't know about the score. 49ers are, I think, favored by three. So we'll see. It'll be a good game, and I'll tell you what those Chiefs. They always figure out a way, don't they?
John Sicher:I see Is Body Armour running an ad on the Super Bowl. Did I read that right?
Duane Stanford:I believe so. Yeah, that's right. Yeah, it should be kind of interesting. Probably the ads are going to be a little tame this year. Everyone's trying to be very careful, but you've already seen Bud Light going back to some of the fun from previous years. Body Armour will be there, as you mentioned, so it should be interesting. So for today's show, John and I are going to have a little fun. We decided to focus on five predictions and, in some cases, surprise predictions for 2024. Now I'll say right up front whether or not these happen or not, whether they're even probable, it doesn't matter. These predictions get to the heart of a few hot issues within beverage circles these days. John, you ready to go?
John Sicher:All set Duane.
Duane Stanford:So our first prediction Coca-Cola buys beer brewer Molson Coors. What are your thoughts on that, john? We're going to see something like that this year. Is Coke in the market for a big alcohol acquisition now?
John Sicher:Look, I've thought for some time, since James Quincy became a CEO and started talking about Total Beverage Company, I've thought that Coke is going to make a move into alcoholic beverages in a major way. It hasn't happened yet. I could see them buying a beer company or possibly buying a spirits company like Diageo, and I think that Quincy would like to probably transform this company before he retires. And I don't see Coke or Pepsi for that much returning to volume growth on their own anytime soon, given their current brand portfolios. So I think there's a good chance that or a decent chance that you might see a major move by Coke into alcoholic beverages in the next year or two.
Duane Stanford:I mean clearly James Quincy has been on the Total Beverage Company strategy. They bought Coast to Coffee several years ago bad timing, but still that was a play at getting into that very meaningful coffee category. You've seen them quote unquote experiment with alcohol in the last couple years. I think it's pretty safe to say that's beyond experimental stage. Now I don't think they want to say that, but I mean we can see what we see. So it stands to reason. Then, if you want to be a Total Beverage Company in the next several decades, it stands to reason that you're going to want to be an alcohol. So I think there's a lot of reason to believe that they're looking at it even more heavily than just simply a way to experiment with some of these brands by hooking up with other companies.
Duane Stanford:Now, for the time being, though, I mean they've been doing really good with their sparkling beverage portfolio. They're growing it, they're taking share. They have been. There seems to be plenty of opportunity there perhaps. So the question always with Coca-Cola is to what extent do they want to distract themselves from that core and to what extent will the board be okay with them distracting themselves? Or can they chew gum and walk at the same time and that's continue to build that core, sparkling that core soft drink portfolio at the same time that they set themselves up for the future.
Duane Stanford:And James Quincy has said, and calls and earnings calls, that that's going to be a long process, that's going to take time, it's not going to be fast. So that all adds up to me a real possibility that you might see them make a play for a beverage alcohol company eventually. I mean the same way they did with coffee. They weren't satisfied with merely partnering with other companies or even just trying to create another coffee brand themselves. They decided to jump start that by actually buying roasting operations and a retail business that you could actually experiment with and build a brand around on the RTD side. So that could be quite interesting. Any other thoughts on that?
John Sicher:Yeah, I do. I mean you said that Coke's doing relatively well and sparkling. I think relatively is the key word there. I think in January. If you look at the Nielsen data that one of the analysts published today, coke's volume is down 2.1%. Volume has been an issue for Coke and Pepsi and KDP for a while. Coke has been doing relatively better. It's been getting good pricing, it's been generating revenue growth because of pricing.
John Sicher:But I think that, look, the CSD category is in trouble and that's Coke's main business. Over the last 20 years CSD volume has been down about 20%. Dwayne Per capita consumption of CSDs is down about 33%, meaning that the average American is consuming a third less soda than he or she did two decades ago. Coke may have outperformed that a little bit, but there's no indication that CSD volume is going to grow again sustainably. Pricing is going to get more difficult. The New York Federal Reserve Bank had some numbers out this morning that credit card delinquencies are surging, auto loan delinquencies are surging, mortgage delinquencies are up. The consumer is pressured and I think it's going to be hard, as this year plays out, to get pricing. So I think that, while we're talking about Coke, I think that it's been doing a relatively good job in CSDs, but it's got to find new avenues of growth.
Duane Stanford:Yeah, I mean the beginning of this year. Things have already decelerated. It took a while to get there, longer than probably a lot of people thought, but there is that deceleration happening now. You've got that very challenging volume mix along with pricing that's really coming to play. As we've talked about in a couple of podcasts, the big software companies are going to be earning their money this year managing through that. So that makes you wonder okay, do you have time to get distracted with some sort of acquisition If you're talking about 2024, even 2025, or does it somehow spur that along in order to be able to show growth?
Duane Stanford:That could be an interesting question. I looked at the market cap of some of these companies and Coca-Cola's got about a $260 billion market cap. Most in core is there at about a little more than $12 billion, constellation $45 billion, diageo is about $83 billion and Brown Forman is around $27 billion. So obviously Coke has some potential firepower there. But any thoughts on if you're Coca-Cola and you're looking at really shaking things up with an alcohol acquisition, or are you looking at a spirits company or a beer company?
John Sicher:Look, I think you probably know more about the alcohol beverage side of things than I do, but I think beer has not shown much growth. I think spirits are showing the best performance in the alcohol side I think right now, better than beer and wine. Is that not right?
Duane Stanford:Yeah, that's absolutely true. The question is is RTD spirits-based cocktails going to go the same way that hard seltzers did, where it was sort of a boom bus scenario? I mean, topo Chico hard seltzer right now is down in 2023. It finished the year down about 15% according to Bump Williams Consulting. Jack and Coke. That's been showing growth and pretty promising. It was like the number 12 RTD spirits brand in 2023 overall according to Bump Williams Consulting. So to your point, it does seem like the spirit side seems a little more promising now, but it's still kind of early too.
John Sicher:I step back to when I look at things often fairly simplistically. Microsoft was a very, very successful company some years ago. It had basically two lines of business Windows and Office. And Windows and Office stopped growing and Microsoft stock took a hit, and today Microsoft has now passed Apple as the most valuable company in the world in terms of market cap. Today, Microsoft is Windows Office Gaming Cloud. It's a very diversified company. Windows and Office are still generating good money from Microsoft, but that's not where its growth is coming from. I think there's a possibility you're going to see at some point in time. Coke follow a simple pattern it's great brands, it's great. Csd portfolio will be there, will generate a lot of cash, maybe not much growth, and Coke will begin to look to other avenues for future growth.
Duane Stanford:Yeah, I think coffee and alcohol are two places where there's still more story to be written. By the way, simply, I was looking at the numbers for SimplySpiked. I mean flavors that's interesting trend right now after hard sell are kind of fizzled out a little bit. Simplyspiked, that's a brand that Coke has teamed up with Molson Coors, authorized to Molson Coors. That's up about 147%. And then you've got Fresco Mixed, which is a spirits based product with constellation brands, and that growth is up 566%. So still a lot of promise there. So it's kind of a mixed bag. I think hard sell stores where things are kind of challenging. But yeah, to your point, I think there's a lot of reason to believe that Coca-Cola is going to continue to look at alcohol as a way to diversify for the long term. And of course that will be a process that will be long term unless you just simply jumpstart it at some point, take a leap forward with an acquisition.
John Sicher:Exactly.
Duane Stanford:So all right, let's go to number two, John. So number two non-alcoholic beer, jug or not, athletic brewing is acquired. What do you think the chances are of that in 2024?
John Sicher:I think the chances are good. I mean, it's a phenomenon. The Wall Street Journal ran a big story on the front page of their second section last week on the growth and fascination with this brand. You and I have talked about it before. I think it's a great product. What I think could happen is I think that Athletic could be acquired. I think it could be acquired by one of the big soda companies, because I think that right now the analysts all seem to be measuring Athletic in the in the beer universe. In many ways, what Athletic is has a non-alcoholic beer it's. In many ways it's a soft drink. Pricing is different, I understand that, but it's a soft drink package in aluminum cans and I think that Athletic could be a very big opportunity for a company. And if I had to bet which company might buy Athletic as long as we're talking about predictions I might throw Pepsi's name in into the ring.
Duane Stanford:Yeah, it's an interesting concept, you know, not measuring it against the beer. I mean, you know, in Europe I think non-alcoholic beer is what 8-10 percent, something like that Craft beer and its height got you know at 15-16 percent, something like that in the US. I mean, there's going to be a natural ceiling for some of that stuff, but it sounds like what you're saying is you think this non-alcoholic beer could take occasions away from just other non-alcoholic products, and that's maybe a reason why a company like KDP might want to pay attention to it or do more with it.
John Sicher:KDP or possibly PepsiCo. You know, I think that I don't think PepsiCo I mean Coke has made some major acquisitions in the relatively recent past with Costa and Body Armor. Correct me if I'm wrong. Correct me if I'm wrong, but Pepsi, other than Rockstar, has not made a major acquisition on the beverage side for quite a while.
Duane Stanford:Yeah, I mean, that's a good one.
John Sicher:I think you can see Pepsi right for perhaps a major deal in 2024 or 2025. I can't think of a product would be a better fit for Pepsi than Athletic. I think it could be a real growth engine for them.
Duane Stanford:I feel like the thing I might worry about if I'm KDP or Pepsi, is that you've got the big beer companies coming into the market pretty ferociously with their non alcoholic products and you know I just wrote about SingTal. They've got their zero point zero beer coming to the US now and it's done pretty well overseas in Europe. You know you got other brands. I mean Guinness even has a non-alcoholic beer. You've got so much competition in that I would think you'd wonder as a non-alcoholic company with the kind of distribution you have, you know whether long-term that was really gonna pay off for you. You know I'd be afraid to go up against some of those big brewers and you know consumers seem to like some of those imports.
Duane Stanford:Imports are, you know, one part of the beer sector right now that's still holding its own in a in a beer category that's really troubled right now.
Duane Stanford:So you know I think you might have to think long and hard. But I mean, clearly KDP invested in Athletic and is involved in them for a reason. You know it's probably a good business to be involved in now and they probably were smart in structuring it the way they did so that they do have the ability to sort of move on, if, if trends change, if the winds change, if the competition is too great. I mean, it's not a great parallel, but you saw something similar with Suja and Coca-Cola. They invested in that cold pressed juice market when it was just exploding and everybody was super excited about it. Then it became very difficult to move those products through a chilled system, expensive, and consumers kind of got a little fickle on it and, you know, kind of moved away from that investment and then, you know, went another direction. So you know, I kind of wonder if that's what's gonna happen here with something like Athletic.
John Sicher:You know, I think that I think athletic. The reason why I'm sort of fascinated by the idea of PepsiCo buying athletic is it could go right into their existing distribution system. They own about 80% of their US distribution system and athletic would be a great addition to that. I mean it would on a channel by channel by channel basis. It would fit perfectly and it would be a great growth engine for PepsiCo. But we'll see.
Duane Stanford:I mean there's kind of an interesting parallel there. I mean, I think one of the one of the challenges for athletic is really their placement on the shelf, like where do they get shelf space? Across channels, you know, where is it located, how easy is it to find? And you would think that would be something that a company like PepsiCo could potentially help with. I mean again, not a great parallel, but you know Celsius they, you know, didn't have a great C store presence. There was a lot of cold availability. They just didn't have access to or didn't have the capital to. You know, put that cold equipment out out there. Some of the colleges and universities. That was, you know, all those areas PepsiCo was able to help them with really quickly. Now I presume that's what you know KDP is looking to do right now as well. But you know, I see your point on that. I think I'm overall skeptical about all of that right now, but I definitely see the rationale.
John Sicher:You know, in New York gross restores, athletic is in the beer section but and it's mainly in the in the, in the refrigerator beer section. But you know, if you think about it, you know logically or conceptually rather, there's no reason why you couldn't have a shelf set of Pepsi, dipepsy, mountain Dew and Athletic it's, you know, it, it, it. It would be a an opportunity for Pepsi to have a fast-growing brand, to basically pull people to the salt, to its soft drink displays, an aisle and really, as I said, give it, give it a new growth opportunity.
Duane Stanford:Well, I mean it's. That's interesting. I mean, you know, the industry these days is driven so heavily and consumers are driven by, you know, occasions, and so I do wonder okay, what's the occasion? Are you, if you're an athletic brewing, is this a social drinking occasion that you're giving, you know, a consumer, an opportunity to switch back and forth between alcohol, or to just still be in the party mode and still fit in with the crowd but have a non-alcohol version of something that looks and drinks like an alcohol? Or is the occasion for? You know, I'm hot, I just I was just mowing the lawn and I want something refreshing. And or it's just a hot summer day and I'm just thirsty and I'd like a, a non-alcoholic beer, instead of a soft drink or instead of a flavored water or a seltzer. I'm still not there yet that that's the kind of occasion swapping. You're gonna see with this, but I don't know, you may disagree.
John Sicher:You know, I think I think the jury is out. I think that I think that non-alcoholic beers are going to take some occasions from soft drinks, and I can tell you right now if I'm having a sandwich at home at lunchtime, whereas sometimes I might have water, sometimes I might have a diet cola. More recently I've had an athletic. I find it very satisfying, and after I work out in the gym sometimes I'll have a sports drink, but sometimes I'll have an athletic. I think it's got a lot of growth potential because I get the great taste of beer, the thirst quenching of beer, but not the alcohol, so I can go back to work after I've had one or two.
Duane Stanford:It's interesting. As a beer drinker, it's probably my go-to alcoholic beverage. Covered craft beer for a long time. Love craft beers, love breweries. I just have not. Drinking a beer without the alcohol just isn't something that I've really done that much yet. I mean, I've tried it so, yeah, it's interesting. So the question is how many consumers fall on which of those two ends of the spectrum, and that's going to be a lot of the game here. The extent to which the industry can actually convert non-alcoholic users over to this as a refreshment beverage, I think that's if they're able to do that. Again, I'm skeptical. That would be a really interesting variation in terms of who might be interested in these companies and how non-alcohol companies like Pepsi or Coca-Cola could play in this total beverage environment. So very interesting.
Duane Stanford:All right, john, let's move on to number three now. So PepsiCo turns around its underperforming Mountain Dew franchise. I don't know if people have been looking at the numbers very closely lately or not, but Mountain Dew's been going through another one of its trouble spots. I mean, I was looking at the numbers earlier today and Mountain Dew regulars down almost 10% on a volume basis In 2023, diets were down almost the same amount, and that's in a category that was down by volume by about 3.5%. So it's tracking like three times the decline of the category itself on a dollar basis, which is super important these days. And one of the most important metrics regular was up about 3.2%. Diet was up almost 4%. That's in a category that grew by more than 11%. So clearly there's some work for due to be turned around. So, if we're right and PepsiCo turns that around this year, are they going to do that because they get back to getting the core to drink more of this? Are they going to recruit new users?
John Sicher:Look, I think PepsiCo has to really figure out where they want Mountain Dew to play, and I think they have to. Mountain Dew, going back a lot of years, was sort of the original energy drink. It had a bit more caffeine than the Coalas College kids, young people, used to use Mountain Dew to stay up and study. It was an energy drink in many ways. Then along came energy drinks and I think energy drinks have really dinged to Mountain Dew. But it's a very important brand for PepsiCo. For years and years and years I thought it was one of the best marketed brands in the industry and I guess my logic is sort of this way.
John Sicher:I think that PepsiCo will start turning around Mountain Dew because they have to. They can't afford to let this brand be down 10% year after year after year. It's too valuable an asset for them. Pepsico is a great marketing company. I think they have to figure out some new positioning and a new messaging for Mountain Dew, because it's not going to play against Monster and Red Bull, but it's a great brand. It's what I would call a skyhook predictor prediction on my part, and that is. I think PepsiCo will figure out a way to turn it around because they simply have to do that.
Duane Stanford:Yeah, I totally agree. It's a must do. You've heard them talk about in recent years the fact that they need to invest in Pepsi, brand Pepsi, and they need to really get that brand going back the other direction when it comes to share losses et cetera. They've done some pretty heavy investment in this whole new branding for Pepsi and the new Viz ID. Now, based on past history, they do something with Pepsi and then do something with Mountain Dew when they need to kind of get these back on track. You should expect to see them doing something with that this year next. I mean there's still a lot of activity around Pepsi this year, so I wonder if more of the activity might happen next year.
Duane Stanford:But there's always this question with PepsiCo in that they have this massive snacks business. That's super important. It's extremely important to their total company profit margins. I mean it's where they get the biggest bang for their buck. It's where Wall Street is highly tuned to how that business performs in terms of the overall company algorithm. And so it seems to me that PepsiCo's, with their North American beverages business, is always kind of riding this fine line of let's make sure we preserve as much investment for Frito Lay, let's make sure we don't get too far behind on Pepsi and Mountain Dew and core carbonated soft drinks, which is an area where clearly they don't believe that's sort of necessarily a priority over other things for the long haul. So they're always sort of trying to ride this fine line with that and so far I think you could say it's worked pretty well in terms of how Wall Street views the company and past years, how that company has been valued from a Wall Street perspective.
Duane Stanford:But every once in a while you go too far and it catches up with you and that may be one of the times we have now. I know Ramon Liguarta has talked about really trying to get that core back turned around and performing better, gaining some share. So you could be right. This could be a time when we really see some activity behind that. And then the question is have they lost too much and is there they own most of their bottling system and is that bottling system tuned up enough to really kind of go after that share and get it done? I mean, at some point sometimes you go too far and it's hard to kind of get that back. I kind of wonder where they are in that regard now. What's your thinking in terms of that?
John Sicher:You know, look, I think that if you look at the third quarter reported results from Coke and Pepsi, I think Coke North America's volume was flat. I think Pepsi's was down about 6%. I think that I think Pepsi I think you're right Snacks is a great, great, great PepsiCo business. But I think PepsiCo simply has to do better on the beverage side and there are really three brands that can do that for them Pepsi, mountain Dew and Gatorade. And going back to our Mountain Dew discussion, I think that even if they don't get Mountain Dew growing again, getting Mountain Dew to flat, to down one or two percent with a little bit of pricing, would make a very big difference for PepsiCo. So you know I always say you know if you and I realize that they're probably way ahead of us, and so my suspicion is, somewhere in the bowels of Purchase, new York, they're working on a strategy to reposition and revive the performance of Mountain Dew and you know, I think we'll probably see that begin to take shape sometime this year.
Duane Stanford:Yeah, I think it's almost do or die at this point in 24-25. You can't get further behind and expect that to be an easy climb out. So there's something. They're really going to have to put something into that and you know you're seeing signs of that already. So it'll be. It'll be interesting to see how that plays out this year. So while we're on the subject of PepsiCo, let's turn to our number four prediction for 2024. And that's that PepsiCo abandons its Blue Cloud distribution model for alcoholic beverages Thoughts.
John Sicher:Yeah, I mean it's a. I think my guess is Blue Cloud has been a disappointment for them. They're what? How many states are they licensed in now? Do I have 18?
Duane Stanford:18 states and also.
John Sicher:Las.
Duane Stanford:Vegas, yep.
John Sicher:And you know they've been. They've been working on this for a while and I think it was a good idea because, unlike Coke, pepsi North America is both a brand owner and a distribution company, so owning a distribution business for alcoholic beverages made a lot of sense. But you know, they may say to themselves you know, enough is enough. So I think what's going to happen is I think 2024 is going to be what I would call a telltale year, meaning that Blue Cloud will basically penetrate a fair number of additional states, or toward the end of 2024, 2025, we may, we may find see PepsiCo saying that they're going to relook at their distribution strategy for alcohol.
Duane Stanford:I mean this is going to be a critical year. I mean it is true they have stalled in terms of that expansion to new states. They expected by the end of last year, or at least Boston Beer, which is their partner for Hard Mountain Dew, expected Hard Mountain Dew to be in 30 states by the end of 2023. Blue Cloud, which is the, you know, primary distributor for Hard Mountain Dew, is, you know, again, in about 18 states as of now. So clearly something stalled. I mean they've had a leadership changeover.
Duane Stanford:We reported last week that they've you know they've elevated someone within the organization on the sales side to the chief spot for Blue Cloud after the previous leader left for another gig. You know so they're, you know they appear to at least still be committed to it in terms of you know that leadership. You know I get mixed signals as to, you know what the eventual plan is for the business. I don't see them abandoning it, abandoning it. Yet I mean they've appealed in Virginia very important ruling that went against Blue Cloud. You know Virginia basically saying, you know PepsiCo is trying to have their cake and eat it too, a couple of tiers within the three-tier alcohol regulation system there, and saying that they're, you know, in effect a distributor and a manufacturer, but they've appealed that ruling and they've, you know, continued to push their case there and in some other states. So they clearly aren't giving up in that regard. But they, you know, I sorry sorry to interrupt.
John Sicher:You know I saw some data this morning from one of the analysts that Hard Mountain Dew, dwayne has got an ACV of about 16% and I think its share in FMBs is still under 1%. You know that's not sustainable. I mean, I think that Blue Cloud has to basically, as you said, make it, as we were discussing, make a quantum jump this year in terms of market and channel penetration, market penetration. Or I think there's going to be a rethinking of Blue Cloud and possibly a rethinking of Hard Mountain Dew.
Duane Stanford:Yeah, I mean, if it goes the way it is now, that's definitely not sustainable. I have gotten the impression that they got into this. I mean, certainly they understood to some degree the challenge they faced with the beer distribution industry in the US. And you know they're not going to, they're not going to take very lightly someone coming into their territory, so to speak, a non-alcoholic player coming in to some of these states and playing in their sector. And they've pushed back very hard. And I think you know I wonder if they really fully expected the extent of the pushback and also just the way the beer industry has also, you know, called into question these crossover products in terms of a safety perspective and, you know, under 21, the extent to which they could get their hands on them. I mean, that's been something that's been kind of mixed into the discussion, even though there's really there's no evidence that the companies are being irresponsible in what they're doing. So you know, the fight's been pretty, pretty staunch.
Duane Stanford:So I don't know if they quite expected that level of discord, but surely they expected some of it.
John Sicher:Look, I think PepsiCo, given their business, which is both a brand owner and distribution, you know, I think they took a excuse me prudent risk and made a good decision to try to establish a business of blue cloud. If it doesn't work, it doesn't work. But you know, I admire what they tried to do. I think what they tried to do is right for them to try to do. But, as I said, they seem stuck right now and I don't think I think PepsiCo is smart enough that they're not going to taste, they're not going to stay stuck for too long.
Duane Stanford:You know, one counter to that is the fact that it does seem to me that they've gone taking sort of a pay-as-you-go approach.
Duane Stanford:I mean, they seem to have a pretty lean organization here, maybe too lean. I mean, in fact I was getting calls constantly from you know stores, retailers, trying to get a hold of blue cloud, and they really there was no presence online at that point and they were having a whole lot of trouble figuring out how to get the product. I mean, it does seem to me PepsiCo has not invested tremendous amounts of money. It's not like they've just piled in so much cash that you know that low, the slow kind of trying to figure this out is just bleeding cash. I mean to me that signals that maybe they're willing to be patient over time. Maybe they're, you know, they can still stick it out a little further and see if they can get past this Virginia hump, and so I'm not quite ready to think yet that they're ready to pull the plug. I think Virginia is going to be pretty important because a lot of states model themselves their alcohol regulation on that state. So can they break through there, and that could be a real pivotal point for them.
John Sicher:Yeah, I think, I agree. I think that I think that, as we discussed, this year is going to be pivotal. I think a year from now, if they're in 30 states, blue cloud is viable. I think a year from now, if they go from 18 to 19 states, blue cloud may not be viable. But you know, they're smart, they again, they see things, that they see things way ahead of the way you and I see them and I personally think that blue cloud probably. I think if they hadn't, if they have not made a lot more penetration now, what would change that in the next year or two? Therefore, the question in my mind is will blue cloud be here in a year or two?
Duane Stanford:Yeah, it's interesting what happens to with, you know, various Pepsi bottleers getting in alcohol. Now you know you've got companies like Buffalo Rock that you know have applied for licenses. They clearly want to be in alcohol. You know they must have conversations enough to understand some of what's happening in blue cloud, you know. So then the question is okay, what do they know that we don't know? And or maybe they just see with what Coke's doing and what's happening with the industry? They see that as a great opportunity either way. Or does it somehow play into what PepsiCo does eventually?
Duane Stanford:I mean, pepsico has always said blue cloud would be a mix of, you know, blue cloud distribution, beer distributors and PepsiCo system bottlers. That's always been in the cards. So you know, while they're sold out, do they have to ramp up that side of the equation to get Mountain Dew into more states and buy them more time to get past a Virginia hurdle? Maybe so, but I think the I think one thing we definitely agree on is this really is a very pivotal time and pivotal year for Blue Cloud and that whole experiment.
John Sicher:Exactly.
Duane Stanford:All right, John, let's move to our fifth prediction for 2024. And that's that the Coca-Cola system. This is an interesting one. The Coca-Cola system takes on allied brands. Thoughts on that.
John Sicher:Right, right, I mean, I think that, look, as I understand it, under the new re-franchise contracts, the Coca-Cola company has a pretty clear ability to tell its North American bottlers what they can and can't sell.
John Sicher:And I think for many, many years in this business there's been a tendency for Coke and Pepsi to a large degree to keep their systems pure, to sell their own brands plus a few more.
John Sicher:So in the Coke system today, the Coke system largely sells Coke brands, some Dr Pepper and Monster. But I think that, given the struggles that both Coke and Pepsi had with incubating and buying smaller brands, I think that I believe you're going to see Coca-Cola starting to allow its bottlers to take on smaller brands for distribution, perhaps with Coke getting a cut of the business rather than basically spending money buying brands. I mean, body armor may or may not turn around. I think the latest data I saw for January in the retail data is it's still down about 18%. So body armor has been a struggle for Coke. They spent a lot of money on it. The question I have is, or my thought is, that Coke may be starting to realize that allowing small brands into its system may be a better way to allow its bottlers to get the kinds of new brands that it needs, rather than buying brands and owning brands and restricting its bottlers largely to company on brands.
Duane Stanford:Yeah, well, we were noodling through these predictions. I mean, one point you made was that maybe not unlike what KDP has done with its allied brand strategy? What's the parallel there? How do you see that on the Coke side?
John Sicher:I do. I mean, I think KDP has had some real success with that. I mean, it's something that Larry Young started quite a few years ago and they're continuing it. But I think it's hard for the big CPG companies to buy smaller brands and have success with them. Whether you look at Coke and body armor or Pepsi and and Sobi, it's hard for them. They do a very, very good job with their big brand. So why not let the owners of the smaller brands do the marketing, some of the sales and open up your system for some of those smaller brands?
Duane Stanford:It is interesting Bob Gamgord at KDP has said they're perfectly fine to do this sort of allied brand approach where you invest in the brand and kind of ramp up over time. They're perfectly fine for the founders of those companies to in essence do even better than KDP would, with an eventual takeout, but that KDP would reap that upside along the way and they're perfectly happy with that, and that they can get a suite of brands that do that and then perhaps something later on that would just stay in their system. That that's a strategy that they're perfectly happy with.
John Sicher:Right and I look, I think, hypothetically. I think that my view is that body armor would be doing better if it were still an allied brand in the Coke system and being marketed and run and sold by Micropolis team. Now, whether he wanted to do that long term or whether he wanted to sell it is another is another issue, but I think that body armor is a small brand. Coke does a good job with brands like Coke and Diet Coke and Coke Zero and Sprite the small. I think that there is an argument to be made that allowing your bottlers to carry smaller brands on an allied brand basis, let the entrepreneurs, the owners, continue to market and sell them, I think might be an approach you'll see Coke starting to take more and more the next year or two.
Duane Stanford:I mean we've talked about body armor. I think that's kind of a complex issue just in terms of what happened in the market in the last couple of years and several factors like that which we've talked about a good bit. One of the things I wonder about this prediction that they take on allied brands is it's hard for me to see Coke going that way. I mean, this is as you well know. For decades this has been a real sensitive issue. I mean there was the back in the CCE days, coca-cola Enterprises when they had most of the US bottling system or large percentage of it.
Duane Stanford:There were days when there was this belief that Coke wasn't innovating fast enough and getting in on the new beverage wave. So CCE wanted to do what people referred to then as a jailbreak and take on Arizona tea, and there was a big skirmish around that Real sensitive area. It's hard for me to see Coke going that way now, but the one way they would is if bottlers really agitate and push for this. I'm not sure if bottlers are there yet, but maybe they could get there. Maybe they all together see some path forward in order to become a total beverage company. They would need this kind of strategy, but I don't know how close they are.
John Sicher:You know, look, I think that I think if you look, if you step back and look at the Coca-Cola company and let's take Coke North America they have two incredible assets. They have several very, very strong brands and they have the Coca-Cola bottling system. So if you step back and you say to yourself, how do we basically, how do we best use those incredible assets that we have? Well, on the brand side, you do the best you can marketing and selling those brands. On the bottling system, maybe you figure about a way with your bottlers to bring in some brands you don't own 100% of. Let your bottlers basically reap the benefits of that and Coke will reap some benefit too, and without having to spend six, seven, eight, nine billion dollars on buying a brand, like they did with the body armor.
Duane Stanford:Yeah, I mean, you know, I hear you. One of the interesting things now, though, is that they're having a hard time getting to a place where the bottlers can even take on products like Topochico and some of those other products that Coke owns but are not necessarily fully distributed through the bottling system. So you know, they're kind of going back and forth on that right now too, so you almost need to get past some of those issues, and I don't know, does that open the door then to be able to do something on an allied brand basis? Maybe?
John Sicher:Look, I've been hearing from. I've been hearing for decades that certain bottlers don't want to take on more SKUs, and I understand that. I mean SKU proliferation is complicated for bottlers. Some of the bigger bottlers are very proud of their ability to handle multiple SKUs and can take on more. So I think that is a challenge. But I think that again, I think that Coke and Pepsi for that much, are going to need fresh blood in their selling and distribution systems over the next couple of years. It's inevitable, especially with CSDs not performing well. And how are they going to do that? There are three possible ways of doing it Incubate new brands, buy new brands or let some allied brands into the system. At this point, if we're looking at Coke, I bet on the allied brand approach, but we'll see.
Duane Stanford:So, john, it's been fun. So those are our five predictions for this year. We'll see how it all plays out, but it's fun talking it through with you either way.
John Sicher:Happy to be here, dwayne Good, doing this podcast with you.
Duane Stanford:And go San Francisco.
John Sicher:The chief's all the way.
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