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Our experienced professionals guide youthroughout the process. WE GET THE JOB DONE! Please Contact UsFor More Information More than 250 establishedROUTES-FOR-SALEThe Bahamas Market and Deli sits at the western edge of Harlem, on Broadway. It attracts, from the south, Columbia University students and, from the east, residents of the Ulysses S. Grant housing projects. Customers from these disparate communities come to the store for egg-and-cheese sandwiches, soda, beer, and, lately, a class of beverages once associated with health-food stores and farmers’ markets. Drinks like kombucha, coconut water, and cold-brewed coffee have spread from stores like Whole Foods to neighborhood bodegas in Manhattan, Brooklyn, and Queens, where beverage distributors like Dora’s Naturals are seeing sales that seem, at first glance, to be rising in tandem with gentrification in those boroughs. A closer look, however, reveals that it isn’t just businesses inside economic border zones that are swapping out stock.
Soft-drink aisles across the United States are being reshaped by dozens of small, regional drink companies and their distributors. They’re doing so with the backing of a handful of private-equity firms that are anxious to break into territory formerly dominated by Coke and Pepsi, and to buy into brands that are achieving sustained growth in a declining market. In 2013, sales of soda fell for the eighth consecutive year. The three per cent drop was the biggest decline since 2009. For decades, soda and other sugary carbonated drinks ruled the market, not only because they were popular but because they could be shipped cheaply and stored for long periods at room temperature. This made them a low-risk investment for cramped bodegas and convenience stores with limited cooler space. The growth of craft beverages in recent years has forced a change in the old distribution model. Cyrus Schwartz, the owner of Dora’s Naturals, began building his network in New York City two decades ago, as the owner of Juniper Valley organic milk.
When he sold the company to Horizon Organic Dairy, in 1998, he kept the routes he’d established, and used them to grow a business distributing notoriously fragile, finicky perishables like kefir, soy yogurt, and fresh, ready-to-drink beverages. Now, the company stocks thousands of shops across all five boroughs with kombucha, raw coconut water, and cold-brewed coffee. He says that demand for these kinds of drinks has increased by more than a thousand per cent among his customers in the past two years. “There’s a seismic change happening in the beverage world, and companies like Coke and Pepsi are having a very hard time adjusting,” he told me. “Lots of people want healthier drinks, and there are more and more companies offering them. For the big soda companies, all hell is breaking loose.” (This may explain why representatives from Coke, Pepsi, and Dr. Pepper pledged this week at the Clinton Global Initiative, in New York City, to help combat obesity by offering more low- and no-calorie drinks—a strategy that, at this point, can only help their bottom lines.)
Coconut water is one of the beverages that portended the shift. In July, the Times reported that the market for the drink, long popular in countries like Brazil, Indonesia, and Thailand, expanded rapidly after it began to appear in Manhattan bodegas in 2004. It is now a four-hundred-million-dollar-per-year industry, grown on the backs of small companies like its original American manufacturers, Zico and Vita Coco. (Vita Coco settled a 2011 class-action lawsuit over exaggerated health claims for $10 million.*) This success helped give owners of small shops confidence that novel drinks would sell, which in turn allowed distributors to put more refrigerated trucks on the road. Chris Campbell, the owner of Chameleon Cold Brew in Austin, Texas, told me that he was convinced that the popularity of coconut water and juices from the brand Naked had helped his cold-brewed coffee break into markets like New York City. That popularity also attracted the attention of Pepsi, which bought Naked in 2007, and Coca-Cola, which purchased Zico last year.
It’s not just the emergence of health-conscious consumers and new distribution channels that have bedevilled Big Soda. Kombucha, raw coconut water, and cold-brewed coffee are often packaged fresh, and they require constant refrigeration, which has traditionally posed challenges for distributors. But advances in bottling technology have helped to extend the life of some beverages. Stumptown Coffee, a coffee importer and roaster out of Portland, Oregon, has devised its own process for packaging its cold-brewed coffee, for instance, making it an easier sell to retailers. (Stumptown wouldn’t go into detail with me about its approach, which it regards as something of a trade secret.) A still larger role has been played by private-equity firms anxious to invest in upstart manufacturers. One of those firms, TSG Consumer Brands, already has a strong track record in growing ready-to-drink beverage brands. In 2003, it purchased a thirty per cent stake in Glacéau Vitamin Water, which it helped establish as a lifestyle brand—spending heavily on endorsements from celebrities like 50 Cent, Jennifer Aniston, and Steve Nash—before selling its stake three years later for six hundred and seventy-seven million dollars, about twelve times its original investment.
In 2011, TSG decided to invest in Stumptown, which used the money to start selling unsweetened cold-brewed coffee in stubby, amber-colored glass bottles. Since then, it has expanded its cold-brew offerings. Revenues from what began as a side business have tripled each year, according to Stumptown’s marketing director, Diane Aylsworth; the company expects to sell more than a million bottles in 2014. Those million bottles may or may not be coming out of Coke or Pepsi’s bottom line, but the larger companies certainly appear to be on the defensive. John Sicher, an industry analyst, told me that Coca-Cola and Pepsi are relying on a strategy of consolidation and acquisition, strengthening partnerships with companies like Starbucks, and buying into new markets. The purchases of Zico and Naked were prominent examples. This bid for relevance could serve to further grow the very market that has risen as Coke’s long-time mainstay, soda, has declined. The pattern in the market thus far—consumers turning toward fresher and less sugary drinks, small retailers increasingly stocking them, bottling technology improving, and refrigerated distribution becoming more widespread—also has the benefit of bringing the costs on these products down.