Celsius Holdings (CSUH) - A second phase beverge company.

I have had the opportunity in the past to watch three very distinct beverage companies go from relative obscurity, to relative success, each with three very distinct end results. From watching these three companies, along with several other beverage companies which never really made it, I have developed a general 4 phase cycle idea for beverage companies. This blog post will outline these 4 phases and discuss the past three examples, ending in an evaluation of Celsius and where it stands in the path of a typical beverage company.

Snapple, the poster child 

Some people may already know the Snapple story, but for those of you who don't, its a wonderful history. Carbonated soft drinks (CSD's in industry speak) dominated the single serve beverage market in convenience stores and super markets and still to this day command a rather large swath of cooler space. There were a handful of other items available, but the incentives for the store owner clearly centered around CSD's. Along came Snapple. When Snapple entered the market, other types of beverages began to get more door space in convenience stores and began seeing more shelf space in supermarkets. Snapple was a phenomena. I don't remember how many flavors the company ended up marketing, but at one point it was over 48 different flavors. I myself tried perhaps 40 of them and used to collect the bottles. The beverage was a hit and forced retailers to rearrange their coolers. Now teas and juices command a whole door of a typical convenience store cooler, versus the bottom shelf of decades past.

Eventually Snapple would be bought out and shuffled around as an asset to much larger beverage companies. Before this happened, Snapple went through some very distinct phases. It started out small, with hardly anyone knowing about Snapple and there was not a full national footprint (to be sure I never saw a place with all 48 flavors). Next the company expanded to a much larger footprint, then a national footprint complete with TV ads. Finally the company was everywhere and its big growth stage was over. This is when they were bought out and the story ends. The stock of Snapple followed a similarly spectacular path. Going from relative obscurity, to a big winner everyone was talking about, to a has been in the stock world. By the time the Snapple was the buzz, most of the stock performance had been played out, such is the case with most big winners in the market.


Hansen's Natural, a rerun of the rise of Snapple



Hansen's Natural followed a very similar path to Snapple. Before Hansen's there was an energy drink called Red Bull which occupied some shelf space in convenience stores and became part of many a mixed drink. But there was no push for energy drinks to gain any significant dominance in a retailer's cooler. There was CSD's, juices, milks and teas, water, but not a whole cooler door full of energy drinks. Along came Monster energy drinks and the various forms the company has created to infuse energy into the consumer. Hansen's took a similar rise to fame as Snapple. For 70 years, according to the Hansen's website, Hansen's has produced beverages, but in relative obscurity. There was no craze, no grand taking over of shelf space, nothing spectacular. Then all of a sudden the energy drink craze begins and Monster gets a larger distribution footprint. The third stage for Hansen's was about taking over nearly a full cooler door in convenience stores all on its own. Piggybacking on Monster, Hansen's marketed a total of four energy drink lines and a range of energized coffee drinks.

All of a sudden the beverage industry is completely changed once again. In days past one could go to a convenience store and expect one whole cooler door of nothing but Coca Cola in its various forms: diet, cherry, diet cherry, caffeine free, diet caffeine free. The next cooler door would be other Coke products like Sprite and etc.. Then the next two doors were Pepsi, Mountain Dew and Dr. Pepper/Seven Up products. Finally the last few doors were for milks, juices, teas, snacks, microwavable quick meals, cheese, just about everything else. Also, there is typically a contingent of random CSD's shoved in somewhere away from the Coke and Pepsi products so as to shield Coke and Pepsi from competition. Now one expects 1 door for Coke, 1 door for Pepsi and Dr. Pepper/Seven Up, one door for energy drinks and hydration drinks (water, Gatorade, Powerade) 1 door for fruit drinks and teas, and the last door or two will contain milk, other random drinks, and various food products. With the Snapple craze and the energy drink craze as book ends, Coke and Pepsi have lost a very large swath of convenience store cooler space.

Just like Snapple, the stock of Hansen's mirrored the growth pattern of the drink. The company went from relative obscurity, to a winner, to a big winner as the product penetrated more and more of the shelve space allotted to cold drinks. Now, however, the company is in what I would call stage 4 of the growth phase, which is past the peak of the company's success. Here companies typically get taken over, under perform due to lack of growth, or fail miserably when their product does not have staying power. This brings me to my third case study, if you will.

Jones Soda, what went wrong?

The case of Jones Soda is very peculiar indeed, when compared to Snapple and Hansen's. The company went through all 4 stages of growth, yet came out the other side a failure. What happened?

As Hansen's was changing nearly a full cooler door (typically 15-25% of a convenience store shelf space), Jones was working its own strategy to gain cooler space. Jones Soda makes CSD's (carbonated soft drinks), which would in theory be competing against Coke, Pepsi, Dr. Pepper/Seven Up, Faygo, the purple stuff, and all the other hundreds of small CSD makers all over the country. As Jones began its rise, the intent of the company seemed to be just to start shaving off small slices of Coke and Pepsi market share. Sure they admitted they competed against the other products in the cooler, but one going in for a water is not usually going to drink the heavily sugared (with natural sugar cane) CSD produced by Jones. Jones was after an inlet, or a finger of a very large pond. The idea was to get people to drink the more natural CSD's produced by the company. Their gimmick was to have more and better flavors than the established competition.

Jones rose to fame in such a meteoric fashion as Hansen's and Snapple. Out of nowhere Jones went from relative obscurity, to a few flavors in some stores, to a few shelves in most stores, to an exclusive promotion with Target, to shelf space in the largest of them all Wal-Mart. For a while Jones Soda was delivering on its vision. Then, unlike Hansen's and Snapple, whose influence on the beverage industry is still evident today, Jones failed. From my perspective Jones failed because of price and location within the cooler. Instead of being stacked up against Coke and Pepsi, essentially in the same door of the cooler, Jones was relegated to the juice and tea door or the energy drink door. Jones was not placed in a spot which would draw consumers from other CSD's to Jones. Additionally, Jones was expensive. At a time when a Coke or Pepsi bottle could be bought for roughly $1.29, Jones was selling smaller bottles for $2.19 or more. The larger bottles of Jones would go even higher in price (of course).

Jones went through all four stages of growth in the beverage industry and failed. The stock took a similar path to Snapple and Hansen's during the first three stages of growth, but in stage four the stock failed with the product. Hansen's stock is not at all times highs but it has also not failed. No company every offered to take over Jones, like was the case with Snapple. However, as a stock trader we are not interested in stage 4, we are interested in stages 2 and 3, which brings me to an outline of the 4 phases.

Phase 1, Relative Obscurity

Relative obscurity is where nearly every company starts out. Even Hansen's which produced beverages for 65 years before making it big was still in relative obscurity prior to the energy drink craze. After the energy drink craze, one would still be hard pressed to find people who drink the old Hansen's Natural drinks, but they are on the shelves of major grocery store chains. In phase one companies are not making money on their products, but they do have a product which they are testing. Quite often the product is on the shelves of several small regional chains, maybe featured in some, maybe just stuck over to the side in others. Phase 1 is often a period where the company's stock is also not going to go anywhere and quite possibly might not even trade but a few thousand shares a week.


Phase 2, Gaining a Distribution Footprint


Phase 2 is the phase where the company has made a name for itself in the original convenience stores and retail sites and has begun to get a much larger distribution footprint. Quite often the company will issue press releases monthly, or even weekly, of new distribution partners. In late stage 2 the company will begin a national advertising campaign on the radio, in print, and on TV. The company also tries to find an event to sponsor or a celebrity to endorse the product to create brand association. Snapple gave us the slogan "Made from the best stuff on earth." Hansen's promotes Monster with a life style saying on the Monster website "at Monster all our guys walk the walk in action sports, punk rock music, partying, hangin’ with the girls, and living life on the edge."

The company, behind the scenes, is often trying to move from the Bulletin Board trading system to the Nasdaq or Amex. The stock will often rise a few hundred percent or more out of relative obscurity, but will not become a big name everyone is talking about. In stage 2 the company has not made it to the big time yet, but there is a clear path established ahead in an attempt to be a major beverage company. Lastly, the company is likely not to make any profits during this phase and if so they will be small and sporadic. Expenses will ramp up to cover an increased distribution network and increased advertising, thus these companies are going to be issuing shares and raising money through debt and other means.


Stage 3, The Promised Land



Stage three is the most exciting phase for consumers, investors, and the company. To be sure not all companies are going to make it out of phase 2, nor will most even make it out of stage 1. Stage 3 the company has a brand which may be recognized as new. The brand may be talked about in social circles, news programs, and may even be labeled as the latest fad. For evidence one needs to look no further than the penetration of energy drinks into our lives and the talk for years now of how people pay to drink bottled water, for better or for worse. In this stage the company will have penetrated a large percentage of major convenience stores and super markets and will have expanded its shelf space.

From a company perspective there is now a critical mass for the company to turn a profit on. Sales have been skyrocketing for a while and reach some sort of parabolic state for a few quarters, if not a few years. The stock is now listed on a major stock exchange, has a high volume run rate, moves up several hundred percent more, and becomes a name bandied about in stock trading circles. The phrase, "I wish I had bought back then," or some derivation of the phrase is uttered by many a stock trader. Expectations are very high and there is talk of a whole new type of beverage company. Analysts discuss the impacts of the company on Coke and Pepsi and the CEO is on CNBC promoting his meteoric rise to success.

The next part of phase 3 is the kicker. Its the part of phase three which signals ultimate success, but quite often is the end of the rise to stardom. For Jones Soda, it was a very clear signal. The company gets a deal with Wal-Mart, Target, Costco, Kroger, and all the other large behemoths. Just getting initial shipments to these big companies will be a very large sales increase for the beverage maker. These deals represent the most rapid phase of growth for the beverage maker and therefore mark the end of hoopla.

Stage 4, The Come Down

Stage 4 is market by one of three events. First, a company may be taken over, such as in the case of Snapple. Second, a company, such as Hansen's, may have made it big and will continue to sell large quantities of beverages, but the rapid growth phase is over. In this scenario there won't be a whole lot of 200%, 300%, 1000% gains in the stock, because the company's growth rate is likely to be 25%, 10%, or even negative. Simply put, the market has been penetrated. The third event is the failure, which is the case of Jones Soda. Jones had its shot, threw all its chips in, but came out a loser. The company had the national roll out, the Wal-Mart, Target, Costco deal, but the drink did not have staying power. Most companies fail in stages one or two, so making it to stage four means success at some point along the way, but not long term success. In stage 4, these companies are not going to be exciting investments.

Celsius Holdings (CSUH) - A second phase beverage company

Now to the reason I have expounded all this is to explain where I think Celsisus is in their growth phase. The company has begun distributing beverages to many super markets and convenience store chains, but has not struck the big deal with Wal-Mart or Costco, etc...Since the company does not have any huge national distribution accounts to serve, there is plenty of room for the hyper growth of phase three to occur. The company recently signed Mario Lopez as national spokesperson and has launched at least one ad campaign, while working on another. The company also recently filed to issue more shares to raise money for the advertising campaign and to expand the business. The company is not currently making money, but sales are increasingly swiftly as it expands its distribution foot print. Lastly, the company is trying to move from the Bulletin Board to the Amex stock exchange. Everything is set up for the company to enter stage three within the next year and become a big winner, a more recognized name by consumers, and to gain distribution with the behemoths of the retail world. I think CSUH will be one ticker to keep an eye on for the next year or two.

I am not sure if Celsius will make it in the long run. They have a different sort of product which really isn't currently on the shelves. A beverage which burns calories is likely to be stuck next to Hansen's products and therefore be in the energy drink and rehydration door of the convenience store cooler. Thus, it will not directly compete with CSD's, teas, or fruit drinks. There is no direct competition currently as far as drinks which burn calories, so there is some space for Celsius to become a fad or a whole new line up of beverages to unfold with Celsius being the clear leader. Only time shall tell, but I do think stage 3 is achievable so we will see an answer to these musings down the road.

disclosure: a client owns shares of CSUH but I do not own any myself.