Start-ups, uFlavor, and the State of the Beverage Industry

At the end of last week, Fortune ran a story about the current state of the beverage industry and how start-up companies are succeeding and failing. The column began by focusing on uFlavor, an Indianapolis-based start-up that allows consumers to take 42 different flavors and make their own soft drink. Varying amounts of carbonation, sweetness, and caffeine in each flavor enables users to find a drink that fits them. The idea is extremely new and is the perfect example of a store focusing on each customer's experience independently. Currently, customers can create drinks at the company's website. The simple and user friendly site provides customers the ability to log-in and post the ingredients to their desired drink, as well as see others concoctions and create a forum for how to make the best drink. With the first customized drink hopefully shipped out by the end of the month, uFlavor already hopes to have self-serve vending machines available at retail stores and restaurants in eighteen months. With the ambitious goals and an innovative new product, the question remains, will the concept succeed?

The rest of the essay details how tough breaking into industry is for new companies and ideas. Coke and Pepsi have 42% and 29% of the market share respectively and essentially acts as a duopoly. Other players with a much smaller influence in the industry include Dr. Pepper-Snapple and the still independent Jones Soda. For start-ups, the environment is extremely competitive. Industry trends show the best way to succeed is to own a patent and get acquired by Coke or Pepsi, or at the very least sell a minority stake to one of them for access to their massive distribution centers. Examples of this are endless. The popular Vitamin Water is now a part of Coke's product line, and O.N.E. Coconut Water, the trendy new beverage on the market has just been partially acquired by Pepsi.

One of the best examples of this process is Honest Tea. Started in 1998, the brand was extremely successful compared to other beverage start-ups. Although 15,000 retailers carried the product after ten years, the company's bottom-line was hurting. When Coke offered access to their distribution centers and world-wide supply chain for a minority share in the company, the owners could not pass up the opportunity. In the three years after the deal, Honest Tea is approximately five times larger and currently being sold in 75,000 retailers. Coke ended buying the company in 2011. This quintessential example of a beverage start-up exemplifies the largest problem for companies trying to break through the duopoly and become a player in the industry. Many entrepreneurs, who are often more interested and involved in the science of what makes a good drink, do not consider distribution a major factor when they start marketing their invention. Often manufacturing out of their own homes, start-ups that desire to control their own value chain lack the resources to get their products into stores and out in front of customers.

While it is difficult to enter the beverage market and stay independent, companies have not quit trying. The most successful way to do this appears to be maintaining an N=1 model ( focusing on one customer and experience at a time). Jones Soda, a perfect example of the model, creates an online buzz for their product by allowing customers to order Jones' iconic bottles online with personalized pictures and taglines. This allows them to keep up demand and meet customers' needs by skipping retail centers all together. 8% of the companies' revenue comes from special orders and personalized bottles; online sales are expected to top $100 million by the year 2016. The strategy allowed the company to stay in front of customers, creating an experience that kept customers coming back while Jones' management worked on strengthening relationships with retail centers.

Back to uFlavor, will it be able to break through the ceiling and create success independently? will it sell-out to the big players? or will it just crash-and-burn by itself? Using Everett Rogers' success factors of compatibility, complexity, trialability, and observability, it is seems like a long shot. US consumers are by now used to customization and having personalized products, however Coke and Pepsi have been staples for so long it may take users a while to get used to new tastes. For complexity and ease, expecting a customer to be able to mix 42 different flavors into a great-tasting drink seems like a lot to ask for when all I want is a Diet Coke. Low trialability is implied by the pain of ordering a soft drink online and the unlikeliness of stumbling across a vending machine. And low trialability often means low observability. Those obstacles and problems, coupled with an extremely tough industry, potential manufacturing and distribution problems, and enormous up-front costs lead me to believe uFlavor's shot at success is slim. But I wish them the best.