Coconut waters enjoy soaring sales

The rapid growth of the coconut water market underscores the consumer appeal of an all-natural health benefit. In the case of this increasingly popular sports drink, nature delivers a more powerful punch than formulated products. Unsurprisingly, Coca-Cola, PepsiCo and one of Europe’’s biggest brewing families are all investing heavily in growing the category.

First published on New Nutrition Business Newsletter, February 2010

In a rare bright spot for the US beverage market, two huge indicators are validating the robust present and potentially bright future of coconut waters: annual sales that have hit an estimated $35 million (24.7 million), and investments in two of the three leading startups by global beverage giants PepsiCo and Coca-Cola, who want in on the action.

Somewhat echoing the rapid growth that made coconut water a $350 million (247.5 million) business in Brazil in the space of just few years, coconut water sales in the US are said to be about triple what they were just five years ago. The $35 million (24.7 million) estimate of the current size of the market came from both industry players and analysts.

Another sign of the segments growth and potential is that each of the three major players now in America Vita Coco by All Market, Zico and ONE World Enterprises is choosing distinct positioning for its brand. Yet each fits well within the qualifications of a drink that, by modern analysis as well as tradition, has been deemed one of the most nutritionally potent beverages yet found in nature.

“It will become part of the stable of beverages in the US market,” said Tom Pirko, president of Bevmark Consulting, in Santa Inez, California. “And if [PepsiCo and Coke] really dig in, and you give them time to invest in it, this segment could become a several-hundred-million-dollars-a-year business in this country. Just the nature of the scale of the players, and their investment, and the exposure they get can drive it pretty big.”

Yet Pirko and others also cautioned that making such a big success of coconut water brands would require the companies to overcome some obstacles. Among them is their race to acquire dominant positioning for a beverage whose flexibility lends it to a variety of interpretations. Another challenge is to educate American consumers about the beverage per se and its dissimilarity to the coconut-based products they are used to.

Coconut water is extracted from young, green coconuts, where it gathers as the coconut grows at a volume of about 325ml per nut, depending on the variety. It is sterile and a little thicker than pure water, and it tastes like regular water that has been slightly sweetened. But coconut water doesn’t taste anything like the coconut products that people in the West are accustomed to, including coconut milk and shredded coconut, which come from the meat of more mature nuts.

With 224mg of potassium per 100ml, coconut water has more potassium than two bananas and 15 times the amount found in the equivalent volume of most sports and energy drinks. This makes it a natural electrolyte drink, three times more hydrating than water. The same property makes coconut water highly effective as a hangover cure as well. Coconut water also contains sodium, phosphorous, calcium and magnesium and 76% of the RDA of vitamin C, per 100ml.

Although people in the tropics have consumed coconut water for centuries, until very recently it was considered a waste product in the coconut-harvesting business. It oxidizes quickly, but advances in packaging such as the aseptic TetraPak made it technologically feasible to package and distribute fresh coconut water.

In 1999 it appeared on the Brazilian market, and by 2002 had become the second-most highly consumed beverage in the country, after orange juice. Nowadays, it has become so common across Brazil that some McDonalds serve a private-label brand of coconut water.

“It’s a model for what we can imagine in the US some day,” said Emilie Veloso, president of Los Angeles-based ONE. “We think it will become a billion-dollar industry in the US  like cranberry juice.”

Coconut water is already big on both coasts, said Arthur Gallego, a spokesman for All Market. It’s a matter of bringing the rest of America on board.

Here’s a breakdown of the approaches and accomplishments of each of the three major U.S. brands so far:

Vita Coco: Marketed by New York-based All Market, Vita Coco was the first US brand of coconut water, launched in 2005, and already has about 60% of the market nationally, the company said. It was founded by two friends who met a couple of Brazilian women in a New York bar and heard all about coconut water.

Not surprisingly for a brand founded and centered in the media capital of the world, All Market has cultivated a lifestyle positioning for the brand, touting high-profile customers such as Madonna and actress Teri Hatcher. “We’ve become very popular with celebrities,” Gallego said. “Our popularity has grown organically that way; we’ve never advertised.”

Vita Coco, Gallego continued, has become sort of an insider thing. “The brand is sort of quirky and offbeat, the way people ages 18 to 29 connect to it. We’ve even done mystery shopping in the beverage aisle and if people are drinking Vita Coco, we ask why. They’ll always say something like it’s their secret weapon, or a hangover cure. But it always feels like something that’s not being forced on them.”

Pirko, the consultant, endorsed this approach by Vita Coco and said that this broad lifestyle positioning has been one important reason for its quick success. “There’s the most foot traffic in the lifestyle business compared with other major types of better-for-you positioning, such as sports drinks.”

Another big advantage for Vita Coco, Gallego maintained, is that “we have our own factory in Brazil, unlike the other two major U.S. brands. It allows us to innovate faster and to control all the production. This allows us in many ways to have an even better product. All Market also has managed to get distribution in natural-foods retailers such as Whole Foods as well as several mainstream supermarket chains and online.”

The biggest variety in flavours and sizes, Gallego said, also helps Vita Coco. Its six flavours are 100% Pure, Pineapple, Peach & Mango, Tangerine, Passion Fruit, and Acai & Pomegranate. Vita Coco comes in three sizes: 11.2oz (325ml), which typically retails for $1.79 (1.28); 500ml, $2.59 (1.85); and 1 litre, $4.99 (3.56).

People like variety, he said, and noted that All Market developed some of Vita Cocos flavours in direct response to consumer requests, including Acai & Pomegranate.

Vita Coco’s essentially viral approach to marketing may have to change soon, Gallego conceded. He said that All Market spent the first few years building a category through media and consumer education about coconut water in general and how it differs from other coconut-derived products.

“Now were just getting to building a brand,” he said.”We’re not following any traditional paradigm, so if we do advertise it would be much more provocative and stealth versus something very literal.”

The importance of this brand-focused stage for Vita Coco also explains in part why All Market co-founders so far have rebuffed investment overtures by Coke and Pepsi.

“The big players are advertising and marketing juggernauts, but they’re not organic brand builders,” co-founder Michael Kirban told the New York Post recently. “We connect with consumers one-on-one, and with merchants one-on-one, and this is what’s created unbreakable consumer and retailer brand loyalty.”

ImageZico: This Hermosa Beach, California, startup is where Coca-Cola landed, apparently after being rebuffed by All Market. The giant took a minority stake in Zico, reportedly with a $15 million (10.6 million) investment.

In early 2008, co-founder Mark Rampolla told New Nutrition Business that Zico had about a 40% share of the US coconut-water market, but that was before ONE had done much at all in the market.

From the company’s start five years ago, several months after All Market went into business, co-founders Mark and Maura Rampolla have been consistent with their positioning of Zico as Nature’s Sports Drink. “Zico is trying to push things along with a strategy that allows it to be focused to compete in the sports drink-energy drink category,” Pirko said. “They’re really into the benefits of hydration and electrolytes.”

At the same time, Zico was the first US brand to introduce flavours to coconut water, launching both Mango and Passion Fruit & Orange Peel variants with its Natural coconut water in 2004. Nearly two years ago, Rampolla told New Nutrition Business that Zico was priced at a slight premium to its rivals, around $2 (1.42) for a 33ml pack.

Zico plans to take advantage of the greater resources of Coca-Cola to ramp up its marketing. To date, Zico has focused its marketing on upscale consumers at yoga studios, gyms and hotels. Now, it will expand marketing through initiatives such as pasting its name and logo onto pedicabs in New York City.

ImageONE: PepsiCo apparently bounced from All Market to ONE World Enterprises, making an investment in and signing a distribution agreement last fall with the startup that began business in 2005, several months after Zico was started.

“Similar to how Zico has become more ambitious with its new partner in Coca-Cola, obviously [the PepsiCo investment] allows us to grow significantly,” said Emilie Veloso, ONE’s president. “ONE (standing for One Natural Experience) plans to double its marketing budget in 2010, to more than $3 million (2.1 million); is beefing up its sales team; and our distribution is exploding,”” she said. South Florida, California and Las Vegas were among initial markets, and ONE plans to add six to 10 new US urban markets in 2010.

Veloso agreed that positioning is crucial in the nascent coconut-water business. ONE’s strategy is to tout its coconut water as an omnibus, high-nutrition beverage for everyone from pre-birth to old age including pregnant mothers who can drink ONE to relieve cramping in their legs.

“We’re working on becoming the leader in educating consumers and health-care practitioners about the health benefits of coconut water,” she said. “It’s a huge initiative for us.”

Pirko described ONE’s positioning strategy as trying to go down the middle between Vita Coco and Zico. “They’re trying to be a hybrid,” he said.

Veloso essentially agreed. “Zico is going more specific to the idea of being a natural sports drink where, for us, we’re saying that coconut water is a natural alternative to sports drinks, and as an alternative to many other drinks.”

Zico-branded pedicabs are a familiar site on the streets of New York City and are a low-cost choice for a company which had limited marketing funds.

ONE, in late 2009, introduced four new varieties of its original coconut water with splashes of Pineapple, Passion Fruit, Pink Guava or Mango juice and, Veloso said, plans to add three to five coconut-water-based SKUs in 2010.

Typical retail pricing is $1.29 for 8.5oz (0.92 per 250ml). TetraPak containers of ONE Coconut Water, $1.99 for an 11.2oz (1.42 per 325ml) carton and $4.59 (3.27) for a 1-litre carton.

ONE also has taken a guerrilla approach to marketing so far. Its specialty seems to be product placement. The product is making an appearance on ABC-TVs popular Extreme Home Makeover series this season as well as TNT’s The Closer drama series. Within six to eight months, it also plans to launch a billboard campaign.

Actually, PepsiCo’s investment in ONE followed its agreement in August to acquire Amacoco Sudeste Ltd., Brazil’s largest coconut-water company and seller of its top brands, Kero Coco and Trop Coco.

“It’s a great play for us,” PepsiCo spokesman Bart Casabona told New Nutrition Business. “It complements our current business model and will allow us to grow in the Latin America market, which is key.”

The acquisition may be starting to have effect on the business, reportedly sending rivals scrambling to procure new supply sources as Amacoco reserves output for its own needs, although the other key player in the US sector, Vita Coco, secured supply from outside Amacoco before the company was bought by PepsiCo.

ONE now also markets other products and, the company says, like coconut water these products are derived from substances that used to be considered agricultural waste. “Coffee Fruit Juice by ONE, for instance, is made from the fruit of the coffee berry, which is very rich in polyphenols,” said Veloso. Another product, Cashew Fruit Juice, she said, is rich in Vitamin C but has low acidity, so its much softer-tasting than orange juice. “Its a great alternative to orange juice and is great for the skin. Like coconut water, “Veloso said, “both coffee-fruit juice and cashew-fruit juice are common drinks in Brazil.”

For most people the taste of straight coconut water is not easy to like, and hence many brands have tended to focus on flavoured products, although even these present taste challenges in the opinion of many consumers. If the market is to grow, good flavours will become more important if the products appeal is to move beyond its current niche.

One new development which is looking increasingly likely, if coconut water follows the same path as superfruit juices such as pomegranate, is the emergence of a plethora of brands in which coconut water is just a trendy ingredient present to give a product the right image but not in sufficient quantities to have much of an effect.

Such developments aside, there is an flood of coconut water products getting ready to come onto the market. PepsiCo’s Naked Juice business, for example, is believed to be readying an aseptically packaged coconut water for launch in March 2010. This would be the second in the PepsiCo portfolio after ONE Natural. Hansen Natural, marketer of Monster Energy drinks, is also among others believed to be working on a coconut water line.

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