Coca Cola (NYSE:KO)
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1 Month : From Jun 2019 to Jul 2019
By Jennifer Maloney
Five years ago, Jason Zook became a LaCroix convert. Looking to cut sweetened sodas from his diet, he said he switched to the faintly flavored bubbly water, buying it by the trunk load and drinking four to six cans a day.
Now he has changed again, to Spindrift, a startup brand that flavors its seltzer with a touch of real juice rather than the "natural essence oils" LaCroix uses. Trying Spindrift for the first time, "it was literally like biting into a fruit or a vegetable," said Mr. Zook, who is 37 and lives in San Diego.
LaCroix drove an explosion of flavored seltzer sales over the past several years. Now sales have slumped, hurt by new competition and a legal battle over LaCroix's ingredients.
The predicament highlights the challenges that a consumer brand can face when it becomes so popular that new entrants or established giants flood the market.
Blue Apron Holdings Inc. sparked a trend with its meal-kit delivery service but lost customers as competition increased. Lululemon Athletica Inc., meanwhile, says it won't lower prices on its $100 yoga pants though cheaper alternatives now are everywhere.
Coca-Cola Co. and PepsiCo Inc. have put up sparkling water competitors; startups and private-label seltzer brands abound. Offered more choices in the beverage aisle, consumers who have switched from LaCroix say they found alternatives that taste better, cost less or have ingredients they feel more comfortable with.
"You suddenly saw more options," said Loretta Gilewicz, a 32-year-old theater props technician who lives in Kissimmee, Fla. She drank two or three cans of LaCroix a day until a few months ago, when she picked up a pack of cherry-flavored Polar seltzer on sale at a supermarket. She preferred its flavor, and switched.
In March, National Beverage Corp., which makes LaCroix, reported a drop in quarterly sales for the first time in five years and issued an unusual apology for the results, sending the company's share price tumbling. Analysts expect the company to report another drop in quarterly revenue when it reports its latest results after the stock market closes on Wednesday.
"While consumers have additional choices in today's marketplace, LaCroix remains the largest brand of sparkling water by a significant margin," a National Beverage spokesman said in an email.
Analysts say attempts to regain market share -- by spending on marketing and shelf space -- are likely to hurt profits. LaCroix, which had been around for decades but relaunched in 2002, accounts for roughly 70% of National Beverage's sales.
LaCroix began to face rising challenges last year when PepsiCo launched a seltzer brand called Bubly. Coca-Cola, meanwhile, was expanding distribution for Topo Chico, a sparkling mineral water from Mexico it had acquired in late 2017.
Then last October, law firm Beaumont Costales said it had filed a class-action lawsuit against National Beverage on behalf of a consumer, alleging that its all-natural product claims were false and that LaCroix contained synthetic ingredients. The company denied the allegations as "shameless fabrications" and later said independent lab testing it commissioned supported its natural product claims.
The law firm didn't respond to a request for comment.
"LaCroix's reputation has been maligned over the last year by 'buzzworthy' publicity arising from false and intentionally misleading accusations that may take months or years to refute in court," National Beverage said this week in a message to consumers.
LaCroix comes in a variety of fanciful flavors including pamplemousse, which is French for grapefruit, and blackberry cucumber. The cans simply list "carbonated water, naturally essenced" or "carbonated water, natural flavor" as ingredients.
The ingredients in LaCroix flavors are certified natural and not genetically modified, National Beverage said this week. There are no artificial ingredients contained in, or added to, its extracted flavors, the company said. "We never have, and never will, make false statements about our products," it said.
National Beverage says the plaintiff's laboratory didn't actually test whether the ingredients in LaCroix are natural or synthetic. In February, National Beverage filed a motion arguing the plaintiffs lacked sufficient factual and legal support for their allegations. The two sides are waiting for a federal court to rule.
National Beverage's share price has fallen by more than half over the past year, closing Tuesday at $43.16 a share.
"The LaCroix brand has gone from bad, to worse, to disastrous," Guggenheim analyst Laurent Grandet wrote in a note in May, when he placed a "sell" rating on National Beverage shares. "We think it's unlikely that LaCroix can recover to any meaningful degree while in the hands of National Beverage."
LaCroix's share of U.S. sparkling water sales peaked last year at 23.3%, according to Guggenheim. It fell to 17.3% in the four weeks ended May 18, according to an analysis of Nielsen data by Wells Fargo analyst Bonnie Herzog. Bubly meanwhile has surged to 9.4%. The Nielsen data include Sparkling Ice, a carbonated beverage with the same artificial sweetener as diet sodas that markets itself as sparkling water.
Overall, flavored sparkling water sales in the U.S. continue to rise, reaching nearly $2.5 billion in the 52 weeks ended May 18, according to the Wells Fargo analysis.
"We believe LaCroix could stabilize trends [with] incremental brand support in the months ahead," UBS analysts said in a recent report, upgrading their rating to "neutral."
Yet pressure from competitors persists. PepsiCo was late to enter the category but saw an opportunity to market a seltzer like a soda brand, said Stacy Taffet, vice president of the soda giant's water portfolio. The company launched Bubly last year with a Super Bowl ad and distributed the product to convenience stores that LaCroix couldn't reach.
Alex O'Donnell, a college recruiter in Dallas, treats himself to a Topo Chico when eating out, but at home now drinks Kroger brand seltzer instead of LaCroix. "Why spend money," he said, "on something that tastes the same?"
Write to Jennifer Maloney at email@example.com
(END) Dow Jones Newswires
June 26, 2019 05:44 ET (09:44 GMT)
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