CPG Week: Zombie Brands, Kellanova Rumors & Beverage Business Updates

[00:00:05] Monica Watrous: Welcome to the CPG Week podcast by BevNET and Nosh, your source for the latest food and beverage industry news. I'm Monica Watrous, Managing Editor of Nosh, here with my co-hosts, Lukas Southard and Martín Caballero. If you're enjoying the show, please subscribe on your listening platform of choice. On the podcast today, we are discussing zombie brands, a rumored mega merger and a slew of earnings reports. But first, hey Marty, which discontinued food or beverage item do you wish would return to store shelves?

[00:00:39] Lukas Southard: Oh, well, this was a pretty easy one for me to figure out. In 1996 to 1997, a brief but glorious run for the drink called Orbitz. If some of you may remember this one, it was produced by Clearly Canadian. It was clearly not a success. It was not around for very long, but this had, the claim to fame for this drink was the floating little pieces of gel and gum which are floating in the liquid, lots of different colors, really fun, really weird, nothing functional about it, didn't do anything to help you, just fun and weird, and I was apparently one of the few people who enjoyed it because it didn't last very long. I would like to see that come back, so clearly Canadian, I hope you're listening.

[00:01:25] Martín Caballero: I want to say that Brad already brought this up as something that he wanted to see come back in a different podcast, so there's some synergy there.

[00:01:33] Lukas Southard: That's great to hear. We should also note I am not replacing Brad. Brad is safe. He's in a good place right now. He's resting. He's recovering. He will be back for more CPG Week. I'm briefly standing in. Thank you guys for having me.

[00:01:45] Monica Watrous: Well, we appreciate you filling in for Brad and Lucas. What what brand do you want to see come back?

[00:01:51] Martín Caballero: I mean, mine's not as fun as Orbit's to be honest, but I was thinking about Kudos Bars. It was an early kind of chocolate covered granola bar. And growing up in a very California family where my mother would not let me have anything with sugar, I kind of saw it as a candy bar alternative that I still was not able to get or was not bought for me by my mom. But when I would go over to friends' houses and it was there, I would have two to three to maybe a whole box.

[00:02:23] Monica Watrous: Whoa. Wow.

[00:02:24] Martín Caballero: I mean, you got to stuff it in while you got the chance. You might as well.

[00:02:29] Monica Watrous: That was a lunchbox staple for me, for sure. I love Kudo. Who are we kidding? Those were candy bars. They were, right?

[00:02:35] Martín Caballero: They were chocolate covered. Yes, it was a granola bar, but it had a lot of chocolate and marshmallows, I think, in some of them.

[00:02:42] Monica Watrous: I would say that I would like to see Tab return. I feel like it was brought back for a limited time and then Not, or was it Pepsi clear? I get all of those bizarre clear beverages of the 90s confused.

[00:02:56] Lukas Southard: What do you miss about Tab, Monica? I'm very curious.

[00:03:00] Monica Watrous: I miss my childhood.

[00:03:04] Lukas Southard: I miss being a kid. I just opened a door there.

[00:03:07] Monica Watrous: I miss who I was when I was drinking tab. The simplicity of my youth. Moving on. Today we are talking about zombie brands. Modern Retail published an article last month detailing some of the challenges that consumer products businesses are facing, including depressed valuations, mounting costs, waning consumer demand, supply chain challenges. And a lot of brands are quietly disappearing from store shelves or from D to C channels, social media. So according to this article, we are at peak zombie. Do you guys agree?

[00:03:46] Martín Caballero: peak zombie, I don't know how high the zombie bar can go. But when I read this article, it did remind me of a lot of what we've seen in kind of alt meat and alt seafood category. So one example that sticks out is in the plant-based category, there was a company called New Wave Foods, which was touted as one of the kind of darlings of Alt Seafood. The company had innovative tech to make plant-based shrimp. And in early 2021, it raised $18 million. And just after it signed a food service partnership with Dot Foods. Then in November, 2023, it announced it was folding up operations and basically being sold for parts at the beginning of this year. Recently, Big Idea Ventures announced that it had bought the IP from New Wave Foods and was launching a new alt-seafood brand called Bayou Best Foods. using that food tech, the idea of zombie companies is also being seen in cultured meat. So investment in cell culture companies was around $226 million in 2023, which seems like a lot, but when you compare it to 2022, when it was about 922 million, that's a significant decrease in investment in this food tech space. So you have companies like Upside Foods who made headlines about being one of the first cell cultured meat companies to receive full regulatory approval to produce their chicken meat made from animal cells. There was a splashy launch in Michelin star chef Dominic Crenn's restaurant in San Francisco. The company Upside also announced they were moving into a huge, almost 200 square foot production facility in Illinois. And then things got quiet and Upside's chicken is no longer being served at Bar Crenn. The food tech company also pulled back on its plans to move to Illinois and said it needed to basically figure some things out in its smaller facility before it could scale up. And for a company that's raised. think $600 million to date and has a valuation of about a billion dollars, but doesn't have a retail product on the market. It seems a little strange. And I'm not saying Upside is going to file for bankruptcy or is, is just waiting to be acquired, but there are some big questions for this industry where there was a lot of interest. There was a lot of stories about it. And then suddenly there's not a lot of talk about it.

[00:06:15] Lukas Southard: Well, I think the conditions that have created these zombie brands really came out of the pandemic. We've seen the big increase in e-commerce traffic, big increase in investment. And then things changed, normalization of trends, reversal of trends, and the progress that investors and brands were counting on that this was going to continue to grow have clearly not been there. And I think, obviously, a very progressive category like plant-based meat or cell-cultured meat is going to see a high degree of that as well. Part of that is part of the business cycle. The Wall Street Journal had a story, I think, earlier this week or a week ago about Twitch, purchased by Amazon for $1 billion in 2014, has not really shown a profit in those 10 years. It's still unprofitable, I should say. It's still around and it's still going to be around, but it is essentially going to be sidelined or siloed. And it may be a zombie, according to some analysts' predictions. So we've seen definitely some of that in the CPG side as well. Brands that either have been retrofitted, say in Coke's portfolio, low-performing SKUs being retrofitted as perhaps an RTD alcohol play, perhaps moved into different categories and adjacencies. It's really about what can be done with these brands that have some value but aren't going to be growing and in a sense are going to be a drain on the time and resources of other more profitable projects within a portfolio. Just reading that story on Modern Retail, the thing that came to my mind was Steven Seagal movies. Somehow they keep getting made. Somehow people keep watching them. Just enough to justify the next one. And here we are. Steven Seagal movies. Still in 2024.

[00:08:08] Martín Caballero: That was a turn I was not expecting for sure, but I love it.

[00:08:14] Monica Watrous: This week, we are following a Reuters report that candy giant Mars is in advanced talks to acquire Kelinova, the spun-off snack business of the former Kellogg company. The deal would bring together brands including Snickers, M&Ms, Skittles, with Eggo, Pringles, Cheez-It, Pop-Tarts, Lucas's favorite. And the deal would also mark one of the biggest in packaged food and beverage in recent history, on the heels of that big smucker acquisition of Hostess last year. According to the Wall Street Journal, a deal could value Kelanova at around $30 billion and rank among the biggest transactions so far this year. Kelanova recently released its second quarter earnings report and posted a 5% decline in sales, which is attributed to last year's divestment of its Russian business, as well as the impact of its own corporate split in October. The business saw operating profit increase 18% during the quarter and continued gross margin improvement, according to president, chairman, and CEO Steve Calhoun. Mars and Kelanova, what's your take, Lucas?

[00:09:27] Martín Caballero: I do think this is somewhat unexpected from my perspective. When Kellogg's decided to split the company up, initially it was going to split up into three different entities. One being its cereals, one being its snack brands, and then one being its alt-meat, like Morningside, that everyone was saying at the time was going to be what was going to be shopped around for an acquisition. That later turned into just a two-way split. So it turned into WK Kellogg company, which is the cereal brands and Kellanova, which is all the snack brands that also includes the plant-based foods. Now, what we've been seeing and what was been talked about since that split was the fact that the cereal was kind of the end of the business that wasn't doing as well. As we've talked about on this podcast, there isn't a lot of growth in the cereal category, but the snack brands have been doing really well. Pringles does really well. And so I guess this could be seen as a kind of sell high. strike while the iron is hot kind of situation for Kaleidova, but then it leaves me with the thought, okay, so what's going to be left of the Kellogg's Empire except for cereal, which is a pretty stagnant category.

[00:10:53] Lukas Southard: So I think for Mars, this is probably an opportunity to plug some gaps in its product portfolio at a decent price. We'll see if the deal goes through. Again, this is still being sort of rumored and nothing has been confirmed yet, but certainly an opportunity to sort of play more in that better for you space in some way. Mondelēz in recent years has shown some interest in snacking that I think is, you know, wavered in some degree. But it's certainly interesting to see candy brands sort of looking for more adjacencies in different kind of snack categories. We'll see if it goes through.

[00:11:26] Monica Watrous: Some of the recent transactions we've seen from Mars suggests interest in expanding into better-for-you snacking with Trufru, Kind Healthy Snacks, as well as Kevin's Natural Foods. So to make this play into not better for you snacks, or I guess you could call them legacy, indulgent in some cases, but certainly not the health halo that a kind or a true fru have. It's an interesting play.

[00:11:59] Martín Caballero: I mean, who doesn't love a Pringles, really? I'll pick up a can if it's in front of me. It's a great chip. So there is a lot of upside for Mars. I'm just wondering what the upside is for the Kellogg's empire other than, I guess, just a heavy payday.

[00:12:19] Monica Watrous: Now, Marty, we've seen a bunch of earnings reports coming through on the beverage front. Can you tell us what you've been tracking?

[00:12:27] Lukas Southard: Yeah, so last week we saw some of the big guys report their earnings, KDP, Vitacoco, a few others. But just this morning we have one of the most anticipated that we've been watching for, and that is Celsius. Much discussed ahead of this earnings call, and the good news is that revenue is up 23.4%, $402 million. North America is driving a large portion of those sales, but the highlight to me, 41% growth on Amazon. It's one of the top selling energy brands there, so making an impact in traditional channels, C-stores, food service, but also on Amazon, certainly one to watch there. However, The problem with Celsius, if you can call it that, is their previous performance in prior quarters has been so spectacular that these actually represent a decline in their numbers. The results are two quarters in a row of declining sales growth. It may not look as impressive as prior quarters, But the company is still on track to grow 10% to 15% by 2028. It is the only third energy company to break a 10% share of the category, so still a lot of runway there. And Celsius performing well in this earnings report released just today. The other big one today, Bell Ring Brands, of course, the maker of Premier Protein, the RTD, and the Powder product. Both those have shown impressive growth in the mid-double digits. So, we'll have more on that on BevNET today. But looking good for bell ring brands. Protein continues to be a major driver of interest for consumers, and they're one of the top brands doing it. So, definitely one to watch.

[00:14:05] Martín Caballero: You mentioned Celsius' growth in e-commerce and on Amazon, which is very impressive. One thing we've reported a lot on is Celsius' partnership with PepsiCo, utilizing the PepsiCo DSD network to really help both and the synergy there. That was something that stood out to me when I was reporting on KDP a couple of weeks ago is although KDP had some slower growth in their portfolio brands, whether, especially in the coffee end, they have really leaned on their distribution as a source of revenue. in their partnerships with C4 in the energy category, Electrolit in the hydration and sports drink category, and Lacolome in RTD coffees. So this use of distribution by the strategics to really kind of boost up their earnings has been something that I've been noticing the last couple cycles.

[00:15:05] Monica Watrous: Also this week, Marty, you wrote about Refresco Beverages suing Congo Brands for backing out of a long-term production agreement. Can you tell us more?

[00:15:17] Lukas Southard: Yeah, that's right. You've read the date correctly. It's a story from this week, but it is another lawsuit involving Prime. So another story. The drink's popularity is tapering off at a critically difficult time in the midst of some behind-the-scenes trouble. So this is a pretty tough combination for the company to face. But basically, to summarize this lawsuit, Refresco is asking for at least $67 million in damages after they've accused Congo Brands of essentially backing out of a three-year production agreement to produce Prime. at their facility in Missouri. Now, according to Refresco, they installed special equipment that is required to produce the special bottles for Prime. If people are familiar with the product, they can probably envision what I'm talking about, the 16.9 ounce PET bottles. That equipment was installed and ready to go and ready to turn on in April of this year, at which point, According to Refresco, Congo brands went dead, essentially, and refused to give them a volume estimation and refused to actually place a single order to get a single piece of product off the line here. So, again, this is coming against some other bad headlines or sort of difficult behind-the-scenes news for the company and declining sales numbers. So, it is a bit of a one to watch here. Of course, we've talked before about some of the issues they're having with their DSD distributors, bringing product directly to stores that hasn't been very popular with their partners, as you can imagine. And as I mentioned, there is a slowdown in volume and sales over recent months, although the trailing 52-week numbers are still pretty good. So what does this mean? I think it means there's going to be opportunities elsewhere. Prime enjoyed a lot of pickup from DSD distributors who had lost other products within the hydration and energy category, and we may see the same now. Electrolyte's move to KDP, as Lucas mentioned earlier, has created some open slots for some challenger brands, thinking things like Moss Plus by Messi, down to BioLite, Ghost, down to things like Jocko, Element. Lots of brands in this mix here, so I would expect more players to kind of be fluid in that mix, and we may even see more entrance from, say, a brand like Nutribolt being able to play in that protein, energy, and potentially hydration space. Difficult times for Prime may mean opportunities for others, but we'll certainly be following this case as it develops.

[00:17:49] Monica Watrous: Yes, we will. And of course, as always, insiders can read more at BevNET.com. Marty, thanks for joining us today. That was great. Thanks for having me, guys. Welcome back anytime. Here are some other notable bits of news from the week. A friendly freezer. Frozen food startup diversifies via cold storage. Akua shuts down, citing manufacturing catastrophes and decline of plant-based movement. And Sobra festival goers seeing new non-ALK options. For these stories and more, become an insider at BevNET and Nosh. That wraps up this edition of CPG Week by BevNET and Nosh. Thank you to our audio engineer, Joshua Pratt, our director is Mike Schneider, and our designer is Aaron Willette. If you enjoyed the podcast, please subscribe on your listening platform of choice, and we will see you next time.