When L.A. Libations CEO Danny Stepper started the beverage incubator in 2009, the company took on nearly any business it could get.
Today, the California-based group, renowned for identifying trends and supporting emerging brands, has become a partner for nascent beverage companies seeking to succeed in the competitive and unpredictable industry. L.A. Libations is now more discerning in choosing which companies to collaborate with, favoring those with receptive CEOs and innovative brands.
While L.A. Libations admits to its fair share of misses, the accelerator has proven to have a shrewd ability to identify up-and-coming brands — many of which have evolved into multi-billion dollar products. Several were eventually acquired by larger beverage manufacturers, including Body Armor and Zico by Coca-Cola and Core alkaline water by Keurig Dr Pepper, while others have attracted an investment, such as Zoa Energy from Molson Coors.
L.A. Libations latest round of companies hoping to benefit from the beverage incubator include non-alcoholic beer Athletic Brewing; Arriba Chelada, a tomato-and-clam-juice drink made without artificial coloring, and Plezi, a company focusing on healthier food and beverage products for children co-founded by Michelle Obama.
With more than 98% of beverage brands failing to survive, L.A. Libations has proven to be a valuable resource for companies looking to increase their likelihood of success. In 2019, Molson Coors purchased a large stake in the nonalcoholic beverage incubator as the beer giant looked to diversify its portfolio beyond its signature brews.
Stepper, who recently purchased the Beverage Forum, the industry’s annual gathering discussing the sector, talked to Food Dive about what L.A. Libations has learned since its founding, how companies can improve their outlook and where beverage innovation is heading.
This interview has been edited for brevity and clarity.
FOOD DIVE: What’s your take on the beverage space today?
DANNY STEPPER: The good news, if you’re a guy or gal starting a brand in your garage right now, is the consumer is incredibly promiscuous and wants to try new things. Fifty percent of the growth is coming from brands and categories that didn’t exist five years ago. So that is a very important statistic. Think about it, if you’re a retailer, you have to grow your category, right? That’s the lifeblood of your business. And your job is to grow your category. Well, 50% of the growth is coming from new things. Retailers have to be in new things to grow. That’s the good news for all the entrepreneurs and founders that are starting new things.
The bad news is, there’s a 98% infant mortality rate. So only 2% of brands get to 10 million in revenue. That is the conundrum that everyone’s trying to solve. And that’s really our “reason to be” for L.A. Libations. We still get it wrong but our batting average is a lot better than 2%. Retailers depend heavily on us for what they should bring in. That’s a huge responsibility for us because if we start becoming 2% correct, they don’t need us anymore.
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So we’ve overthought and over-investigated and overstudied what makes brands work. It’s ultimately about the founder, but there’s a lot of other factors. Before even getting to the liquid in the brand and trademark, it’s access to capital. It’s total addressable market. But really it’s about the founder, and the founders have to have this crazy combination, which very few people do, of being innovative, yet coachable. There’s a lot that are innovative, and there are a lot that are coachable, but there’s very few that are both.
The reason why you have to be coachable is because there are so many just industry things that if you’ve never done it before, there’s so many pitfalls and it’s so hard. If you don’t know where the bodies are buried, then you’ll fail, no matter how innovative you are. And if you’re just coachable and not innovative, the world doesn’t need you. So that’s really kind of our opportunity and our reason to be.
Why is there a significant amount of growth and innovation in beverages today? How did it all start?
STEPPER: It started with Whole Foods, like in 2011 when Whole Foods started just exploding, and, you know, they really focused on clean Whole Foods-compliant, organic, functional beverages. And so we went through this period of time where everyone’s holding their nose and drinking terrible-tasting kombucha. That was very weird.
Then what happened was the consumer demanded more. The consumer still wanted that functionality, but they demanded great taste. And the sweetener systems and technology has come so far that you can make things taste great and still be healthy, where you couldn’t do that in the 70s 80s and even 90s. I think what’s happened is the democratization of Whole Foods. Now you’ll find healthy, great-tasting products at Walmart, at Kroger. You see these big, scalable traditional retailers going earlier than they ever had with emerging brands.
That’s really created this opportunity for founders. There were huge barriers to entry before. Coke and Pepsi just dominated it. They had the entire shelf, and there were a lot of one-player categories like Gatorade, that was basically a one-player category.
What we’ve seen in hydration over the last two years has been incredible. Brands like Electrolit and Prime and BodyArmor really have come in and taken huge market share. But ultimately the category is actually healthier than it ever was. Gatorade is actually growing. It’s just brought more attention and more light to the category and challenged them to not sit on their laurels and innovate. I mean Gatorade, has so many new products now.
There are two other trends that we happen to sit in the middle of. We didn’t plan it this way, but this whole creator economy and talent and celebrities and influencers that have brands. When we launched Zoa with The Rock, something happened. Now, every celebrity wants to do a drink with me. … We spend our lives trying to create awareness and therefore trial for our beverages because you may have a great brand, it doesn’t matter if no one knows about it … Consumers don’t want to be told what to drink. They want to discover it. They want to see someone they trust. Consumers don’t trust big companies anymore. They trust people, friends, influencers or creators.
And the other trend, which we sit in the middle of, is that every alcohol company wants to be a non-alc company, and vice versa. … We brought Coke into alcohol. It’s Topo Chico Hard Seltzer. We put the deal together between Coke and Molson, and they had a baby and that was Topo Chico Hard Seltzer, which lead to Simply Spiked and other Coke brands jumping to Alcohol.
How influential have these startup brands been in spurring innovation at the big beverage companies?
STEPPER: This emerging brand ecosystem is actually making the big guys better and sharper and quicker. Still not fast but faster. They have to evolve or they’re just gonna get eaten away from all sides. So that’s definitely going on.
Despite growing demand from consumers and retailers for new beverages, why is the failure rate still so high?
STEPPER: I’ve seen this movie a million times. What happens is a guy or gal has an idea. They think it’s the greatest idea in the world. It’s usually not, and they borrow friends and family money. And they go and do their first production run. And it comes out, and it’s probably not great on the first production run.
So they’re sitting with a garage and a couple of Public Storage units full of product, and this product has date codes, so the clock starts ticking and they have to get it out there and they have no idea how to do that. They try to get a hold of retailers who are super busy because everyone’s calling them trying to get meetings. They’re very hard to get. And if you’re fortunate enough to get a meeting with the retailer and the retailer actually likes it, usually not, and says I want it, how are you going to get to my store, then the founder has to go figure out distribution and all that and by the time all this stuff happens, usually the products out of code, and their friends and family are mad at them and they go back and get a day job. That happens a lot, a lot to skew that number.
If you’re a startup company faced with all these challenges and obstacles that you’ve never faced before, what do you do?
STEPPER: That’s why we created SIP, our SoCal Incubation Program, to solve this exact problem. Founders can come and work for hire or pay us to get them on the shelves and prove their concept because we’re meeting with the buyers every single week. We have our own distributor here in L.A. so we have our own route to market and we can solve that for them.
We take a lot of the friction out of it, and they can see what they actually got a lot faster. So, the problem is time, time is money because you’re burning through capital in the beginning. Usually, you quit your job so you’re not paying yourself if you’re a founder, you can only do that for so long, especially if you’ve got a family. Time is critical and what we offer, and there are a few others out there that can do it, you get an advisor or someone that’s done it before that can coach you. That’s where the coachability factor comes in.
You mentioned your success rate is higher than the average across the industry. How are you doing?
STEPPER: It’s much better than [the 2% success rate across the industry.] We’re actually getting better for a couple of reasons. We continue to get smarter and understand more what we think will work. We’ve been doing this, we’re in year 15. We still don’t have all the answers. I promise you that we still fail a lot, but it’s getting better. It’s getting much better and we’re becoming much pickier, like so many brands want to get into SIP whereas when we were building the company, we needed just to make revenue and we would kind of, anybody that wanted to hire us can hire us. That’s not the case anymore. If we’re gonna go and tell the retailers to bring something in, we have to really, really believe in it.
Within beverages, where is growth the largest?
STEPPER: Hydration is massive. Hydration is really a category on the move and it’s interesting because for forever, Gatorade had a 90 share and Powerade had a 10 share, that’s Coke and Pepsi. And no one could break through. No one. When BodyArmor … broke through, it showed that it could be done and now we’ve had brands like Electrolit and like Prime and now Ghost coming out with their hydration. … There’s a lot of entrepreneurial energy coming in for hydration. Consumers want more hydration as well.
Energy just continues to defy gravity. It’s huge and profitable. Usually things that are huge are not profitable. Healthy energy, plant-based energy, people upgrading Monster and Red Bull, Celsius. There’s a lot of others that are starting to, Ghost has been a phenomenon, C4, Zoa is starting to make some inroads. There’s still room in energy. Those two categories are really fascinating right now.
What have you learned during the last 15 years in beverages and running L.A. Libations?
STEPPER: One hundred percent that the founder is the most important thing when it comes to these things that work. It’s no coincidence that a lot of the guys that have done it, are doing again, Mike Repole, Lance Collins, Seth Goldman. They’re incredible founders. Also, access to capital, we’re able to help brands raise capital now. That’s a new muscle that we built because every brand needs capital. It doesn’t matter how great it is, it needs capital. [When a brand works with us,] we give investors confidence, they’re more inclined to write checks to those brands. And you need that oxygen.
I think the other thing is the idea of continuous improvement is a really important thing. You’re never done. You’re constantly tinkering. You’re constantly getting consumer, customer, distributor feedback and you’re incorporating that in and you’re making changes on every next production run. You show me a founder that thinks they’ve got a perfect product, I’ll show you a founder that’s going out of business. Whether it’s your liquid, your branding or supply chain, you’re always continuously improving it. You have to have that mindset.