South Beach Beverage Company, Inc. Business Information, Profile, and History

Company Perspectives:

South Beach Beverage Company (or "SoBe" as we call it around here) makes and markets the world's best-tasting naturally flavored beverages. We've designed our "healthy refreshment" beverages with fun, active people (presumably like you) in mind.

History of South Beach Beverage Company, Inc.

South Beach Beverage Company, Inc. is a leading marketer of noncarbonated juice and tea-based drinks. The firm's offerings include herb- and vitamin-enhanced beverages with such names as Tsunami, Love Bus Brew, and Orange-Carrot Elixir; energy drinks including Adrenaline Rush and No Fear Super Energy Supplement; and related products including SoBe Gum, SoBe Chocolate bars, SoBe Ice frozen fruit juices, and SoBe clothing. The firm has been a unit of PepsiCo, Inc. since 2001.

Beginnings

The South Beach Beverage Company traces its origins to January 1995, and a lunch meeting in Norwalk, Connecticut, between John Bello and Tom Schwalm. Bello, who had earned his M.B.A. from Dartmouth, had worked for the National Football League's marketing arm for 15 years, including five as its president, and also briefly at Pepsi-Cola and AriZona Beverages. Schwalm had worked for The Stroh Brewery Co., Dribeck Importers, and Barton Beers, and had headed consulting firm Greenwich Beverage Group. Inspired by the success of recent start-up AriZona, which had reached $300 million in sales in less than three years, they decided to form a new beverage company to produce noncarbonated "new age" drinks.

Feeling that a regional identity would help distinguish their brand, they chose the health- and fashion-conscious South Beach area of Miami Beach, Florida, for the company's name, and appropriated a lizard design from the Art Deco façade of the Abbey Hotel in Miami Beach for its logo. The pair assembled a small group of investors to back the venture with $5 million in capital, and signed on the Stroh Brewery Co. to bottle the products at its Winston-Salem, North Carolina plant.

In December 1995 the first South Beach drinks hit stores in Connecticut and Florida. Packaged in 20-ounce bottles with the firm's lizard mascot embossed on the glass, they sported slogans like "Shake well," "Drain the Lizard," and "Grab a Lizard" on their caps. Flavors included Boca Berry-Grape and Palm Peach-Mango, several iced teas, nonalcoholic cocktails such as Pina-Colada Nite Cap, and a blend of orange and carrot juice called Orange Elixir. To promote the launch, the firm's executives began making the rounds of beverage industry conventions and outdoor festivals to give out samples. After a few months the brand name evolved into SoBe, which was Florida shorthand for South Beach.

During its first full year in operation the company shipped 200,000 cases of beverages to stores and took in revenues of $2.1 million, but also recorded $2 million in losses. The firm's products, while good, were not different enough from competitors' to stand out, and distributors were unenthusiastic about the brand. One bright spot was South Beach's healthful orange/carrot juice blend, which had generated a fair amount of positive consumer feedback. Having recently noticed media reports about the health benefits of herbs, Bello decided that adding more health-promoting ingredients to his drinks might reverse the company's fortunes. When Billy Bishop, Jr., the 26-year-old son of Executive Vice-President Bill Bishop, Sr., suggested a new product that blended tea with Oriental medicinal herbs, SoBe 3G Black Tea was born.

The 3G name was a reference to ginseng, gingko, and guarana, herbal derivatives that purportedly improved concentration, endurance, and energy, respectively. Although such benefits were not scientifically proven, and the amounts contained in the drinks were relatively small, the inclusion of herbs in a drink marketed to mainstream consumers struck a chord, and upon its introduction in December 1996 the tea began to fly off shelves.

The firm quickly decided to roll out new Green Tea, Red Tea, and Oolong Tea drinks, which contained such exotic ingredients as echinacea, selenium, and bee pollen. With funds running perilously low, Bello put his house up as collateral on a $1 million loan, and persuaded the company's other shareholders to help raise a total of $4.5 million to finance this new direction. The company also negotiated extended credit agreements with its glassmaker, flavor supplier, and packagers.

Functional Drinks Bringing Success in 1997

By the spring of 1997 the firm's product line had been revamped to feature eight tea and fruit-flavored "wellness" or "functional" drinks that bore designations such as 3G, 3C, and SoBe Energy, each of which contained various combinations of exotic herbs, vitamins, and minerals. South Beach had by now junked all but two of its original flavors, Orange Elixir and Cranberry-Grapefruit Elixir, and the single lizard logo on labels had become a pair of lizards entwined in "yin-yang" complementarity, courtesy of Bello's design student daughter. The flavors had been developed by the firm's in-house nutritionist in consultation with formulation experts Wild Flavors of Erlanger, Kentucky.

Unlike the first round of South Beach products, which had gotten minimal shelf space in stores already crowded with similar Snapple and Mistic drinks, distributors were now enthusiastic about pushing the reformulated line. The company had been helped by distribution changes at rival AriZona, which had left some territories open to new brands, as well as the increasing media attention being given to the firm's products. Whereas other companies had marketed beverages with one or two herb or vitamin additives, South Beach was taking the concept to a higher level, which meshed with the American public's newfound interest in the benefits of herbs.

In September 1997 the company appointed Michael B. Schott, former Snapple president and AriZona Beverages CEO, to the posts of president and chief operating officer, and gave him a stake in the firm. By this time, South Beach products were being distributed in 30 states and Bermuda, and were being manufactured at six locations.

Early 1998 brought more new drinks, including Zen Blend, Wisdom, and Orange-Tomato 3C Elixir, and by summer the firm was selling a total of 12 juice-based drinks and teas, including the most recent addition, Eros, which used the tagline, "Who Needs Viagra?" The beverages were priced at between 99 cents and $1.49. Because the company contracted its manufacturing, it had only 92 employees.

In the fall South Beach introduced dairy-based Lizzard Blizzard, as well as a three-product tea- and fruit-based line called SoBe Essentials, which contained higher "supplement levels" of herbal extracts. They were marketed in 14-ounce bottles. Sales for the year jumped from $13 million to $67 million, with 5.4 million cases of drinks sold. Threatened by the firm's success, Snapple owner Triarc attempted to buy South Beach during the year but was rebuffed, and soon afterward Snapple Elements, a thinly-veiled knockoff of the successful SoBe Essentials line, was introduced.

The spring of 1999 saw a number of new products added. In April, three flavors of SoBe Lean Metabolic Enhancer were introduced, which contained an appetite suppressant and were sweetened with a blend of aspartame and Ace-K, and in May Lizard Fuel, a dairy-based strawberry-banana drink, hit stores. During the summer the firm added Lemon Tea, and began offering many of its products in 11.5-ounce cans for use on beaches and other glass-free places, priced at between 99 cents and $1.29. Other new drinks included Passion, Drive, and Soy Essentials, which contained soy protein, which was touted for its health benefits. Another dairy-based drink, Lizard Lightning, also appeared, containing herbs that were thought to boost the immune system. Distribution continued to expand during the year, with a deal reached to produce SoBe drinks in Canada.

Adding Sports Sponsorships in 1999

South Beach was now working to build visibility in "extreme sports" activities like mountain biking and snowboarding, using multi-sport athlete Bode Miller as an endorser and linking with bike maker Cannondale Corp. to sponsor its HeadShok Racing Team. The firm also launched its first ad campaign, buying $2 million worth of radio spots on the East and West Coasts that touted the purported health and energy-enhancing qualities of its drinks.

Other elements of the firm's $5 million marketing campaign included sending two vintage school buses ("SoBe Love Buses") to festivals, fairs, sports events, and concerts on the East and West Coasts, a web site, a toll-free "Lizard Line," and a catalog of hats, shirts, and other "Lizard Gear." Billy Bishop, Jr., had been named vice-president of marketing to coordinate these activities, which were aimed at young, active individualists. The firm now had 300 distributors selling SoBe drinks to stores in all 50 states.

By the end of 1999 the company had sold 14.8 million cases of drinks and taken in $166.4 million. South Beach had recently surpassed rival AriZona in sales and was second only to Snapple in the new age drink category. Less than pleased, rival AriZona slapped the company with a lawsuit claiming that SoBe had copied its bottle design.

In February 2000 the U.S. Food and Drug Administration (FDA) warned the firm that its product labels contained exaggerated claims of health benefits, asking that it delete copy such as that on Lizzard Blizzard that stated it was "loaded with nature's most powerful cold and flu fighters." The firm subsequently changed its packaging to adhere to the FDA's guidelines.

Early 2000 saw the introduction of Tsunami, a dairy/fruit drink, which featured a surfing lizard on the label. Laird Hamilton, one of the world's top surfers, was engaged to help promote it. South Beach was now budgeting $9 million per year for radio ads and $3 million for sampling vehicles, athletic sponsorships including the Major League Lacrosse circuit, and other events including the Warped music tour. The firm's ads used the tagline, "SoBe Yourself," and sought to position the brand as one for individuals who wanted to stand out. In June the company announced plans to introduce ten of its best-selling products in the United Kingdom through distributor Food Brands Group Ltd.

Sale to PepsiCo in 2001

In the summer of 1999 South Beach had begun looking for an outside investor to fund growth, improve distribution, and allow its investors to cash out, and the following spring the company announced that it would sell a 70 percent ownership stake to Boston-based investment firm J.W. Childs Associates LP, for a reported $260 million. By fall the Coca-Cola Company had opted in for 20 percent, but negotiations bogged down, and an exclusivity window lapsed at the end of September. With little advance warning, PepsiCo, Inc. swooped in with an offer of close to $370 million for a 90 percent stake in South Beach, and within two weeks a deal had been struck.

Sales of carbonated soft drinks including Pepsi had been stagnant for some time, but the alternative juice drink and tea category was growing by 12 percent a year. Pepsi already made Aquafina water, Lipton tea, Frappuccino coffee, Tropicana juices, and FruitWorks fruit drinks, and the purchase of the hot new SoBe brand was expected to help it increase its hold on this growing market.

After the purchase SoBe would be operated as an independent unit of the firm, with CEO Bello remaining in place, although Pepsi installed new sales and marketing executives. The deal had come shortly after Snapple and Mistic's acquisition by Cadbury Schweppes PLC, and just before PepsiCo acquired Quaker Oats, makers of Gatorade, for $13.8 billion.

The latter half of 2000 saw the launch of a line of plastic-bottled sports drinks called the SoBe Sports System, as well as Adrenaline Rush, which was designed to compete with energy drinks such as Red Bull. It was priced at $1.99 per 8.2-ounce can, though it was later repackaged in a 6.5-ounce amber bottle. Also introduced were 11-ounce aseptic containers called Lizard Packs, and frozen fountain drinks for sale in convenience stores and restaurants under the name SoBe Ice. For 2000, the firm sold 19 million cases of drinks for revenues of $203.2 million.

In early 2001 the Pepsi deal was finalized, and soon afterward the firm's Canadian distribution was taken over by SoBe's new parent, as was distribution to much of the United States. Integration of the formerly independent SoBe was not going entirely smoothly, however. The firm's new sports drinks had been overshadowed by a similar Pepsi line, and when the highly successful Adrenaline Rush was encroached upon by Pepsi's new Amp energy drink, Bello wrote a defensive memo to the firm's remaining non-Pepsi distributors warning them to be on guard.

Late 2001 saw the introduction of more new drinks including chocolate-flavored Love Bus Brew, Nirvana, Lizard Lava, Dragon, and MacLizard's Lemonade. In November, the firm agreed to modify claims in advertisements that promoted SoBe Lean as a drink that would help users lose weight.

Adding Carbonated Drinks, Chocolate, and Gum in 2002

New offerings for 2002 included Bodacious Brew, named in honor of spokesperson and Olympic medalist Bode Miller, and the company's first carbonated product, Mr. Green, which contained herbal extracts and had a flavor likened to Dr. Pepper. In the summer a SoBe Chocolate Bar was introduced, as was SoBe Gum, which had been created in partnership with retailer 7-Eleven. The gum contained liquid centers that were based on several of the firm's most popular beverages.

In December 2002 South Beach recalled several thousand cases of SoBe Green Tea and Energy drinks, because they had accidentally been bottled with dextromethorphan, an ingredient in cough medicine. That same month the firm agreed to pay nearly $1.8 million to settle sexual harassment claims brought by five female employees.

At the end of 2002 founder and CEO John Bello left the company. He later formed an investment firm, Quest Capital, and then Firefighter Brand Products, which produced chili, chips, and soda. Tom Bene took over leadership of the unit after his departure.

New products for 2003 included Long John Lizard's Grape Grog, which contained grapeseed extracts; SoBe No Fear Super Energy Supplement, which was co-branded with an edgy apparel maker; and SoBe Fuerte, a mango-passionfruit blend that was targeted at Hispanics. The firm also relaunched its SoBe Lean line with supermodel Molly Sims as spokesperson, and created SoBe Synergy, a five-flavor line of 50 percent juice drinks packaged in cans for vending machines such as those found in schools.

Early 2004 saw a marketing partnership formed with Buy Music.com, Inc., an online music store. A promotion was soon launched that gave one in 12 buyers of SoBe drinks prizes such as free downloads, Rio MP3 players, and more. In March 2004 Scott Moffitt was named to head the firm. He was an 11-year veteran of PepsiCo who had run SoBe's marketing efforts for more than a year. Products introduced during the year included sugar-free versions of No Fear and Adrenaline Rush, as well as carbonated SoBe Rush, introduced in Mexico. The year also saw a $219,000 fine levied by the state of Connecticut stemming from former claims of cold- and flu-fighting qualities on some of the firm's bottles.

In early 2005 PepsiCo announced a new $20 million advertising push for SoBe and its other alternative beverage lines. Upscale, urban-themed TV ads began running in April for Adrenaline Rush on channels including Comedy Central, Fuse, and MTV, while No Fear, the firm's biggest recent success, was promoted with billboards and print ads featuring professional surfers and a female motocross team. The year 2005 also saw the Lean line expanded and the logo of the South Beach Diet added.

In little more than a decade, South Beach Beverage Company Inc.'s SoBe had become one of the top brands in the U.S. noncarbonated beverage market through its functional drinks that contained herbs, vitamins, and minerals. The deep pockets and marketing muscle of new owner Pepsi gave the firm a strong foundation for continued success.

Principal Subsidiaries: SoBe Operating Corp., Inc.

Principal Competitors: The Coca-Cola Company; Cadbury Schweppes PLC; Ferolito, Vultaggio & Sons; Red Bull GmbH.

Chronology

• Key Dates:
• 1995: John Bello and Tom Schwalm form South Beach Beverage.
• 1997: Sales take off with new herb-enhanced SoBe 3G, 3C, Energy drinks.
• 1998: Lizzard Blizzard and SoBe Essentials are introduced.
• 1999: SoBe Lean and Lizard Fuel debut; distribution is expanded to Canada.
• 2000: SoBe Tsunami is introduced; the firm's products reach the United Kingdom.
• 2001: PepsiCo, Inc. acquires a 90 percent stake in South Beach Beverage.
• 2002: SoBe gum, chocolate, and carbonated Mr. Green debut; Bello leaves the company.
• 2003: No Fear energy drink is introduced, with strong sales.
• 2004: A marketing pact is formed with BuyMusic.com; Scott Moffit is named to head the firm.
• 2005: The Lean line is expanded, and wins the endorsement of the South Beach Diet.