While the Lack of Slotting Fees is Welcomed, Regulatory Environment is Complex.

As the crossover between alcoholic and non-alcoholic beverage distribution and product development heats up, BD caught up with longtime beverage entrepreneur Larry Trachtenbroit to see what lessons he’s learned after making the transition. Trachtenbroit sold a ready-to-drink coffee business to Coke for more than $5 million 20 years ago before going on to create a beverage innovation shop called Brain Twist that counted Coca-Cola as an investor. More than five years ago, he switched fully to alcoholic beverages. He co- founded his current venture FS Beverages with former global ocean shipping industry executive Greg Howard, who is president. FS Beverages is building sales and distribution for a line of alcohol-infused cherries, teas, lemonades, and coffees under a brand called Howie’s Spiked. The flagship product, Howie’s Spiked Cherries, is distributed in 15 Midwestern, Southern, and East Coast markets. The distribution network includes at least 30 independent Anheuser Busch-aligned distributors, as well as other independent wholesale distributors. The company generated revenue of $1.5 million in 2020 after growth of +28%, according to Howard. With the introduction of a spiked coffee called Alc-A-Chino later this year, revenue is expected to approach $2 million in 2021. A 12- oz jar of about 22 Spiked Cherries retails for $8.99 and has an alcohol content of 10%. The cherries come in two flavors: Original, and cinnamon Balls of Fire. They are marketed for use in everything from cocktails and hard seltzers to ice cream. Trachtenbroit has tested a CBD- infused version. The following interview has been edited for clarity and space:

BD: What’s the biggest difference when it comes to building a brand with alcohol distributors compared to non-alcohol?
LT: Believe it or not, they are the same when it comes to being built on relationships, brands, and customer service. One key difference is that there are no slotting fees. In regulated alcohol, it’s illegal to charge slotting fees. So, our success has been working with our distributors and being able to leverage their relationships in the market. Also, each state has its own set of rules to ensure the brand is legally compliant. This impacts our go-to- market strategy. For example, with a non-alcoholic beverage, we had the ability to run trial & awareness programs anytime and anywhere. We could simply have a sampling truck show up in front a venue or event and start handing out samples. It’s much more complex with the handling and distribution of alcohol and navigating the legal drinking age.

BD: What’s your best advice for a non-alcoholic distributor who wants to move into alcohol?
LT: As with any brand opportunity, the product must meet a consumer need. It all starts with innovation that delivers a true point of difference. Whether working with an alcohol or non-alcohol distributor, they want a unique product. Will it add incremental cases? Will it add incremental profits? Does this product make them a better supplier to their customers? Can they use this new product to cross market with their existing portfolio? For example, our spiked cherries cross promote with spirits and beers and are 100% incremental. Separately, with alcohol, 50 States equals 50 different sets of rules. Some states are easier to cross over to alcohol than others. States that can sell beer in c-stores and grocery would be a natural fit for a non-alcoholic distributor since they are in and out of those stores daily and would be able to leverage their sales team and relationships.

BD: What’s your best advice for an alcoholic distributor who wants to move into non- alcohol?
LT: The three-tier alcohol distribution system does not apply to non-alcoholic products, so a distributor who is in alcohol would have an easier time than someone who is not set up for or who does not understand the three-tier system. Regardless, a supplier still needs to deliver a product that has a point of difference that will drive both incremental volume and profit. In certain states, a distributor of alcohol who does not deliver to c-stores and grocery will have a tougher time as they would need a separate sales force and would have to work to identify and establish relationships in these new accounts. For the most part, the alcohol distributor needs to understand the “fast nickel versus slow dime” concept. While a non-alcoholic product may offer a lower dollar margin than an alcoholic product, the volume and velocity can be much higher.

BD: Do you expect more convergence between alcohol and non-alcohol distribution in the US? LT: Yes, you see brand owners leveraging their brand equity into alcohol-based offerings. As mentioned, some states will be easier than others. For a brand owner, moving into alcohol is a way to continue to engage with the consumer. It is critical that these brand owners do their homework to make sure that by moving into the alcohol space they are living up to the promise of the brand.

BD: Why are large non-alcoholic beverage companies seemingly more hesitant to get into alcohol than vice versa?
LT: Monster, Coke, PepsiCo, Bang, Sparkling Ice, Spindrift, and Snapple in Canada are either entering or are reportedly exploring the alcohol space. In the US, you have to use the three-tier system and each state has its own legal and licensing complexities, and these bigger companies are typically cautious in moving. It comes down to their capabilities and understanding of the parameters of the system. Crossing over with a brand into alcohol is about growing the category and showing these distributors that you are bringing a new brand that will grow their portfolio, be incremental, and drive sales and profits for both the distributor and retailer. These bigger companies also have to make sure that they have a value chain that warrants the effort required to enter and grow the space. I’ll note also that the issue here isn’t just about distributors looking to move from non-alcohol to alcohol. This transition and learning is setting the stage for CBD and THC infused beverages that will be legalized over the next couple of years. Both alcoholic and non-alcoholic distributors are going to want to be part of this new frontier. In this new world of alcohol and non-alcohol blending together, and with CBD beverages on the horizon, it is crucial to be small and nimble and have solid relationships with your distributors to make sure that you can properly adjust to take advantage of these evolving opportunities.