Bai Brands & KeVita snapped up as Dr Pepper & PepsiCo expand low-cal, functional beverage platforms

By Elaine Watson

- Last updated on GMT

PepsiCo to acquire KeVita, Dr Pepper to acquire Bai Brands

Related tags Dr pepper Brand management Brand

As widely rumored, two major players in the functional beverages space are to change hands, with PepsiCo to acquire KeVita for an undisclosed sum and Dr Pepper Snapple Group to acquire Bai Brands – in which it already has a small stake – for $1.7bn. And for the time being, both will continue to be run by their founders.

KeVita​, which has three organic product lines – its flagship sparkling probiotic drink, its Master Brew kombucha line and a drinking tonic line – will continue to operate independently with its production and bottling facilities located in Oxnard, California, said CEO and co-founder Bill Moses.

Terms of the deal were not disclosed, but an industry source told FoodNavigator-USA that media reports that the purchase price was between $200 and $300m were accurate.

Bai - which makes enhanced water, carbonated flavored water, coconut water and ready-to-drink teas - will operate within DPS’s Packaged Beverages segment and continue to be led by founder Ben Weiss, who "eats, lives and sleeps this business​," said DPS CEO Larry Young this morning.

“Joining the PepsiCo family will give us an opportunity to extend KeVita's trend-forward beverages to a broader audience, while staying committed to our core values," ​said Moses, who struck a deal with PepsiCo three years ago to get KeVita products distributed via PepsiCo's refrigerated DSD network (PepsiCo's Naked Emerging Brands venture arm also owns a minority stake in KeVita).  

"We're looking forward to more consumers experiencing the KeVita brand and to leveraging PepsiCo's marketing and distribution capabilities."

He added: "This transaction never would have happened without Whipstitch Capital's Michael Burgmaier and Nick McCoy, who have been working directly with KeVita since 2011. The pair made the initial introduction to Pepsi, structured and negotiated KeVita's 2013 transaction with Pepsi and have continued to  advise KeVita through the ultimate strategic sale brilliantly.”

Bai has carved out a leadership position in the enhanced water category

Dr Pepper Snapple Group said Bai provided a platform to incubate and grow better-for-you beverages and is expected to generate c.$425m in net sales in 2017 and add an incremental $132m to DPS’s current net sales expectation for 2017.

"In a relatively short time, Bai has carved out a leadership position in the enhanced water category and has now extended that success into other fast-growing and profitable categories. We're equally impressed with their innovation pipeline,” ​said DPS president and CEO Larry Young.

DRP slide on Bai Brands deal Nov 2016
Source: Dr Pepper Snapple Group presentation, Nov 22, 2016

“Moving forward, we will empower Bai's management team to continue the breakthrough and disruptive branding and innovation that have revolutionized their categories and work with them to put the brand in front of more consumers in more places."

On the conference call, DPS executives said they plan to increase Bai Brands' marketing budget by $25m in 2017.

The transaction, which is subject to customary closing conditions, is expected to close in the first quarter of 2017, said DPS, which started distributing Bai products in 2013 and took a minority stake in the business in 2015.​ 

Wells Fargo: Hefty price tag justified, We believe Bai will be a billion dollar brand by 2020

In a note on the Bai Brands deal issued this morning, Wells Fargo said the high price tag (which includes a tax benefit of about $400m) was justified: "While these are certainly lofty multiples, given expectations of net sales doubling by 2018 (to $625m in our estimation) and the cheap cost of debt (3.2%) to fund this transaction, we believe DPS’s purchase of Bai was the right decision given:

  1. Bai has been one of DPS’s most successful partnerships and this deal ensures DPS will continue to participate in the long-term growth opportunities for the brand vs. another acquirer;
  2. Bai has a strong track record of innovation which DPS can potentially leverage for the rest of its portfolio;
  3. There is a long runway of potential distribution gains for Bai, including in Mexico and other international markets;
  4. There should be very limited execution risk post-closing given their current relationship;
  5. We believe Bai will be a billion dollar brand by 2020, accelerating DPS’s top-line growth trajectory through 2020 from around 2% to more than 3%."
    DPS slide Bai Brands
    Source: Dr Pepper Snapple Group presentation, Nov 22, 2016

Bai range

Launched in 2009, Bai Brands​ has grown at a truly meteoric pace, generating revenues of $5.2m in 2012; $17m in 2013, $120m in 2015, $231m in 2016 and a predicted $425m in 2017. Bai's first beverage (Bai antioxidant infusion originally Bai5) contains a blend of antioxidant-packed coffee fruit and white tea extracts, and is sweetened with stevia extract and erythritol (each bottle has 5 calories). 

The New Jersey-based brand - which introduced a carbonated version of its flagship drink (Bai Bubbles) in late 2014, and a functional water infused with antioxidants and electrolytes called Antiwater in 2015, followed by Bai Cocofusions, Bai Black and Bai RTD tea -  has found success in natural and conventional grocery chains and clubstores, but still has a huge opportunity to grow in c-stores, drugstores and the foodservice channel, says founder and CEO Ben Weiss.

According to Weiss, consumers are ditching empty calories, but spurning ‘diet’ products, they want natural foods but won’t compromise on flavor or taste, and are in general looking for new, exciting experiences and brands – trends which all benefit Bai.

But Bai has also grown because it has made good business decisions, he told Nielsen for its recent Breakthrough Innovation report​: “I think we did a number of things that were unusual for a start-up. One, we did a lot of consumer research early, and two, we focused on building ‘distribution equity’ as much as brand equity. In my estimation, too many CPG start-ups focus mostly on the product and the brand... They don’t prioritize distribution as a strategic pillar. We did… As a result, we’ve been able to grow at triple-digit rates for five years​.”

Bill Moses

KeVita​, founded by Bill Moses (pictured right) and Moses and Chakra Earthsong Levy in 2009, has also generated explosive growth in recent years, which Moses ascribed to a combination of changing tastes, good timing and superior execution in an interview with FoodNavigator-USA in 2014.

What KeVita has proved is that consumers have not lost their taste for bubbles, they have just become more demanding, and expect more bang for their buck in terms of taste and health, he said.

“Why can’t there be healthy sparkling refreshing beverages that are flavorful and yet low-caloric that can compete at a price point with traditional sodas, and actually be good for you?”

You see a similar phenomenon in the beer category, he says, where shoppers are demanding more interesting products: “15 years ago you’d get Bud and Coors and Amstel and now you’ve got all these craft beers that are just bigger and bolder and yeastier.”

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