Zevia CEO on the IPO, stevia, and margins: ‘Our business model offers attractive profitability…’

By Elaine Watson contact

- Last updated on GMT

CEO Paddy Spence: '“Higher-margin innovation items are increasing as a proportion of our mix...' Image credit: Zevia
CEO Paddy Spence: '“Higher-margin innovation items are increasing as a proportion of our mix...' Image credit: Zevia

Related tags: Zevia, Stevia

While a recent probe into Oatly’s accounting practices and a flood of tech money going into food has raised questions about valuations in the space, zero-sugar soda brand Zevia has a solid track record of growth, a clear consumer proposition (great taste, zero sugar), and attractive gross margins, CEO Paddy Spence told FoodNavigator-USA as the brand started trading on the New York Stock Exchange (ZVIA) on Thursday.

Los Angeles-based Zevia has been on the market since 2007, but is still generating strong double-digit growth, growing net sales by 29% to $110m in 2020 and generating a profit in Q1 2021, although it made a net loss of $6m in FY 2020, said Spence.

“When you even look at some of the mature food companies, a lot of them have gross margins in the mid-30s. We were at 43% in 2019, 45% in 2020, and 46.2% in Q1, 2021, so you can see a progression," ​added Spence, who said two things consumers are consistently looking for are less sugar and natural ingredients.

“Higher-margin innovation items are also increasing as a proportion of our mix. When you look at a category like energy, that offers really exciting gross margins relative to soda.”

Asked when Zevia might become consistently profitable, he said: “We're addressing a massive global $770bn opportunity, so right now it's prudent to invest in growth and continue to scale this business, but our business model does offer attractive profitability… we're fortunate to be in beverage where there are high gross margins.”

‘There are 50 jurisdictions around the world with taxes on sugar, soda or sugary beverages’

Looking at growth opportunities from a channel perspective, he said Zevia had distribution in 25,000+ locations in the US and Canada, but sees significant white space in convenience and foodservice as well as international markets and e-commerce.

“We started in the natural channel where we've been dominant for a decade. And even there, we're still growing at double digits. And then we went for food, drug and mass, and there’s still a tremendous amount of upside there.

Amy Taylor Zevia
Zevia recently recruited former Red Bull exec Amy Taylor as president to help it build its brand and enter international markets, said CEO Paddy Spence: “Amy has only been on our team full time for about four weeks. But what an incredibly productive four weeks it's been.” Picture credit: Zevia

“We also see opportunities in immediate consumption channels in food service and convenience. Amy Taylor – our new president - came from Red Bull North America and has strong experience in immediate consumption channels like food service and convenience, as well as ​[helping Zevia unlock] this massive opportunity of global expansion."

Zevia is not providing a timeline, but says it is eyeing up markets including the UK, Australia and Mexico, where pressure is intensifying to cut sugar. “There are 50 jurisdictions around the world with taxes on sugar, soda or sugary beverages, and so we're seeing not only huge consumer demand, but also retail demand for products that meet those regulatory structures.”

E-commerce accounted for 13% of sales in 2020

E-commerce – which accounted for 13% of sales in 2020 – is also a significant growth opportunity, and works together with the bricks & mortar business, said Spence, who said the brand has taken off on Amazon, recently entered Walmart.com, and is also building a subscription business direct to consumer on Zevia.com.

We truly believe that the whole discovery consideration and selection process for packaged goods has largely migrated online, in part because of the pandemic. And Zevia is a brand that the more you learn about it, the more you love.

“We've got the number one soft drink item on Amazon, and 50% of our purchasers online also buy our brand in brick and mortar, so e-commerce is about transactions, but it's also a trial opportunity; our leading items on Amazon are variety packs, so it reinforces that variety strategy, and continues to support our retail infrastructure.”

Formulation: Stevia expert Dr Mel Jackson now working for Zevia full time

When it comes to formulation, Zevia has been constantly refining its sweetening system, dropping erythritol and monk fruit and now just working with a stevia leaf extract that combines the best-tasting steviol glycosides, he said (Zevia only uses four ingredients in its core range: water, stevia leaf extract, natural flavors, and citric acid).

“Stevia was a novel ingredient back in 2008, but even 13 years later, we're still refining and improving the taste profile of our products. In the last two months, we brought on one of the world's leading experts in stevia beverage formulation, Dr. Mel Jackson, who has led innovation at our stevia supplier, Sweet Green Fields, for a decade.

“As a supplier, he helped us formulate these incredible products, now he's working full time on our behalf, and continues to keep us ahead of the competition.”

aluminum price mintec
Aluminum prices started rising steadily in spring 2020, peaking in early summer 2021. Source: Mintec

Stockpiling cans

When it comes to raw materials costs and transport, he said, “There are inflationary headwinds, but we're less exposed to commodity inflation than many of our peers...”

When it comes to aluminum cans, which were in short supply in early 2020, prompting sharp price increases, he said, “We maintained a 95% service level throughout the pandemic and we did that by identifying challenges early on, diversifying our can supply, and ensuring we stockpiled cans to maintain safety stock.”

zevia range July 2021
Zevia's core zero-calorie soda range still accounts for the majority of sales, while its cola SKU alone accounted for 24% of its retail sales last year. However, brand extensions launched since 2016 (sparkling, Energy, Kidz, Mixers, Organic Tea) comprised 14% of net sales in 2020, said the company, which has an ‘asset-light’ business model deploying third-party contract-manufacturing and logistics providers. Image credit: Zevia
Zevia products
While stevia-sweetened variants of Coke and Pepsi (Coke Life and Pepsi True) failed to set the world on fire, Zevia has continued to gain traction, particularly with Millennials, claimed the company: “Our passionate consumer base over-indexes to Millennials, whom we believe will continue to favor our better-for-you, more sustainable liquid refreshment beverages as they age.” Image credit: Zevia

 

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