Conscious Choice: Is it the Real Thing?

March 2002

Is it the Real Thing?

Coca-Cola buys itself a seat at the juice bar

by Dennis Rodkin

Gulp! Coca-Cola now owns one of the country’s best-known natural juice companies. Will the people who make the world’s leading brand of caffeine-laden sugar water keep their hands off the "Living Flavor" of Odwalla, as they’ve promised?

The December 2001 purchase of Odwalla by Minute Maid, a unit of the Coca-Cola company, might seem like the same old story — entrepreneurs dream up healthy alternative products, get gobbled up by mainstream companies, and watch as the lifeblood is drained out of their great idea. But Minute Maid’s key guy at Odwalla vows that won’t happen on his watch.

"We have no intention of changing the quality; that’s the uniqueness of the product," says Shawn Sugarman, who in January became chief operating officer at Odwalla. A seventeen-year Minute Maid veteran, Sugarman was the Houston juice giant’s vice-president of business development and bottled juice brands until the Odwalla purchase. Then he moved over as Minute Maid’s designated hitter.

Although his surname suggests he’d be the last person to get behind a company peddling natural, all-fruit juices, Sugarman says he and Coca-Cola are fully committed to getting Odwalla’s "meals in a bottle" into the hands of as many American consumers as they can.

"The mainstream consumer is ready for these products," Sugarman says. "People are much more aware than they were twenty years ago of the linkage between health and food, and that’s going to progress." He describes the Odwalla purchase as extending Coca-Cola and Minute Maid’s reach into a part of the beverage market that "will be an enduring trend." Changing the products — pasteurizing them to the point that their nutritional quality is zapped, or boosting their water content to bring down the price — would take away the whole reason people drink them, he says, so "that’s not the plan."

So far, the plan that Sugarman describes entails tinkering with the bottling process so the products will last about a week longer on shelves — but not into perpetuity, like shelf-stable Coke — and otherwise letting Odwalla be Odwalla. (Odwalla CEO Steven Williamson, who predates the buyout, could not be reached for comment before presstime.)

If that’s how it plays out, it’ll be good news for people who drink healthy; Odwalla’s juices will be in many more retail outlets, and you won’t have to buy only as many as you’ll drink in the next day or two.

If it doesn’t play out, then one more bunch of optimists will have been had by the big corporate boys.

Beyond what the sale says about Odwalla’s rise from its start in a backyard shed in Santa Cruz to space on Coke’s worldwide shelf of over 230 brands, this big transaction signals that the entire fresh juice business has taken a huge step toward the mainstream, where all the real action is in America’s consumer markets.

"It’s kind of a validation of the fresh juice and smoothie business," says George Noroian, CEO of Happy Planet, a juice company in Vancouver, British Columbia. "Coca-Cola is giving its stamp of approval to a significant trend in the beverage industry. This category has been growing quite rapidly for many years. Now [Coca-Cola] is acknowledging that consumers are looking for healthier drinks with fewer preservatives and less added sugar."

Only a few months have passed since the $181 million deal turned Odwalla, a two-decades-old innovator in fresh juices founded by a trio of community-conscious musicians, into a unit of mammoth Coca-Cola, the $4 billion corporation with tentacles that reach pretty much anything non-alcoholic you might drink. So it’s too early to say yet whether Odwalla will truly get to keep its place at the head of the fresh-juice industry, or if Coca-Cola will love Odwalla to death, pushing it so hard toward mass appeal that its essential Odwalla-ness dissipates.

Fortunately for people who like to see good products fly, early signs indicate that Odwalla will get to go on being the real thing.

Take, for one, Minute Maid’s announced reason for going after Odwalla. Both Minute Maid’s president, Don Short, in press releases about the purchase, and Sugarman, in an interview with Conscious Choice, have said the whole idea was to hitch their wagon to the star of a fast-growing new beverage realm. "Odwalla is a key component of Coca-Cola’s strategy for building category leaders in new beverage categories," Short was quoted as saying.

Sugarman says Coca-Cola has been watching the burgeoning fresh juice category and wanted to get in on it. "Coca-Cola is a total beverage company and wants to participate in all aspects of beverages," he said. "We have moved into water and other juices like not-from-concentrate orange juice, and the portfolio keeps expanding. Soft drink consumption in mature markets is slowing down, so the portfolio is shifting to what people are going to be drinking."

Here’s another sign that Odwalla will be left alone: Sugarman is the only Minute Maid personnel who’s been shifted to Odwalla’s headquarters in hip Half Moon Bay, California. There’s been no flock of Houston suits descending to school everybody in the Minute Maid way.

It really is hard to knit together two companies that arrive with widely different outlooks, particularly when one of them is way, way bigger. In a much discussed article in the New York Times magazine last May, writer Michael Pollan explored the same motion — from alternative to mainstream — of the organic food business. Odwalla’s counterpart in that segment is Cascadian Farms, the Washington company that was so successful in canned and frozen organics that it was eventually bought by General Mills. Shadowing Cascadian’s founder, Gene Kahn, through meetings at the Minneapolis food giant, Pollan shows how deep the ambivalence goes. Cascadian and Kahn are sometimes handled like General Mills’ pets, with Kahn doing cute tricks like showing up in a denim workshirt at suit meetings; at other times, the old-line organic farm is given all the reverence (and research funding) that farsighted pioneers deserve.

Not everybody is convinced that Odwalla’s future looks keen. One beverage industry executive cites the example of Sobe, the maker of herbal-accented drinks that was bought by Pepsi last year. Sobe, this observer says, "isn’t as independent as they said they’d be. They have an office and a president, but they are not running independent of Pepsi at all. Will Coke do the same thing? Say the right things but do what it wants?"

And Bill Sipper, the aptly surnamed marketing vice-president of the Ultimate Juice Company, a New Jersey firm that purchased Chicago’s Fantasia Juice in 2000, wonders if Coca-Cola will trip itself up trying to make Odwalla fit on the Coke shelf. Because of its fresh liquid ingredients, an Odwalla juice has to stay refrigerated all the way from the factory until it gets into your grocery cart; otherwise, its taste and nutritional content both decline. Coke, of course, could sit in the back of a room-temperature warehouse for weeks and still taste the same.

"I don’t know Coca-Cola’s intentions," Sipper says. "But if they want to make it more feasible for non-refrigerated distribution, that’ll be a bad sign."

Sipper contends that Fresh Samantha, a Maine juice brand that merged with Odwalla in May 2000, has already begun reducing its fresh-fruit content by boosting the water content—a way to make juices cheaper and longer-lasting. But Sugarman says "no formulas have been changed."

Even with his concerns about the company he calls "the king of caffeine and sugar" storming the fresh juice business, Sipper predicts that the likeliest path will be to keep going in the direction Odwalla was already headed. "Coca-Cola and Minute Maid are going to be very smart about what they do," he forecasts. "They didn’t spend [$181 million] to go in and make a lot of deadly changes." Coca-Cola executives can hardly have missed the steep trajectory fresh juices have been on for almost two decades, he says. "They want to get into this game because consumers are going to the category in droves," he says.

In Chicago alone, Sipper says, the juice business grew 42 percent last year—more than San Francisco’s 30 percent, but then, San Francisco was already far ahead of us.

Coca-Cola’s own annual financial report tells the story well. In January, the company reported that in 2001 sales of its fastest-growing carbonated beverages, Diet Coke and Fanta, were up 6 percent over the previous year. But Coca-Cola’s non-carbonated drinks saw real spikes for the year: its water sales were up 62 percent, juices up 18 percent and sports drinks up 13 percent. Clearly, growth lies outside the traditional soft drinks. No wonder Odwalla looked good; the company’s sales were up 37 percent in 2001, in line with its twenty-year average of 40 percent growth.

Niche entrepreneurial companies like Odwalla perform a vital service for major players like Coca-Cola, says Christie Nordhielm, a professor of marketing at Northwestern’s Kellogg Graduate School of Management. "The smaller companies act as market research firms for the big guys," she explains. "They go out and identify and develop a viable market, and then they get picked up by the big guys."

Herself the daughter of an old Coca-Cola vice-president, Nordhielm explains that large companies can’t stick their fingers into every emerging trend in the hope that one or two will turn out to have a lucrative future. Instead, they watch all the trends grow, and then buy into the few that develop legs. Odwalla may not have meant to be, but it was working as Coca-Cola’s farm team for its first couple of decades.

In 1980, according to the Roots section of Odwalla’s Web site, three Santa Cruz, California, musicians — Greg Steltenpohl, Gerry Percy, and Bonnie Bassett — whipped up Odwalla not as a fledgling future unit of Coca-Cola but as a quick way to generate cash to fund the stuff they really wanted to do. They were going to create "musical and multimedia presentations for local schools and cultural events to educate people about cultural diversity and the environment."

Steltenpohl was in a public library looking for information on grants when he stumbled onto a book called "100 Businesses You Can Start for Under $100." One of the ideas was fresh juice. Armed with a used juicer, they set up shop in a back yard shed and planned to make juice for local restaurants. The first day, they juiced one box of oranges. The profits bought them two boxes for juicing the next day.

The name Odwalla came from a character in a song-poem by the Art Ensemble of Chicago. Odwalla is someone who leads "people of the sun" out of the "gray haze." The health-conscious believe that fresh, nutrient-rich foods relieve a body of the "gray haze" of overly processed foods.

From that ragtag start, Odwalla grew fast, averaging growth of 40 percent a year, until it was well established as a leader in what people in the business call the "super-premium minimally processed juice" arena. By fiscal year 2001, Odwalla was selling $123.8 million in fresh juices, smoothies, soy milks, and fruit-and-grain bars. Its May 2000 acquisition of Fresh Samantha, a similarly out-there company that had grown out of one family’s bean sprouts business, made it the biggest player in the booming juice industry.

Although the products are largely not organic, Odwalla uses some organics and has groomed organic suppliers over the years. Throughout the 1990s, Odwalla was showered with awards for its corporate environmentalism, brand awareness, and great working conditions.

Noroian, of competitor Happy Planet, admires the things Odwalla has done. "Odwalla has been very good at generating products that stick around," he says. "Not only juice and smoothies but they have Odwalla bars and soy-rice milk and other things." On top of that is Odwalla’s much-admired distribution network, a fleet of refrigerated trucks piloted by "driver-merchandisers" who inspect, turn over, and generally baby the Odwalla items in each store on their route.

"They have everything that a big consumer products company would be impressed with," Noroian says.

Plus a not-so-secret weapon called Flash Pasteurization.

Traditional pasteurization requires heating a product to a point where disease-carrying organisms can’t survive. Trouble is, much of the nutrition in fruit and vegetable juices doesn’t survive pasteurization either. Pasteurized orange juice has less than half the Vitamin C that’s in fresh-squeezed.

But pasteurized juice (or milk or anything else) suits the modern grocery business because it stays viable longer, for a period of weeks instead of days. Fresh juice companies that forbid any kind of pasteurization can’t expect to distribute their products over the enormous distances that it takes to be a national brand in this vast nation, so the fresh juice business has been mostly regional.

Odwalla, though, was among the first and most aggressive juice companies to work a compromise via Flash Pasteurization. Fresh juice is heated quickly, and then immediately chilled. Odwalla claims that its flash pasteurized orange juice retains 95 percent of the nutrients in fresh.

It also gets them about three weeks of shelf life, enough to be shipped from the plant in Dinuba, California, to the Midwest and still have time to wait a bit before being plunked into a consumer’s grocery basket without going bad.

By mastering the juggle of great fresh taste, high nutritional value, and easy distribution, Odwalla got itself to a point where it lit up Coca-Cola’s radar screen. Sugarman was the radar guy.

"I had bifurcated the health and wellness beverage market into two groups," he explains. "There’s the more mainstream subset that says,‘I want calcium added to my orange juice. I believe in the guys in the white coats putting healthy things in.’ And the other subset is more of a homeopathy-driven person:‘I don’t trust that. I want it more natural than that, and I want it minimally processed.’" Minute Maid has long capitalized on the first group with not-from-concentrate juices, but, Sugarman says, "we didn’t have the tight bond with the second group, and Odwalla did."

Sugarman is 41 and the father of two. He says it was having kids that nudged him over toward the healthy side of the beverage industry. When his wife, Elizabeth, started pursuing healthy options for their kids, "she found a lot of these minimally processed things and introduced me to them." He soon learned that the category was exploding as millions of other people were trying to eat and drink closer to pure.

Some research, some negotiation, and by the end of 2001, Coca-Cola had bought 95.6 percent of all the shares of Odwalla. There’s a historical irony in Coca-Cola buying somebody else’s good idea for health beverages — that’s essentially how the bottled-drink behemoth got its own start. John Pemberton, an Atlanta pharmacist, concocted Coca-Cola in 1886 as a quick cure for headaches. But he sold his idea to businessman Asa Candler, who went on to build the start of the Coca-Cola empire. One of his first ad slogans for Coke was, "The Ideal Brain Tonic."

Industry observers all wonder whether Coca-Cola will push Odwalla to pasteurize its products to get them longer shelf life — "either that or putting in chemical preservatives would be the end of Odwalla," Noroian says. But Sugarman says there’s no such push in the works. "They actually have a reasonably good shelf life," he says. "We are looking at some simple things in the manufacturing process that don’t change the product." He forecasts a sizable investment in the factory to keep greater numbers of contaminants out of the air and the sterile pipelines.

"A small company can’t afford to do these things, but we can do them," Sugarman says. "We can do them without damaging the products’ quality, and we can add a week or two to shelf life." He won’t divulge how much the improvements will cost, but says he expects them to happen over the course of the next year.

The uphill battle will be against the seemingly incongruous idea of the freshest drinks in the store being brought to you by Coca-Cola, forever linked with burpy brown syrup. "No matter what’s in the product they’re buying, consumers are also buying the product’s image," notes Kellogg’s Nordhielm. "The image of a small company like Odwalla is its alternativeness and naturalness; that image becomes a little less credible when you’re owned by Coca-Cola." She then adds that she’s a Coca-Cola stockholder.

Nordhielm and Ultimate Juice’s Sipper both expect that some number of Odwalla drinkers will turn their backs on the product expressly because it’s now owned by The Dark Side. Noroian predicts that some of Odwalla’s suppliers will walk for the same reason. None of them expects the ranks of the disaffected to be very big. Noroian and Sipper both figure the losses will be more than offset by enormous gains Odwalla will make with Coca-Cola’s ad muscle and deep pockets behind it.

For drinkers of fresh juices as well as for people in the juice industry, looking in on Odwalla and Coca-Cola at their early stage together is kind of like sitting at a wedding. We all know how many marriages end up unhappy, split up, or volcanically bad.

But just for now, we want to believe that this marriage was made in heaven.

Message in a Bottle: Warning Signs

Okay, okay, they’ve vowed there’ll be no change in Odwalla. But keep your eyes peeled anyway, just in case. Here are some things to watch for — not only in Odwalla but in any natural, healthy product that comes under new corporate ownership.

NEW INGREDIENTS: Right now most Odwalla drinks have a pretty simple ingredients list. The label of a Blackberry Fruit Shake, for example, lists apple juice and orange juice with tangerine, bananas, blackberries, strawberries, and raspberries. That’s ideal. No high-fructose corn syrup, glucose, glucose-fructose syrup, or anything else out of the food chemist’s cabinet of sweeteners. No preservatives, no artificial color, nothing but food.

Clearly, if the ingredients lists don’t change, Odwalla hasn’t changed. Any introduction of preservatives or artificial sweeteners, says Happy Planet’s George Noroian, "would tell you, that’s the end of Odwalla’s vision."

And watch out for water. In products where it hasn’t been before, the addition of water indicates that the formula is being thinned, Noroian notes, and the same is true if the water content moves up the ingredients list in products where it has been — such as lemonade.

One good way to track label changes is to keep an empty bottle from an Odwalla drink around for the next year or so. Buy the same product periodically, and if the label stays the same, that’s a check in the Yay! Column.

NEW ITEMS: Odwalla is about fresh juice (and some fruit bars and other products). If it suddenly shows up in juice boxes or some other shelf-stable package, a serious wrong turn has been taken. More subtle, suggests Kellogg’s Christie Nordheilm, would be brand extensions into drinks that don’t bear any obvious relationship to the all-fruit fresh juice concept — such as iced tea. "Sometimes a big company makes the mistake of thinking loyal customers will follow the label onto any other idea, but it doesn’t work. You don’t buy customers, you buy the effort and the concept that attracted those customers."

ADVERTISING: Noroian notes that little companies like Happy Planet and Odwalla typically don’t do enormous ad campaigns, but not because they’re anti-advertising. They simply can’t afford it. If Odwalla suddenly seems ubiquitous — popping up on TV and in consumer magazines, on billboards and radio — that’s not necessarily a bad sign.

"Everybody would like to get their products out where more people could see them," Noroian says. "That’s probably a lot of what Coke can provide for Odwalla." The danger, he and Nordheilm agree, is if the advertising hinges more on how hip and happening Odwalla is, instead of on its health-promoting qualities. "Does the advertising look like it’s only about Odwalla’s image and not its vision?" Nordheilm asks.

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