Go to any deli or 7-Eleven these days and you're sure to see a gigantic, technicolor wall of beverages. There are juices and sodas and CBD-infused beverages and caffeinated energy drinks as far as the eye can see. The wall just keeps getting larger. And whereas in the past you might just see Red Bull and Monster in the energy drink space, now there are numerous competitors, with a wide range of flavors and branding. So what does it take to stand out in this booming market? And how do you get your beverage on that gigantic wall? On this episode, we speak with John Fieldly, the CEO and president of Celsius Holdings, about how his company became the third largest energy drink company in the US. We discuss what it takes to succeed in terms of branding, packaging, distribution and shelf-space. This transcript has been lightly edited for clarity.
Key insights from the pod
:
Where did Celsius come from? — 5:09
How Celsius got its start — 8:25
What is a planogram? — 11:17
The ‘chicken and egg’ problem of shelf space and sales — 17:01
When do drink makers do their own distribution? — 19:51
How competition works on Amazon — 21:47
Commodity inflation and supply chain disruptions — 31:05
What is the role of co-packing in the beverage industry? — 35:44
What are the promising international markets? — 38:14
----
Joe Weisenthal: (00:20)
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway: (00:25)
And I'm Tracy Alloway.
Joe: (00:26)
Tracy, I have to say I've been feeling a little lethargic this week. A little bit under the weather. You know, sometimes you wake up on the wrong side of the bed. Anyway, I'm feeling a little bit better because I've been consuming a lot of caffeine today.
Tracy: (00:43)
Yes, I'm looking at you in the studio right now and you have with you another Celsius. What's the flavor on your one?
Joe: (00:52)
I am drinking an Arctic Vibe, which is a sparkling frozen berry edition. I don’t know, I’m not sure like if in a blind taste test, I would say ‘Oh, this is berry,’ but it's very flavorful and it's sugar free and it's perked me up and I feel very keyed up and ready to go. You are also drinking a Celsius, what are you drinking?
Tracy: (01:10)
I have Cosmic Vibe, a sparkling fruit punch, and it does actually taste like carbonated Kool-Aid, it's sort of nostalgic in some way. But the thing that interests me is, you know, I'm looking at the branding and the ads on the can and we've talked about this before — we did a whole episode about Celsius — but the interesting thing to me is how this is slightly different from other energy drinks.
So it talks about obviously providing energy, but also accelerating metabolism and burning body fat. And I was going through the ingredients earlier and it has biotin in it, which is something that I take for like hair and skin and nails and stuff. So I guess I don't need to take supplements anymore. I can just drink Celsius.
Joe: (01:53)
Supposedly you could just drink Celsius. No, I'm fascinated in this for all kinds of reasons. I mean, we've talked about energy drinks for a while. We did an episode about the incredible rise of Monster a few years ago, one of the stocks that's actually outperformed Amazon over the same time period.
And if you go into any local deli or bodega or 7-11 these days, you just see this wall, and the wall just keeps getting bigger, of drinks. And many of them [are] highly caffeinated energy drinks. And it's sort of fascinating to me, like there are all these energy drinks out there that exist. How is there room for more? Right? It’s like you basically want to consume one and you get a jolt of caffeine, you go about your day.
It's amazing that despite this maturity and this size and we had a Red Bull and Monster and all those, that yet somehow there could still be room for another competitor to seemingly, I know it's never coming out nowhere, but seemingly coming out of nowhere.
Tracy: (02:50)
This is the thing that fascinates me too. So we don't just have different brands of energy drinks, like within the brands themselves, there are so many different flavors now and options. It's kind of amazing. And again, when you go into the store, you see this sort of rainbow of cans on display.
The other thing that interests me is the distribution question. So I'm always curious, like who makes the decisions of what ends up on the shelves in your local 7-11 or Circle K or Duane Reade, or whatever. How do those specific flavors get chosen, much less even the brands, right? And I think this is something that's come up in a number of episodes now, just how important distribution can actually be to these particular types of products.
Joe: (03:36)
Well, I think we should just jump right into it. We really do have the perfect guest because today we are going to be speaking with John Fieldly. He is the president and CEO of Celsius Holdings. He's been CEO since 2017, been with the company for 12 years. And we are going to ask him all these questions about how this all works, how you rise to the top in what is clearly a very competitive field. So John, thank you so much for coming on Odd Lots.
John Fieldly: (04:03)
Glad to be here, Joe. Excited Tracy. It's exciting. I like how you brought in our Cosmic Vibe. We love the flavors on that fruit punch, refreshing. That's what it's all about. Glad to be here.
Joe: (04:14)
Alright, I have a question. So like a year ago I started noticing that all the fit and cool-looking people at my gym were drinking Celsius. And then I was like ‘Wwell, I want to be one of the fit and cool looking people at the gym,’ so I then bought a Celsius. What happened? Celsius has been around a long time, but suddenly over the last year, year and a half, maybe two years, I started seeing it somewhere. What happened a year and a half ago that suddenly, was that a thing that you guys did? Was it word of mouth? What suddenly happened that sort of really, I started seeing it everywhere.
John: (04:46)
Yeah. I mean, when you found us at the gym, the brand's been around for over 15 years. We built it in the gyms and health clubs at GNC, Gold’s and 24 Hour. Those are the likes. If you're going back only a year and a half ago, and you were talking about your comments on the intro about distribution, we partnered with Pepsi a year ago as our distribution partner.
Joe: (05:09)
Ah so there you go.
John: (05:09)
That really expanded the availability of Celsius to where we are today, which they call a 98% ACV. So there's reporting stores that report sales for consumer products into IRI data, or Nielsen they call it. And then looking at the total population of the stores reporting in. Pepsi's been able to get us to about 98% ACV. So we’ve still got a lot of work to do on the placements in each store, but in general, you should be able to find a Celsius probably in almost every retailer in the United States, or at least 98% of them or so the data says,
Tracy: (05:42)
I have a really straightforward question before we dig into some of the specifics of this particular business, but how much caffeine do you need to consume to be CEO of Celsius? How much do you drink on a daily basis?
John: (05:55)
You know, I start the morning off, I probably have two cans a day. I have a can in the morning, a Celsius in the morning and then usually have one with my lunch. So drinking a watermelon right now, which is dynamite and a great flavor.
Tracy: (06:10)
Alright. So you mentioned distribution and the deal with Pepsi. My understanding from the previous episode we did Mark Astrachan is that a lot of this business is about distribution. And you struck that deal with Pepsi, Monster has a deal with Coke from what I remember, how do those distribution deals actually come into being? What are the conversations actually like?
John: (06:33)
Yeah, well, you know, distribution for consumer product companies [is] extremely key and and beverage, Joe, I hear you talking in the beginning about how competitive beverage industry is, and there's about 5,000 new brands in the beverage industry that come to market each year. About 10% of those will make it to a hundred million in sales, and then another 10% of those will make it to like a million dollars. And very rare[ly] will any of them make it to a billion dollars in sales.
So it's a highly competitive market and when you look at the distribution, that's been a challenge. You know, it's a definitely a tough conversation because if you have a product, you need to be able to have retailers’ acceptance. So your distributor needs to have a place to put it, right? If they take the distribution.
And then you also need to have consumers that are buying it. So it's like a chicken and the egg, which is very difficult to do. So when we go to distribution — prior to Pepsi — we were in a lot of ABI, Anheuser-Busch independent distributors. And we had a lot of conversations with them. You know, it was very difficult for them to take a product because they were saying ‘You know, I'll take your product on, but then I just can't have it sit in my warehouse. You know, I need a product, I need a consumer pull, I need retailers that want it.’
So what we had to do is we had to really build the demand at the retailer prior to going and really getting these distributors to sign up. So we actually had to, what they call sell direct. So we'd sold direct to a lot of the retailers, our targeted retailers that we built scale and volume and consumers around, to create that, you know, that sales channel.
So then we could go to the distributor and show the distributor there's a reason why we should be in their distribution network. And that's constantly reinforcing and then collaborating with them to build out the distribution, build a consumer awareness, and ultimately work to get a loyal consumer around the brand within that given market.
Joe: (08:25)
Yeah, no, I mean, that makes a ton of sense, right? So that whether it's the independent Anheuser-Busch distributors, whether it's Pepsi, they're not going to pick it up unless their own end retailers are going to actually devote shelf space. They're not going to devote shelf space unless they see that there is some evidence that if they devote shelf space that someone's going to buy it.
What did you do? You know, different energy drinks seem to have different audiences or different. So I, you know, I think some like are probably more for the gamer space and some are more for like, sort of like Euro types who like go to clubs and listen to DJs. And some want to be associated with extreme sports and some are associated with construction sites and maybe more blue collar workers or truck drivers, etc. How do you pick a lane?
John: (09:11)
Well, that's the other thing, you really need to have a target audience. You need to have a retailer story, you need to have a distributor story, you need to have a consumer story. So that's one thing that we've been able to work on over the years. The same retailer story and your distributor story or sales pitch might, you know, needs to be different than potentially the consumer pitch.
When you look at it, it's really understanding your customer. You have to be customer centric. You have to understand why does your customer need your product? What is the reason, what is the void in maybe their portfolio? And at the end of the day, how can they make more money on your product?
So as an example to your point, there's different segments. So Celsius is really essential energy. So [at] Celsius ‘Live Fit’ is our mantra. We have over 2.8 grams of vitamin. You mentioned biotin, Tracy, is in the product. And we have a variety. We have green tea and ginger, chromium. We have vitamin C and your B complexes. So a lot of great vitamins in there. It's almost like a multivitamin within a can.
And that really positions us as this healthy better for you energy segment. And that's really what we, when we’re speaking with our distributors, they had a void. Because historically it's been sugary energy drinks that they've had within their portfolio. And we were offering this different offering for them to sell for this better for you consumer, which is, especially coming out of a post-Covid world, everyone's thinking about health and wellness and fitness, which is a key DNA component of who we are. We originally started off as a pre-workout, but now we're aligned with today's health-minded consumer with our attributes of accelerating metabolism and helping burn body fat.
So really help you achieve your health and wellness goals. So that allowed us to position ourselves within the distributors as a unique offering within their portfolio. And that was our go-to-market strategy with our distributors and also with our retailers — to be able to carve that space out within those precious planograms that retailers have. So it's a multifaceted approach to gain planogram approval at your retailer and then get that distributor to actually get it on the shelf.
Tracy: (11:17)
Oh wait, what's a planogram? I’ve never heard that word before.
John: (11:20)
So you mentioned how do your products get included on your retail shelf? So when you go to your retailer and you go to these chains, all those products are pre-, are mainly orchestrated or designed based on planograms. So the products are preselected by a buyer at the corporate office on almost like, think of them as portfolio managers or, you know, like a mutual fund manager or so on, that's picking investments within their shared space to maximize their retail, maximize revenue for that retailer.
So they're picking the particular products for their consumer base to drive the highest return for that retailer. And that's all driven based on planograms. That's what buyers set. And then those get provided to the store levels able to be able to set the shelves for the right strategy.
And those strategies get reviewed multiple times a year. There's big annual reviews that happen usually in October and November, depending on the retailer. And then retailers will do like a mini cut-in or a reset or a review right around midyear historically where they'll make some changes to their planograms to really kind of dial in to maximize the opportunity.
So [for] example, if, you know, a certain brand or certain flavors aren't working within the initial few months, they'll maybe get cut and they'll try new opportunities that come in. So one thing in a retail space, especially in the energy category, you really only have in some cases up to 45 days to perform on shelf. Otherwise you're out.
So, highly competitive highly difficult. And it's really hard to compete in today's energy drink category and in beverage just because it's dominated by really strong brands that are out there. And Celsius has been able to really rise to the top as we are the third largest energy drink brand right now in the United States. So we have over a 10 share in the energy category for the first time, and just getting one share is practically near impossible.
Tracy: (13:14)
So from your perspective, how do you fight for that shelf space or that space in the planogram? And I'm looking at some images of this right now...
Joe: (13:22)
Yeha, they're cool. They look like this, they're like a visual representation of what a deli looks like.
Tracy: (13:27)
Yeah. It's basically the rainbow wall that I mentioned before. I'm looking at one for detergent and it's extremely colorful. But how do you convince companies that you deserve that space? And going back to the chicken and egg issue that you kind of described before, and the idea that you only have 45 days or so to prove yourself, how do you actually go about demonstrating that there is demand, especially when you're unveiling something that's still relatively new in the market?
John: (13:55)
Yeah, that’s the highly difficult thing to do. You know, usually it starts off, certain retailers are able to make regionalized or localized buying decisions. So those planograms you're looking at for the Clorox, the detergent set that you're looking at, those will be mandated down from corporate. But then on a localized level, let's say maybe 10%, maybe 15% of those planograms can be adjusted for local store manager level customization.
So what we did is we were able to work locally with a few managers at some of these key retailers to really focus on building a story. So, you know, gaining trial, working with the retailers, building a loyal consumer in that outlet, and then kind of scaling that to two to three stores, then eventually going to a region. So you start to build a sales story on why you need to be in that retailer and why you warrant maybe a larger regional or national rollout within the retailer.
So it's really starting those grassroots stories and then being able to get that buyer meeting, which is so difficult to do at the corporate headquarters for their annual reviews. And then convincing the buyer why they need to bet on your product. I mean, ultimately at the end of the day, you're trying to get the buyer at these retailers to invest in you, as a brand, as a company.
So it's those type of strategies and you're going to have to convince — a lot of it's emotion too, right? So in your early brand, the argument is, well that brand doesn't travel. Maybe it's a certain community segment, certain income level demographics. So there's a lot of negativity. But you have to convince that buyer to believe.
Once you convince that buyer to believe you get the opportunity, then it's on you to perform. And if you can perform, then you continue to build the brand based on data that shows results. It shows that you need to get better placement in that planogram, shows that you need to get additional flavors because you're offering a variety and opportunity, and the billboard effect is super critical.
You need to get a billboard effect. So when we started — I'll take like Target as an example — when we first got listed nationally in Target, we only had two flavors authorized. That was on the warm shelf. And almost every year after that we were able to, because of the increase in sales and working with local managers, we were able to build that and get authorized for an additional flavor to be added into the target sets.
But once we got to about five flavors at Target, we were able to create this, like a billboard or a Celsius brand on shelf, which started to be incremental. So when we added another flavor, it didn't cannibalize our sales. It actually increased our sales because more consumers can see the product because you create the billboard.
Just think last time, just think last week, how many new brands you tried in the last, you know, seven days in the last 14 days and 30 days. It's really difficult to get a consumer to try a new product. You really only have about 30 seconds at best at retail, at that retail shelf, to convince that consumer to try your product for the first time.
Joe: (17:01)
Wait, you mentioned you started at Target on the warm shelf. I assume now you're in the refrigerated section of Target?
John: (17:07)
Yeah, today we have a warm availability in the energy set, in a variety of stores around the country or in the front checkout coolers and additional cold placements throughout the store.
Joe: (17:17)
Yeah, I noticed at my local deli, I think I said this last time we talked about you guys, I remember like I was looking for the Celsius and I didn't see you. And then it was only because I realized that there was, my local bodega now has an entire Celsius devoted refrigerator that’s just Celsius. So well done on that.
Let's talk about the distribution relationship. I have to imagine, you know, if Tracy and I were starting an energy drink, we would be desperate to get like on part of Pepsi's distribution network early on. But then if we grew really big and the Odd Lots energy drink were huge, then I imagine that power relationship between us and Pepsi might change. And maybe in a few years we say ‘Hey Pepsi, you know what? Maybe we want to change the terms of our contract.’
I'm sure you have a great relationship with Pepsi, so I don't want to say anything, you know, I'm not trying to cause any trouble, but can you talk to us about how that relationship with the distributor changes or evolves as you grow bigger and have your own form of leverage?
John: (18:15)
Yeah, I think that’s a, we're still in the early phases, so call it the honeymoon with Pepsi. Because really we're only one year in, so we gained distribution, we're gaining additional displays. We're working with them collaboratively for the first time this year, because it's really our first time that we've had a full year of planning. You can imagine Pepsi, a company so large as that, their planning cycles, you know, they're planning like two years in advance versus, you know, at Celsius we're very nimble and quick.
We've had to adjust our planning cycles to really align with their planning cycle on execution innovation and retailer marketing programs. Those are the likes. But what we've been able to do this year, we're really excited for the first time to really be able to harness Pepsi's resources and strategic planning so we can be included on like national priorities and national execution program.
So I would say we're still in the, you know, the early phase. We're really excited about the opportunities, we're gaining cold placements. You mentioned the deli that you went to and saw Celsius-dedicated coolers. We've placed over 10,000 coolers together, did an amount of displays together. So we're really excited. This partnership's just getting started. You know, what we say in the beverage industry, especially in energy, you know ‘If it's cold, it's sold and then stack it high and watch it fly’ with display. So we say that all the time internally and it's been great with our Pepsi partnership.
Joe: (19:51)
Do beverage brands, however, like dream of owning more of their distribution over time? I mean, eventually, again, I understand you're in the honeymoon phase, you're probably going to be working with Pepsi for a long time, but just conceptually, does a beverage company eventually try to own more as much of their own distribution capacity as they can?
John: (20:13)
Well, that, you know, it's an interesting question and it's like when you go to think about that, you know, it's what type of business are you? And what type of business do you want to become? So there has been a successful company that's did it on their own, which is Red Bull. I mean, Red Bull owns their own distribution. They're phenomenal. They do a great job, great executors, and it's worked extremely well.
There's been other regional brands that have tried that, and it's just, if you don't have the right amount of scale until they get that scaling point, it could be an extreme, truly costly strategy. If you think about all the trucks and warehouses and people and resources, you're going to need to manage that. So when you look at Monster as an example, they use the backend of Coke and they're really focused on what they do best, which is portfolio management within sales and marketing teams.
So, you know, that's our strategy. Our strategy is to leverage the PepsiCo distribution network and their resources and team members to further bring our brand to more people and more consumers and do what we do best, which is the sales and marketing component. Really bringing great tasting, innovative energy drinks to market. Tracy's drinking that Cosmic Vibe, which is out of this world. And we're launching a trilogy and going intergalactic with Galaxy Vibe and Astro Vibe is two new flavors this year.
Tracy: (21:30)
Oh man. I have a slightly different distribution question, which is, if I go on Amazon right now and I type in Celsius, the second result I get is a sponsored ad for Monster Energy. How annoyed does that make you?
John: (21:47)
I think we're flattered? I think, you know, that's quite flattering that we've gotten to the point that Monster’s buying ads against our consumers and fans searching for Celsius. So we do not see our consumers really trading between brands. So Monster's a great brand, Red Bull's a great brand, but that's really flattering. It's a highly competitive environment. The category continues to grow. Celsius is actually bringing new consumers into the category. So we're one of the true growth drivers, largest growth driver, not only in dollars, but units to the categories. So highly competitive, highly competitive.
Tracy: (22:24)
Yeah, that's right. First it's a Celsius and then it's that Swedish fish flavored energy drink. That's like the transition. But actually on a more serious note, the thing I'm really getting at is how much does the algorithm of something like an Amazon affect your sales and how much control do you have over something like the results that actually show up?
John: (22:48)
I think the algorithm is based on the user preferences, but one thing [is] we're the number one selling energy drink on Amazon, the most recent read. And we've been roughly around 20 share of the whole energy category on Amazon and perform extremely well. I think when you look at Amazon, you know, that's a really, really loyal consumer base.
You know, it's someone that's spending, you know, over $20 to purchase a a 12 pack of warm beverage, that's going to take it home have it shipped to their house, put it in a refrigerator, chill it, and then drink it as a daily routine or daily lifestyle. So I think that's a, you know, really loyal consumer base that's on there. And it's been a, it really just shows you the loyalty that we have with the Celsius portfolio, that even with the distribution gains and the increased availability with our Pepsi partnership, we've been pretty much able to maintain our share numbers and growth trajectory on the Amazon [platform].
So it's like all tides are rising as we are distribution gains showing that Celsius is aligned with today's health, mind and consumer, that continues to evolve. Looking for better for you, wants more out of their lives. And most importantly about Celsius, it's all our DNA is all about a helping you accomplish your goals and objectives.
Joe: (24:03)
Let's talk about the branding element some more. So obviously you want to continue to grow and find new consumers of the beverage, but also, you know, like you have this lane, you have this sleek sort of like pretty well-defined can, the fit people at the gym. How do you think about growing the brand? I looked in your recent quarterly call and you're talking about something with the Jake Paul fight, something with the MLS, an F1 partnership. Talk to us about that process of deciding like what's in the brand and what would be sort of growth that might costly, because perhaps it's outside of what people know Celsius as?
John: (24:44)
Yeah, I think when you mentioned Jake Paul and you mentioned MLS, we just also also partnered with Ferrari, with F1, I think, you know, as we gain broader distribution and we're building out a broader consumer base, [what’s] really important to us is keeping true to our DNA, which is fitness. And we were just at the Arnold Classic. It's the largest fitness show in the US. Big supporters of of that show. We had Arnold drinking a Galaxy Vibe at the event. It was a lot of fun.
A ton of athletes, we're all about the athletes and the inner athletes. And I think when you look at like Jake Paul, yes, he's massive influencer on social media, but he's also an athlete. He's boxing. He's going to be involved with the Olympics. He wants to be the number one boxer world champion. So really Celsius is there supporting him achieve his health and wellness goals.
And then MLS is a great partnership for us. You’ve got the World Cup coming to North America, so the timing of that could be great. You also have a young consumer base of fans and followers that are Gen Z, 18 to 24, and growing. And soccer, you definitely need some essential energy. They're complete athletes that are always on the go. So we felt that was really aligning. We do align with health and wellness, so we will not run, you know, away from that or go in other areas. But to your point, maintaining the brand's authenticity is extremely important to us in order to stay relevant with our consumers.
Tracy: (26:15)
So I'm still on Amazon actually, flipping through all the different Celsius offerings, and I see one thing that kind of catches my eye, which is a huge bulk pack of Celsius with 15 flavors. And you've touched on this a number of times now, but you guys have an extraordinary array of flavors and different options nowadays, and you've managed to do that, it seems like, without cannibalizing existing sales.
And I'm genuinely curious how that works, because in my mind, I'm buying one energy drink a day — if that, to be honest. And, you know, I'll try new flavors, but my volume of consumption just isn't going to go up based on the availability of new types and flavors to me. So how does that exactly work, and I guess how do you weigh the opportunities, the benefits and the costs, of launching and developing these new offerings?
John: (27:14)
Yeah, I think when you look at the 15-pack you're talking about, it's a variety pack. What we're seeing is that our Celsius consumer is increasing their consumption. So, you know, a can or two a day and, you know, to your point, some consumers like the watermelon or like the Cosmic Vibe, and will be loyal to a single flavor. But we're also seeing, especially with Gen Z, is they're looking for an experience. So we do have our fruit-forward line with great fruit-forward flavors. And then we have our Vibe line, which is an experience in every sip or a journey in every sip, we try to experience with the consumer.
But when you look at flavors, I mean, flavor innovation is really exciting. So it's one thing we lean on. We do see our consumers stay within the portfolio, so we try to harmonize the flavors. So we do have similarity within the lines, our Core and our Vibe as well as our Celsius essential line.
So when you look at, you know, the flavor profiles, some of them will be in and out, gaining trial and bringing new consumers into the portfolio. We do have about top five flavors, actually. Orange is our number one flavor. And when you go into the Vibes, our Peach Vibe is one of our top flavors as well as Tropical Vibe.
Joe: (28:23)
What's your favorite flavor?
John: (28:25)
My favorite flavor? I just had a Lemon Lime flavor. I had that with lunch. It was super refreshing. It's crisp. It tastes like a Starry or a Sprite. And it really that's one thing we see with Celsius, which is interesting, is there's a usage occasion historically for energy drinks, right? It's a specific need state. It's usually early in the morning or right in the afternoon after lunch. But what we're seeing with Celsius, especially with the Pepsi partnership [which] further opened up this opportunity, they've expanded us into food service.
So we launched into Jersey Mike's, just went into actual Dunkin Donuts as well, almost 3,000 stores at Dunkin Donuts. But what we're seeing is the Celsius consumer is consuming Celsius with a meal as well during lunchtime. So that could be a sandwich, a salad, and so on.
And what we also see, especially at retailers, and retailers love to hear that, you know, you're not an appetite suppressant. And what you historically have seen with energy drinks traditionally is that it's more like an appetite suppressant. They're not buying other items with your food items traditionally with their energy product. But what we see with Celsius, we are also seeing it paired with foods and snacks. So we're really incremental to the retailers offering additional dollar ring and items per basket.
Tracy: (29:42)
Wait, wasn't there a rumor that Celsius contains like a weight loss chemical that you also find in Ozempic? Didn't that like start? Like there is perception that this is in fact an appetite suppressing beverage.
John: (29:59)
Yeah, I'm not sure where that came from, there was some chatter on TikTok or something around that line. But I will say on Ozempic when you're on that weight loss product, you know, you're not taking in as much calories, so you really need some energy. And there's probably no other better energy drink to consume than Celsius because of the zero sugar, we’re low on the glycemic index. And we also have those additional vitamins,
Joe: (30:38)
There's a form of commodities that we never talk about on the show, and that is like the commodity market for all these vitamins, getting Vitamin B12 or Vitamin C or taurine or whatever it does. Can you talk about pricing on the input side right now? And at the same time that all the other industrial commodities surge, what has been the trajectory of like acquiring these ingredients for the drink? And where do things stand right now from your perspective?
John: (31:05)
You know, now it's much better than it was during Covid, that’s for sure. But when you look at our vitamin pack, you know, we're gaining more scale and volume, so we're gaining more leverage. So although pricing has gone up, because of the increase in volume, we're able to offset some of that based on scale.
The biggest challenge we had prior was actually the cans because of the aluminum. As an example, during Covid there was basically a can shortage because everyone moved away, I guess, from fountain drinks and just started buying more cans. I guess, you know, no more draft beer and whatever else we were buying at restaurants, now we had to buy canned products and have it at our house. So that put a major constraint on the can manufacturing to the point that can manufacturers were basically oversold and couldn't produce our cans.
We actually had to work with some of our partners in Europe and around the world to source cans and actually wound up having to import cans into the United States, which is something that we weren't ready for. When you start to deal with importing charges and demurrage charges, which I didn't even know what that is, but that's when your product has to sit at port. And if for some reason it was shipped with a non-union worker, then the barge or container you had couldn't get loaded on a truck.
We learned so much, I feel really bad for our supply chain, they went through a lot — all the do's and don'ts — and we mainly learned a lot of don'ts on what you do when you're importing product, which is materials, which is extremely difficult. So a lot of key learnings there, but that was probably the most difficult time.
We did source cans, we were in a position where we could. That allowed us to have product on shelf when many of our competitors were wrapping cans. I don't know if you saw. Even some cans today, if you're out and about and you look, you'll see some cans have like a plastic wrap around them. Number one, you can't recycle them, so that's not good for the environment. But number two as well is they're really expensive to produce.
So that was a really difficult challenge and time for a lot of companies. And we strategically with our partners, were able to find cans, so we didn't have to deal with the wrap cans that were out there during Covid. And you still see like smaller brands do it today just because they don't have the scale for the large runs.
Tracy: (33:19)
Since you brought up packaging and the cans themselves, I did notice in your most recent results, you talked about profit margins being up primarily because packaging costs have gone down since the crisis. So supply chains starting to normalize, maybe some commodity prices are starting to normalize as well.
When do you decide to pass those savings on to consumers? And more generally, I'm always just very, very interested in how these pricing decisions get made. What are the factors going into them? Is price something that you have to negotiate with distributors as well? I imagine they take some sort of cut, so if they want more, maybe you're tempted to raise prices, but how does that all work?
John: (34:02)
Well, you know, it's a really difficult environment because costs are going up, but then we're trying to offset them strategically as well. So it's a constant battle. You have gas prices, aluminum prices, labor costs, as we all know, have gone up as well. And then also, you know, a lot of times inefficiencies within our supply chain are difficult as well.
We have a model that we are building out as we further scale, and we're calling it an ‘orbit model.’ And what that orbit model means is that we'll produce the product in a region, we'll source the product materials in a region, we'll build the product in a region, and then we'll sell the product within the region. And what that does is it allows you to be more efficient in your freight rates. That's probably the biggest area we have in savings, is really being able to be more strategic with our freight and trucks and shipping.
Versus, as an example, when you're smaller, you're shipping from say, North Carolina all the way to LA, right? Just because you can't produce the product in multiple markets just due to the limited run sizes that require that, you know, you can't run. You need to have a certain size run of product in order for it to be advantageous for co-packers. So those are the things we're working on.
In regards to pricing, you know, there's a channel strategy, it's pricing promotional strategies, the category is very promotional. So it's 26 weeks in a year on average that you're on deal or on promo. So it's really trying to work strategically to be able to be at the right price to maintain your distributors' margins, your retailers' margins, and still be attractive for the overall consumer based on the pricing architecture within the category, space and channel you're operating in.
Joe: (35:44)
So you mentioned co-packing. So right now, do you have your own canning facilities or do you, how does that work?
John: (35:51)
No, we don't. We use some of the best can manufacturers in the US, which is some of the largest brands in the US are producing at those same facilities.
Joe: (36:00)
At what point does it make sense for a beverage company to own its own canning operation? Like does Red Bull do they do their own can? At what point does that kick in?
John: (36:11)
Each brand's somewhat different on manufacturing. So, you know, I think that needs to be made up by each brand individually based on where your volume is. Also, you know, running a plant is a totally different animal as well, right? I mean, there's a lot more involved, you know, they run three shifts 24 hours a day, seven days a week.
It's a different margin profile as well. So I think you need to look at who you want to be, what are the margin requirements of your investors, what are the margin requirements of your business? And really make those strategic decisions accordingly. So when we look at our model, our model is an asset light model. So we don't currently own, you know, any manufacturing facilities, we’re really truly a sales and marketing machine.
Tracy: (36:56)
So one other thing that's happened recently is you've been expanding into international markets and specifically Canada in recent months, but how do you decide what markets to enter? And what are the considerations that you think about there?
John: (37:11)
Well, you know, we operate in the energy category. So number one, we're going to look at markets on size of prize. So, you know, how big is the category? What is the opportunity? What is the strategic path to distribution and to the retailer? What is the right margin profile? Is there an opportunity to make the required margins we need as an overall business? So you're looking at market data, understanding what type of market it is, how much share can you potentially source in the category?
How many new consumers, potentially with our Celsius position, can we bring in, size of prize? What is the route to market? How is the retailers’ acceptance of the product? Do you have the right distribution partner and the acceptance there? So that's kind of what we constantly go through, those processes internally on identifying markets. And you look at the energy drink markets, you know, it's really the US, it's the UK, it's going to be Australia, it's going to be Japan, Germany. So those are some of the biggest energy drink markets in the world.
Joe: (38:14)
John Fieldly, CEO and President of Celsius. Thank you so much for coming on and helping us continue our journey of understanding this market. Really appreciate you taking your time to break things down.
John: (38:26)
Excellent. Thank you very much guys. Glad to be here. Go grab a Celsius.
Joe: (38:29)
Thanks, that was a lot of fun. No, I’m not going to have two. I already had my Celsius today. I’m not having a second one.
Tracy: (38:33)
I’m already on a cosmic journey, so I only need one.
Joe: (38:50)
Tracy, I really enjoyed that conversation. It's interesting to think, you know, there's actually a lot in there that speaks to the things we care about. It's interesting to think about like the idea of like freight and scale, right? And so if you and I started an energy drink company, we probably would just be working with like one co-packer, right? Somewhere in the Carolinas. We would be paying a lot in freight if we wanted to sell to the Los Angeles market.
Tracy: (39:15)
Yeah, absolutely. The other thing I think about is just the importance of the distribution channel especially in something as competitive as this. And I'm sure if we did start our own energy drink, we would be begging Pepsi or Coke to be our distributors. And I still wonder how those conversations go, because as John described it, you know, there is that chicken and egg problem where you want to be able to prove that you can sell a lot of volume, but then in order to do that, you do need the distribution channel, it sounds like.
And it was interesting also to hear him kind of describe that they go about it in an almost grassroots way where you start out kind of local in order to prove yourselves and then you build up, I hadn't realized just how, I guess, specific some of those decisions and relationships are.
Joe: (40:04)
Everyone listening, you should just Google the word ‘planogram.’
Tracy: (40:07)
Oh yeah, that too.
Joe: (40:08)
As soon as you see it, suddenly it clicks that these huge walls of whatever product, whether it's beverages, whether it's detergent, whether it's toothpaste, whether it's chewing gum, etc., it's like that's not there by accident. And I guess that's obvious because nothing is by accident in business or the corporate world but still it's a reminder. All of those things, like down to like the height of where it is and the side, I think he used that term, billboarding within Target. It's one thing, like if you have two types of Celsius flavors in a Target, you just walk right by it, right? But if you have five, and this hadn't occurred to me...
Tracy: (40:07)
A giant cooler…
Joe: (40:48)
If you have five in a row, then it's like ‘Oh, well there's something here that actually catches my eye within the wall of colors.’ And so the fact that like, you fight, that each one of those actually like expands your ability to sell is really fascinating and not something I had thought about. But I guess I'm not surprised that there are people that are like, this is their job to think about exactly this question.
Tracy: (41:09)
Well, that's also, I guess why the market keeps growing and not self cannibalizing. Because you see these massive displays, where you have one fridge that's full of just Celsius, and while I do not personally decide to pick up like three different cans or flavors, maybe someone else does. So you grab one and another one looks interesting, whether it's Cosmic Vibe or something else, so you just grab a bunch.
Joe: (41:33)
Tracy, if we launch an energy drink, I volunteer to be that person, and just like with give out free Dixie cups’ worth, you know, like stand there at the grocery store with like a little, wearing a little Odd Lots apron.
Tracy: (41:49)
I thought you were going to say that you volunteered to try all the different flavors and be the Guinea pig...
Joe: (41:55)
No. I just want to be the person standing there like ‘Oh, would you like to try this new Odd Lots flavored drink energy drink” because you’ve got to figure, like it's got to start somewhere. And then you smile and move on and maybe one out of 20 people actually buys one. Something like that.
Tracy: (42:08)
You know, the other thing I was thinking about, you asked about the sort of relatively lesser-known commodity prices, specifically vitamins. And that's something I have thought about ever since I read this book way back in the day. The reason I remember is because it was the first book I ever read on Kindle, and it was called Twinkie Deconstructed. And it was so interesting because it basically went through all the ingredients in a Twinkie and did a whole chapter on specific chemicals, or minerals, or obviously more generic ingredients like wheat or whatever goes into it.
And it was so interesting because you kind of just assume vitamins like appear in pill form, but of course, there's this whole industry attached to it. There's a lot of debate about where they come from, whether or not the absorption process actually works. And that's something that I kind of wonder about as I'm drinking this Celsius. Like, how much of these vitamins am I actually absorbing? But that would be a whole other episode, I think, the vitamin industry.
Joe: (43:10)
Absolutely. And we've never done a vitamin episode as far as I know. I just think, you know, there are just a lot of market power questions in this whole conversation. And so for example, I am interested in, like, okay, you signed a deal with Pepsi under some set of terms, and then 10 years later or whenever it is, you're a much bigger company and you're a much bigger brand, and maybe you can like play Pepsi and Coke off of each other, or Pepsi and whoever else.
So, it's interesting to think about these sort of market power questions. And then there's the power of who has the co-packing facility to actually make cans and fill beverages. It's sort of interesting to think about like, okay, I don't know how much I paid for this Celsius, if I paid like a $1.49 or a $1.99 for a can of Celsius, how much is Pepsi's cut? And how much is the co-packers cut? And how much is the pure marketing?
And it's interesting that, you know, for now Celsius, they really just want to be a marketing company, but presumably at some point, or assuming at some point, there is value in like owning your distribution and charging others rent on your distribution network and so forth. And so I think there's just a lot of very interesting sort of market concentration and mark market power questions that arise of thinking of like, that you can examine through one specific category.
Tracy: (44:28)
Totally. And we touched on this in the previous episode with Mark Astrachan, where we asked ‘Well, why don't Pepsi and Coke just start their own energy drink?’ because they, they have lots of money. Presumably they have entire departments devoted to developing new products. It seems like they could theoretically do it, but I believe his answer was that, well, a lot of these products are extremely specialized and it's easier just to strike a deal and then take a cut. But again, it goes to those sort of like concentration and power points that you just brought up.
Alright, well we have clearly had a lot of caffeine. Should we leave it there?
Joe: (45:02)
Yeah let's leave it there because I made it through this whole episode so far without spilling on my keyboard. So let's leave it there.
Tracy: (45:07)
Congratulations, Joe!