Great! Well, good afternoon, everyone. I'm Eric Serotta from Morgan Stanley's Beverages and Household Products team, and I'm very pleased to welcome The Vita Coco Company to the Morgan Stanley Consumer Retail Conference. Before we begin, please see the Morgan Stanley Research website at www.morganstanley.com/researchdisclosures for important disclosures, and if you have any questions, you can reach out to your Morgan Stanley representative. The Vita Coco Company is the leader in the Coconut Water category, with 2023 forecast sales approaching $500 million. The Vita Coco Brand has over 50% share in the U.S., and the company intends to leverage this scale and expertise to build a broader, better- for- you beverages platform. Joining us today is Co-founder and Executive Chairman, Mike Kirban. Mike, thanks for joining us.
Thanks for having me.
We've seen a strong acceleration in the Coconut Water category and the Vita Coco brand over the past two years, after a period of pretty anemic growth pre-COVID. Can you discuss the drivers of the acceleration in terms of the category and your brand, and the sustainability of those drivers into 2024 and beyond?
Yeah, let's start with... I mean, the category is growing. You see, Coconut Water is actually the fastest growing category in the beverage aisle this year in the United States, and also in some of our other markets, like the U.K. So there's great growth. We've been doing this now, this next year will be 20 years since I started this business, and we were the first ones doing Coconut Water in the U.S. 20 years ago. So it's been a slow build of a category. But in those years, now 19 years, we've grown double digits all but 2 years.
So, yes, we did have a period pre-COVID, when Coke and Pepsi were coming out of the category, and there was a bunch of noise and a bunch of things going on that made a little bit of a mess. But the category growth has continued as we're building this category from scratch, and building what we think can be a very large category one day. I mean, Coconut Water across the tropical world is one of the largest beverage categories in all of these countries, whether it's India, Indonesia, Brazil, Africa, parts of Africa, whatever it might be. And we think that that's possible here also. So it's a slow build of a category from scratch, and what we're seeing happening is the category continues to grow as we're growing household penetration, bringing new consumers into the category.
As, you know, new households are coming in, more members of the households are drinking the product. We think that we can continue adding households at kind of a similar clip to what we've been adding, which is about 10% growth of category of household penetration per year. And we think we could do that while we have these incredible demographic tailwinds also. We way over- index with young consumers, with ethnically diverse consumers. More than half of our consumers today are non-white, and they're also the fastest growing demographics in the United States. So we see this opportunity to continue growth for a long period of time as the category mainstreams, which is the objective.
Great, and, multi-packs have been a significant contributor to Vita Coco's growth over the past year or so. Can you talk about the further runway for multi-pack growth from here? Your multi-pack ACV, on one hand, is still significantly below the single serve, but on the other hand, there's a lot of stores that just aren't necessarily suited for having-
Sure
... take a large multi-pack, take-home pack. And then, you know, what do you see in terms of consumer behavior once they get that multi-pack home? How does that compare to, you know, more of a single serve consumer?
Yeah. So I'm new to consumer goods and definitely to beverage as of 20 years ago when I started Vita Coco Company. I didn't know how this thing works, and I didn't know that big beverage companies sell a lot of multi-packs, and started this business and started selling single serves. Until, like, 3 or 4 years ago, all we had on the shelf in a Kroger or Safeway was 3 or 4 or 5 facings of this, and that's what we thought was building a beverage company. Realized over the last couple of years that the key to really growing households, but also growing consumption per household, is multi-packs. People might buy 2 or 3 or 4 single serve units at a grocery store and carry them home or put them in the basket, but now they have the opportunity to buy 12.
And they bring them home, and now the person who was buying them, maybe Mom was buying them and putting them in the smoothie. Now she's buying, instead of 3 or 4 units, she's buying 12, and the kids are using it in, you know, after they get back from soccer practice. And maybe she's using it in a cocktail, and her and dad, and dad's using it for the hangover the next day. Whatever the usage occasion might be, there's more opportunities when you get more product into the household. And as it relates to the runway for growth in terms of distribution of multi-packs, we started with a 4-pack, 500 ml, I think, 2 or 3 years ago. Today, our single serve is, like, 80% ACV across MULO. So don't think about C-store, just think about MULO, where multi-packs go.
We have about 80% ACV on single serve. Our 4-pack multi-pack is about 60%. Our 12-pack, 330 ml, which is the one we launched last year, is still less than 55%, like, probably 52%, and our 1 liter 4-pack is in the mid-40s percent. There's no reason that all of those packs can't get closer to that 80% number over the next couple of years. So this is a multi-year strategy to continue to roll out multi-packs, and then from there, you start to upsize even further, and the 4-pack becomes a 6-pack, and so on and so forth.
Great. And then, as you alluded to earlier, Coconut Water has been one of the few beverages categories that's actually posting healthy volume growth or just about any volume growth over the past year or two. You know, on the other hand, Vita Coco and the category took a lot less pricing-
Mm-hmm.
- than you saw in competitive categories or substitute categories.... So are you comfortable with where your pricing is today relative to sports drinks, water, enhanced water, CSDs? And, if so, you know, is the implication that we should expect less of a tailwind going forward from improved relative affordability?
Okay, so let's start with, I think pre-COVID, I would say I wasn't thrilled where our price point was in terms of how it, how it related to other products on the shelf. We pull pretty equally from three large categories: sport drinks, enhanced waters, and juice. Together, those are a $30 billion category that we pull from pretty equally, about a third, a third, and a third. Those categories took significant price over the last couple of years. Sport drinks took roughly 100% price. We've taken roughly sub-10% price. So coming into COVID, I think we were potentially too expensive to really become a household staple. I think on a relative basis today, we're still aspirational.
We're still one of the higher priced items in the beverage aisle, but we're affordable from a relative basis now to sports drinks and also to juices and also to enhanced waters. So I think we're in a great place, and I think this was important for us, and now we have the opportunity to start to really build this category and build household penetration in a much larger way than if we were limited to only a specific consumer who could spend that type of money and that type of disparity between their sports drink option or a Vita Coco.
Good. And then have to ask about the private label situation. Been a lot of noise lately around that, you know? So as of the second quarter, you were expecting to lose a key customer's private label water and oil business, and then as of the third quarter, you expected to retain the majority of the business, primarily on the water side. So why did this customer change course? Is there a risk that they gradually migrate the private label water business away from The Vita Coco Company? And then, you know, I guess, why the difference between the oil business and the water business, and what are the implications of this customer testing the waters, so to speak, in terms of shifting some of that business to private label?
What does it say in terms of Vita Coco's competitive moat?
Yep. I think this was a very good test for us. We've been saying for a long time that we've created a real moat around our business and around this category through our exclusive supply chain contracts and through our, you know, advantaged supply chain. We've believed that for a long time. You know, we really value this specific customer. We do a lot of business with them, both on the branded and the private label side. When they came to us, and we realized that we just couldn't come to terms coming into Q2 earnings, and that they decided they were going to go a different direction, we told them, "Well, that's fine, and we'll be very happy to help you with the transition." We were there for them. We stayed in close contact with them.
I think they tried some things that didn't work the way they might have expected or wanted them to work, and pretty quickly realized, you know, that we do have an advantage supply chain, that we do offer the most scale, the most reliability, the best quality at, in all, the best price, for quality Coconut Water in the market. And that's why we have this advantage, and it became quite evident. And I think it was a good test for our supply chain, and I think we're in a very good position with this customer and with other customers as it relates to, you know, continuing to be the leader in supplying and producing Coconut Water.
Then, they are, my understanding, still moving a portion of the or all of the coconut oil business to an alternative supplier. So I guess what's different about that business versus the Coconut Water?
Yeah. So Coconut Water is where we, I think, have the biggest advantage. Coconut water, for those of you who aren't so familiar with the story, Coconut Water historically was a byproduct of the coconut manufacturing industry. So coconut oil, coconut cream, shredded coconut, coconut carbon fiber from the coconut husk, all of these type of things, and the water was always a byproduct. We came in 15 years ago and started to help these manufacturers upcycle this byproduct, gave them a route to market with the Vita Coco brand and with private label, and helped them package and produce this product. By doing that, we achieved long-term exclusive supply contracts with these suppliers for the water, specifically. Coconut oil is a little bit more of a commodity. It's a little bit easier to get. It's a little bit easier to process and manufacture.
So we don't have the same type of supply chain advantage and the same type of exclusive contracts and manufacturing capabilities around coconut oil that we have around Coconut Water.
Great. And then, let's talk about your private label strategy more broadly.
Mm-hmm.
You know, outside of this customer, you know, your private label business actually grew faster than your branded business in the third quarter. You had some new customer wins, some store growth. Can you talk a bit about the strategy behind being in private label? Are these, you know, new private label wins, opening the door, putting you at... giving you a seat at the table in terms of new branded business?
Yeah, we love private label. When the margins work and when the business model works, and when the customer is big enough and there's enough scale for that customer and so on and so forth. So we've been doing private label for north of 10 years, for customers, and it really helped us. As we built our supply chain, it helped us gain scale to be able to sign more of these long-term exclusive supply contracts and lock up more of the Coconut Water supply that was out there, or that could have been out there in the market. So it's a great advantage from that respect. Our private label is also a great advantage because today it's more and more scale that enables us to find efficiencies throughout the supply chain, to drive down costs of goods and so on.
But it also gives us a different level of relationship, I think, with retailers. You know, when we're just a brand selling a branded business at retail, you have a specific, you know, relationship with the buyer and so on. But when you add in the private label, the relationship gets much deeper into supply chain and everything else. So it gives us a really nice, really helps build our partnerships with retailers. And I think what you were referring to on the international side, there are certain markets, Germany specific, is a market that is so private label driven, that we've taken, the mindset of let's go after the private label business with some of these large retailers in markets like Germany and France. We've done that.
We've won the private label business, and then we've gone in and gotten the brand in on top of it, which gives us the ability to really have that relationship and then bring the brand in and grow the brand and the private label together. So private label is an important part of our business when the margins work appropriately.
And then my last question on private label, and I promise we'll move over back to the branded side. So we have seen private label Coconut Water pricing start to move down as we look at, scanner data and track panels recently. Is that at all a surprise to you based on how those contracts work? And are you comfortable with your branded price gaps relative to private label?
Yeah. So I think there's been some. I think, you know, you saw, a lot of increase in private label cost, last year, as ocean freight rates specifically went up. And whether it was us or others doing private label had to pass on those costs because it's somewhat of a cost-plus model. So you saw price go up, you see price come down a little bit, and I think, you know, that's to be expected. I actually think we're in a better place in terms of price discrepancy between brand and private label than we were a year ago. You want there to be a nice little gap between private label pricing and Vita Coco brand pricing. And when that gap becomes too small, I, I don't think it's great for the, for the, for the brand or the private label.
I think it's. It should be there, and it started to kind of dissipate, and now it's coming back to a point where I think it's really in the right place.
Okay. So, turning now back to the branded side, you know, Vita Coco brand has over 50% share. Could you talk a bit about competitive dynamics? You know, on the one hand, you have Harmless Harvest that, you know, roughly double your price point, posting some really healthy growth from an admittedly small base, but they're still, I think, approaching 10% share or so. So how... You know, is that ultra-premium segment of the category attractive to you guys? Do you have something that plays in that side? And then on the other hand, you know, there's a large segment of the category that's below you guys in terms of pricing, you know, more on the value side, some of it in cans.
Mm-hmm.
So, you know, what's the... Is there an attraction to participating more broadly on the value side?
Yeah, I think as you think about the Coconut Water category in the U.S., we're just north of a 50% share, call it a 52% share of the category. And then the majority of the rest of the category is both on the value segment in coconut juice in a can. So I think Goya, there's brands like FOCO and Parrot, these brands that sit in a can, and it's sugar-added. It's a different type of product, more in the value segment. That's about 30% of the category, and then about 10% is this super- premium segment of the category. And we now have a position in both of those subsegments of the category.
For 52% share of the total, and we now have our coconut juice in a can, which we're expanding greatly across C-store, and then looking to add it into large format next year. If we could take our fair share of that value segment or the coconut juice segment, and with our Farmers Organic line on the super- premium side, we think there's ability to not only continue to grow household penetration as we grow this category, but continue to take share in the category.
Great. Then I guess that sort of leads into your innovation strategy. Could you talk a bit about sort of what the strategy is behind some of your innovation? What niches or opportunities you look at ahead? It looks like Pressed was nicely incremental. The juice line, you know, it's a... It's been more of a slow build. It's a, you know, little bit of street fighting and-
We're a year in.
You know, we expect results overnight.
Tell me about it.
Yeah, I guess, talk a bit about the innovation strategy and then some of the learnings from both the Pressed and the, the juice line.
Yeah. Pressed has been great. We launched Pressed a few years ago. Pressed is Coconut Water with a little bit of pressed coconut meat. So it's a little bit creamier. It tastes a little bit more like a light piña colada. And actually, you know, 16, 17, whatever many years I was doing this up until then, people would drink Vita Coco, the blue one, the plain one, and they would be like, "Okay, it's good, but it's not what I expected." Everybody expects... Who hasn't had Coconut Water, everybody expects Coconut Water to taste like our Pressed product. A little bit more coconut, a little bit creamier. And so when we launched that, we're seeing consumers coming into the category with Pressed, with our pineapple SKU. It's kind of the entry point for the category.
What we're seeing happening is people are coming in there, and they're eventually transitioning to the original, which is still the largest percentage of our sales. But as we think about innovation, as it relates to innovation closest to the core, that's what we really like, right? It's this is where it starts. From here, you go flavors, you go pack types, you go pack sizes, you go formats. The canned coconut juice, like I mentioned, is a great opportunity for us to play in the value segment of the category. It's really a different consumer for a different occasion. But, you know, we launched it in 2022 with one retailer. We then started to launch it across C-store this year in 2023.
Today, we're at a 20% ACV in C-store, compared to the canned juice category, which is at 40% ACV in C-store. We've made some good progress, and we think we're on the right track, and velocity is good, and we're excited about it.
Great. And, let's shift gears and talk a bit about margins. I see Corey's in the audience, so, but you're in the hot seat here. So, Vita Coco's gross margins are up, you know, over 1,200 basis points this year, with lower ocean freight and domestic transportation costs finally flowing into cost of goods. You know, with spot ocean freight rates now back below pre-COVID levels or roughly in line with pre-COVID levels, you know, what are the levers that you have to improve gross margins from here?
Yeah. So yes, I think, you know, as of Q2, more like Q3... Q2, Q3 of this year, ocean freight rates have normalized back to pretty much back to pre-COVID levels. We've seen a lot of opportunity, which we've taken advantage of this year, and we believe we can continue to take advantage of in years to come, just on efficiencies in terms of our supply chain, in terms of logistics, specifically. You know, in 2022, it wasn't only the cost of ocean freight. We had inventory in the wrong places. We had stop and go in terms of supply and inventory coming into the country and all these other issues that are starting to resolve themselves, and we're starting to get better and more efficient and effective.
As you think about our cost of goods, you know, on finished goods, the more scale we get, the more efficiencies we get, and therefore, the better our costs become, and therefore, we see margin improvement over time. And, you know, unlike a lot of products or brands that use a co-packing network, they don't have the ability to get those efficiencies. They just pay a cost-plus model, they get their product, and so on. We're kind of somewhere in between a manufacturer and a brand that uses co-packers, because we have a team of engineers, we have a 40-person supply chain team based in Singapore, which operates within our factories, helps our factories by sharing best practices, bringing them all sorts of efficiencies in terms of how they produce our product.
As we bring them those efficiencies, both through scale and bringing them to them, we share in the cost reduction. So we see an ability that in 2024, you'll see another quarter or two of the ocean freight issue that we've talked about, but over time, we see the ability to improve our COGS just through scale and efficiency.
And then, on the SG&A and operating expense side, you had a pretty significant build-out over the past couple of years, you know, consistent with the growth in the business, but-
Nobody told me what it'd be like to be a public company.
Yeah.
Tell me.
So, you know, as you look forward, you know, what are the opportunities in terms of SG&A leverage, whether it's on the sales and marketing side or the overhead side?
Well, I think we've finally got enough people in our new legal department, which is great. But as you think... But it's really true. Like, it took us a couple of years to build out the back office that we needed to operate a public company. We feel we've done that. You know, and as you think about, you know, SG&A, I think we're in a really good place right now, from, you know, having gone through these last couple of years of building out the business and operating it as a public company, that now we will start to get some SG&A leverage, which we weren't able to get this year.
And then marketing efficiencies, you know, you're not doing traditional big bang or-
Yeah
... media campaigns, but you are spending, you have influencers. Any opportunity for efficiencies there?
Yeah, absolutely. I think for us, this year, we had this massive transition from a gross margin perspective, right? So we had a lot of money flowing into the business. We were able to move some of that money into testing things, specifically on the marketing side. We were able to try things, some of which we believe worked really well and some of which might not have worked so well. So it was a year of testing, and now I think moving forward, we know what works really well for this business and this brand specifically from a marketing perspective, and it's about focusing on those things. And that, that, in turn, gives us some leverage as it relates to, you know, knowing where to spend the dollars and how best to spend the dollars.
Great. So, looking now in terms of your long-term targets, you guys target mid-teens, top line growth over the long term. What are the building blocks there as you think about it conceptually between branded versus private label, or volume versus price, category versus share, or organic versus M&A contribution?
Yep. So let's start with, as we think about that growth, private label will be lumpy, right, as we go. We believe that we can continue to grow the Vita Coco brand mid-teens well into the future. The category is growing at high single digits. Right? We believe that that continues in on that path, both through, like, the demographic tailwinds that we talked about and the category growth and the mainstreaming of the category. We think that that high single digits is where the category continues to grow. We think we can continue, as I mentioned previously, to grow share in the category, so that will add, obviously, more points of growth to the business.
And then, as we think about the rest of the Vita Coco Brand, the innovation around it, our coconut milk and other products, will continue to add to get us to that mid-teens. Everything else, like, as we think about potential M&A, as we think about some of the new-to-world brands, like PWR LIFT, which is actually starting to do really well, and we're excited about expanding that into this area, into the New York area, actually in January. That is, you know, potentially incremental to the growth of the business, and we think there's opportunity there. But we believe we could grow the Vita Coco Coconut Water- the Vita Coco Brand, mid-teens well into the future.
Great. And then, you know, when you look at, Vita Coco Coconut Water and your, your share at 52% or so, last I looked, you know, are there structural limits as to... That, that you think of as to what that share could go to on an organic basis? There aren't many categories where the leader is 52%. There's a couple of categories I could think of where you have a leader at, you know, 60%, 70%. You know, and then, you know, how much of a focus is it in terms of driving share versus as the category leader? You know, you're, you're half the category. How much of it is of the focus of your and Martin's attention is really growing the category and growing occasions versus growing share?
It's growing the category, growing households, and, we believe that as we're the ones doing that, share will follow. So if you think about our U.K. business, which is a big business for us today, four or five years ago, we had a 50% share. Today, we have an 85% share. That's happened as we've grown the category significantly, we've taken more and more shares. So the share will come. That is not our focus. It's not a share fight. It's more households, more consumers. That's how we will grow this into a multi-billion dollar business, as opposed to just taking pieces of share. The share will come.
Great. Then, you've previously talked about the Vita Coco's mission of building a better beverages platform for the future. It's a mouthful with a lot of Bs there. So, what are some of the strategic criteria that you're looking at, in terms of potential M&A targets, and what are the financial hurdles?
So as we, you know, look at building this platform, we believe we've got an incredible route to market. We've got a really strong back office. We've got financial resources. We're generating a lot of cash, and we don't have CapEx needs. You know, and so we think we're spending appropriately against the business. So we're generating cash, and we're looking at where do we best spend that cash. And I think M&A could very well play a role in this business over time. I think for us, it needs to be things that we can accelerate their growth. It needs to be products that have good gross margins, that, you know, are potentially gross margin accretive.
And I think that, you know, as we think about healthy, better-for-you beverages out there, there's quite a few of them that are subscale, and it's hard to create scale in the beverage category. And so I think leveraging our scale to create further scale for some of these brands is definitely something that we're interested in doing.
Good. And then in terms of potential M&A opportunities, are you seeing more opportunities today amid higher rates, making it tougher for smaller companies to operate at... Additionally, you know, Coke and Pepsi have clearly stepped back from smaller, more experimental M&A. And then, you know, what do you see as Vita Coco's competitive advantages outside of the Coconut, outside of Coconut Water? It's very clear what the advantages are in your core, but, what's the sort of the reason to believe that you can sort of do it again in an adjacency?
Yeah. I think for the first part of the question, I think valuation expectations are moderating. I think the guy who started a beverage company and got to $20 million and wants $1 billion for his company next year, you know, is becoming less, you know, commonplace. So that's good. But they are still... I think value expectations are still quite high, but I think we have the ability. We're in these retailers, we're at the buyer's desk, we're in these stores, we're working in the front of the store coolers, we're doing building displays at retail. I think our route to market is probably, you know, our biggest benefit for some of these companies that just can't get to market.
And so I think that's, you know, a key component of what we can do from a revenue synergy standpoint that we would like to be able to prove out over time.
Great. Well, I'm gonna keep everyone on schedule here and a couple minutes early. Want to thank Mike for joining us and, really, great to hear more about the Vita Coco story.
Great. Thanks so much.
Great. Thank you so much. Yeah, thanks.