AF Drinks | How to Scale a Non Alc Challenger Brand in the USA

20:55Lisa King:So we'll find the best alcoholic dark and stormy, you know, using like the best spiced rum and the, you know, the best ginger ale and would use that as the benchmark for product development. and then we'll go away and make sure that like we're delivering on all the complexity and the different layers that you would get in that great cocktail so you'll taste that in our Aparole spritz it's you know you've got the Italian orange bitterness as well as that kind of like a slightly whiny Prosecco taste a little bit of that Aparole medicinal um flavor in there as well and then we also knew like we wanted it to taste as far away from just being a soft drink as possible and alcohol is often about you know mouthfeel and so we wanted to replicate that and that spirit bite or burn that you get from a great alcoholic drink and so we found this ingredient and we call it afterglow and it's specially made in New Zealand it's an ingredient that's been used in other applications but it had never been actually used in a liquid before and so we added it and we're like yeah actually we do get that little burn at the back of your throat and that warming feeling that you get after you've had a couple.

22:08Lisa King:And for each of us, it was quite a different experience. Like for me, after two AFs, my cheeks get a bit warm. You know, for some of the guys, it's like in their chest or in their ears. So we kind of knew like drinking, there is this ritual. It's part of the experience, but also that feeling that you get when you drink. And that's what we really wanted to recreate with the afterglow. Okay, so over time then you've learned, I suppose, what works, what doesn't work, and you've ended up in, I suppose, the cocktail space. The brand must have become pretty famous pretty quickly in New Zealand, did it?

22:41Lisa King:Yeah, it did. And, you know, again, being a second-time founder, it helps because you've kind of had a profile, particularly in a small place like New Zealand. So it was kind of easy to leverage that. Okay, so you ended up with a business that was generating cash and margin and you were in the supermarkets in New Zealand and people would have known who you were. And then you made a decision to play somewhere else. So talk to us about that decision. From the very beginning, we had made the decision that this had to be a global business. Because New Zealand is so small, we knew there would be a restriction in terms of how far we could take it.

23:19Lisa King:And so we had planned from the start, like co-packing. You know, we didn't want to invest in assets. We always say like our values and our IP and in our brand. we knew this co-packing model meant that we could actually scale globally very quickly and then of course like most New Zealand businesses we looked to Australia which is about five times bigger than New Zealand when we actually looked not many New Zealand businesses make it successfully across the ditch and people think Australians and Kiwis are so similar but we actually have very very different tastes it's like Ireland and the UK really you know very different countries, different taste profiles.

23:57Lisa King:Yeah. And so we were talking to an ex Coca-Cola exec, actually we're talking to him about investment. And he just said, look, forget Australia. He said, if you guys are looking for, you know, a potential acquisition by one of the big guys, no one cares about New Zealand and Australia. If you can make it either on the West coast or east coast of the US or in the UK, that's where all your value is going to come from. So that's why you made the decision. That's really interesting. You wanted to expand, but you had in mind that at some point you want to be acquired by a particular type of business.

24:35You see, this is why it's so important to know that from the beginning, because the decisions you make, and this is what we go through in the mini MBA, you know, unless you have a really clear vision of the type of business you want in three to five years, you won't know what to build and where to build it in a way that signals to who you want to buy it or who you want to buy it. Or if you don't want someone to buy it, the kind of business that you want to build over 20 years. This is such a great case study. If you're getting value and insight out of the conversations we have with the founders and business leaders on Brand Growth Heroes podcast, then please like, follow, subscribe wherever you're watching or listening to the podcast, whether that's iTunes or Spotify or YouTube or whether you're connecting with us on LinkedIn or Instagram, it really matters.

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25:34Lisa King:Do you know, we went to the US. We went to California because we were like, actually, there's a huge state of 50 million people. if we only just won in California that would be a massive win for us and California is like such a trendsetter for beverages and things like that we were shocked that there weren't actually other brands and products like ours when we went there in 22 it was really surprising because we just thought we'd be late you know might be number 10 yeah there's not many opportunities a brand gets to be first in a second market, but in the US. So we definitely thought, okay, we're going to go to the US.

26:16Lisa King:And also the UK was much more mature in this category at the time. And the other factor, which sounds silly, is that just the time difference with New Zealand, just the practicalities of trying to run a business. Yeah, that's 12 hours different. We just thought, okay, no. We have a direct flight from New Zealand to LA. You know, the time zone works much better. And we have an opportunity to be first here. I think that makes perfect sense. Okay, so how long then did it take you to get traction in California? So we did a market trip in July. We got an indication of ranging in December. And that was our first production.

26:59Lisa King:We knew as a small startup, it's one of our biggest advantages is the ability to move fast. and we had the small window to be one of the first. And so, you know, it's like July to December was all it took for us to get set up in the US. So who did you have that listing with? With a retailer called Sprouts. They're similar to Whole Foods, yeah. And we had said to them, hey, we want to do a trial. We want to go to California, maybe do 50 stores, see how it goes. They called us during that first production and said, actually guys, this has to go national in 400 stores or nothing. You're not really in a position to turn that down, even though that wasn't our plan.

27:45Talk to us about the funding without, like, I don't want to get sidetracked down the funding route yet, but what were you thinking in terms of cash flow that was going to be needed in order to fund this much bigger venture than you imagined, rather than just a 50 store trial? You were going to 400 stores. And how did you know how to forecast that in terms of like actual cans needed?

28:06Lisa King:Really tricky because again, this was a new category. Sprouts was the first retailer in the US to actually invest in this category. So there was no previous data of like run rates or you know how this was going to go. From a fundraising point of view, we had already started a lot of conversations and we had a few connections in the US. But our first kind of major non-New Zealand investor was the venture arm of Pernod Ricard. Oh, wow. Okay. Yeah. And they invested in us before we even launched in the US. Wow. And do they have a big stake? They have about 16%. So then that's a bit of a nice piece of feedback from the market that you eventually want to sell to in terms of how appealing you are already.

28:54It's a nice little feedback loop, isn't it, as a business?

28:57Lisa King:As you were saying, you know, our intention was to always kind of have the business acquired. And, you know, the kind of obvious choices were these alcohol companies. Yeah. And so we spoke to actually every one of them. So I'm really interested when you got into the state and you started to see rate of sale or velocity. Was it what you expected? And also, when did the incumbents in the market start to come in and say, oh, God, you know, this is a thing we're going to start launching to? And did the velocity in the category need to be shared across everybody in there? Is it more difficult to compete now?

29:31Talk to us a little bit about that.

29:32Lisa King:Yeah, really hard. Like I said, there's no benchmarks. And, you know, even when potential investors asked us, well, what do retailers expect you to be selling? Even they didn't know. And we're like, we don't know. so definitely I think it's probably a bit slower than we expected okay and when you look across other beverages it's not selling as fast or as much as say you know functional beverages um and definitely not as much as alcohol either so we're kind of somewhere in between in that real gray area the minute sprouts started within six months we got a call from target and they saw what was going on in Sprouts.

30:13Lisa King:I think they all were also seeing the alcohol sales were declining or flat at that point. So they decided to create a non-alc set and we were one of the brands included in that. Okay. And then literally a month later, we got a meeting with Walmart and I had to fly from New Zealand to Bentonville for 48 hours and had a 15-minute presentation. It was drag and den-like. There were three buyers. They tried the products I presented. Then they decided on the spot whether they were going to arrange us or not. Gave me a little golden ticket. They gave you a golden ticket? That's like what they do. They do.

31:00So it's quite a big deal. It is. I can see that that's a thing, you know, but I think it's very American, isn't it? So how many stores did that bring you to? Or doors, as they say in the States?

31:13Lisa King:Yeah, how many doors? So in Walmart, it was about a thousand. Wow. Out of their 4 ,000 stores. And then Target was about the same. So at what point then did you decide, okay, we've got to have a team in place, we need more funding? Talk to us about the other milestones then. It was when we got Target and Walmart and we figured out how much stock we actually needed to make. Wow. It was over a million US dollars worth of product. Okay. And that's when we were like, we need money. We don't have that much money sitting in our bank account. So we went and did another raise. And again, you know, one of the reasons why we chose some of the investors that we did was that we knew they had deep pockets and we knew we would have further rounds.

31:56Lisa King:And so we're able to go back to our existing investors. And it's always a good story when you're raising money for production and future purchase orders. So we did another round then and launched with Target and Walmart in 24, a year later. Wow, that's incredible. And then you started employing a team over there. You've got the team split between the States and New Zealand. Yeah, I was probably from Eat My Lunch, we had 200 employees in that business. That is huge. It was huge. And I hated it. I hate managing people. Okay. It's not the reason I decided to start my own business. Yeah. And I think it's, you know, it's one of the most challenging parts of having a business.

32:44Lisa King:So I was very clear with this business. I didn't want to employ a lot of people. Right. And also employing someone in the US is really scary. Tell us more. I think the costs around health care and employee benefits, just generally the salaries are much higher because you've got to cover living costs and things like that. And one of our biggest challenges in the US has been actually finding people who will deliver on what they say they're going to do. You know, I think Americans are so good at selling. You know, you talk to them and they're amazing and they can do everything. And then actually finding people who can actually deliver on that has been one of the hardest things.

33:31And we've gone through four co-packers,

33:36Lisa King:five Amazon agencies, three brokers. You know, so just really hard to find the right kind of people. And that's costly in terms of time, effort, but money too, right? Because each one of those has got setup costs and the amount of time that you spend working with someone to make something happen, then it doesn't happen. Why do you think so many brands decide not to go into the state? If you had to reflect, what do you think are the hygiene factors that you have to be able to tick in order to say, right, if I don't have these in place, there's just no point. What are those things? Way more money than you expect.

34:09Lisa King:Okay. Then you think you're going to use. So, you know, I've talked to brands where they're like, oh, we're going to raise like half a million dollars. I'm like, okay, well, that will last you about four months. Like it just takes millions and millions of dollars, particularly because there are so many different layers as well. So, you know, you don't just have a distributor, but you've got a broker and then there's fees and, you know, everyone's taking a little cut. So it's super expensive to launch in the US. Eventually though, can you make margin on a product? I mean, I know beverage has got way more gross margin than food generally because it's water and flavouring, right?

34:49Is there enough money with all those little cuts? Is there enough money to make margin if you're bringing it across? Well, you're not bringing it across though, are you? So talk to me about that in terms of SKU.

34:57Lisa King:Again, just from a cost perspective, you know, there's no point shipping stuff halfway around the world from New Zealand. And particularly coming out of COVID, you know, just all the freight challenges as well. So we decided to manufacture and market, which again, sounds easy. There are a lot of co-packers, but finding the right one is really difficult. And it's not as cheap as people think. Like we thought the US would be really cheap. And actually the costs are about the same as in New Zealand, but just in US dollars. Yeah. So that's, I think, something you go in there thinking, oh, it'll probably cost half of what we're paying in New Zealand.

35:35Lisa King:And it just wasn't like that at all. it is really expensive having staff is expensive you know what we pay someone in New Zealand would pay them pretty much double in the US. Crikey. So we actually decided to keep most of our operations team in New Zealand so production logistics customer services marketing everything is managed from New Zealand. Okay and that obviously also has its challenges so the only people we have in the States are our general manager and two sales people. And do you do, you're in charge of strategic marketing? And what about then marketing execution? Lots of agencies that we employ and again, expensive, but you know, kind of easier to get rid of if things aren't working out.

36:28Lisa King:Okay. Yeah. So I think that's been really challenging, just finding the right partners and the right people. That's really interesting. And so then when the others came into the market, so competitors coming into the market after you opened it, what happened then to velocity rate of sale and general demand? I mean, did the category just grow exponentially because new people were coming in or was it more difficult? Yeah, the category exploded. And actually it was great because we wanted more competitors to really build out this set because a lot of people are like, is this just a fad? You know, and when retailers like Target and Walmart come into a category, you know, normally they're slow followers.

37:09Lisa King:Like Walmart would not look at a new category for two years. But the fact that they came in in that first year, you know, they're looking at the data and they've been seeing the trends. Yeah. And so it's not just a fad. Or a niche. It's like the stamp of this is mass marketifiable. Absolutely. The category in the US has grown in the last three years. It reached a billion US dollars last year. Wow. It's 400 million in the UK. Okay. So yeah, it's growing super fast in pretty much every retailer. And you're here in the UK today. So is that just because you're on your way somewhere else? Or are you in the UK because you're looking at business here?

37:51Lisa King:Looking at business. Yeah. So we launched in the UK in December. a few months ago. Yeah. So we launched in 400 Morrisons. Okay. And how's it doing? It's doing really well. We weren't looking at the UK because the US is such a massive market, huge opportunities. And we just thought, oh, you know, the set's pretty mature in the UK. So there's kind of no real advantage for us getting in there. But then we got a call from one of the big retailers in the UK about 18 months ago and I flew over, we met them and they were saying actually what they're finding is that that slightly younger consumer who are coming into this category, they don't really have the options that are right for them.

38:41Lisa King:You know, there's big bottle spirits by big alcohol brands, but they're brands that their mothers or, or their parents or their grandparents are drinking. They don't want a con of Gordons. No. And also the format. No one wants to spend 20, 30 pounds on a big bottle of non-alch spirits that they've never tried before and then still have to buy the mixes and everything else that goes with it. We saw that pattern in the U.S. Retailers are getting rid of non-alch big bottle spirits. Oh, are they? Yeah. And about 22 % of the shelf space in the U.S. is for non-alch RTDs. Okay. whereas in the UK you can find maybe a couple of brands on shelf here in that space so again it was a really exciting opportunity for us to go we could actually be one of the first group of brands to launch in that segment and we know you know we have great liquid and also from a communications and marketing you know we're a bit more aligned with the UK they kind of get our sense of humor you know that's been challenging in the US is trying to figure out how to speak to consumers there.

39:46Lisa King:And so, yeah, so we launched in December last year. And you're happy with the results so far? Yeah. Early, really great early traction. Like after the first eight weeks, you know, we're the number three SKU in Morrison's. In ready to drink alcohol free? Okay. Wow. And who else is playing in that market in the UK? Yeah. So Gordon's, quite a few own label brands. you know Tesco's has their own zero percent gin and tonic Waitrose has just launched their own range there's an Australian brand called Naked Life that came into the market late last year you've got brands like Cordino so how are you going to run a three teams I mean because people would have said to me over the years you know oh well just you know stick your brand into into France or stick it into Germany it'll be fine and I would say well no it won't be because you've got to have someone on the ground who can speak to the buyers in their language and someone on the marketing team who really understands the different cultural reference points to make jokes in their language or speak to them in their language and the way they live, you know, manage the agencies, manage the category presentations, unlock the category value story for each retailer.

40:55How are you going to do that in each of those markets? I mean, you've got three potentially really significant markets now. I mean, the state's obviously being massive, but that's one to keep your eye on all the time. You've got New Zealand on your eye and now the UK, a nation that won't take just one person either. What's the plan?

41:10Lisa King:No. Yeah. So we've got a really good agency partner in the UK and, you know, that was something we'd learned from the US just around comms and marketing and, you know, not assuming that what we do for New Zealand is going to work anywhere else. So they helped us with the launch campaign. And when you say comms, what do you mean? Social media, like look and feel all of that but what about the actual ops of that comes aside because I know everyone can do that everyone can get a great agency isn't it well not everyone you can find a great agency but then you know who's doing the line forms and who's doing the in-store like promotional plans and who's there to talk to the buyer and and who's whatever yeah so we've got a really great distributor partner okay so you're partnering with the right people all around Yeah.

41:59Lisa King:So they're doing a lot of that kind of in-store or with retailer execution with our support. Like I've attended every retailer meeting. So there's a lot of travel going on there. But I just think it's so important. And we've never had a no yet from a meeting. and you know like we I always insist that they're in person so that particularly with our products you know like being able to serve them in the right way and when we're doing the tasting and being able to describe it and um and then tell the story behind it as well and share kind of our experiences I think what retailers love is knowing what's happening in other markets so you know in the UK we've been sharing what's been going on in the US in this RTD space which isn't so significant here in the US, they want to know what's happening in the UK.

42:56Yeah, it's like the inside story, isn't it? I remember there was a buyer in Ireland. He's since retired, but he was a real character. But when I was working with Chobani, the US Greek yogurt company, I was with them for three years based in Amsterdam and looking at international expansion, which didn't ever really happen, but a lot of money was spent on it in the meantime. And this Irish buyer used to make a pretext of getting me down to very far from Dublin for one reason or another. But really, it was just to understand the global market for, and particularly what was going on in the US with strange yogurt.

43:28Because then he knew he'd be the only one this side of the hemisphere who had like that inside story in terms of the category. And they do love it. They do love it. And I think you make a really interesting point about insisting that the meetings are face-to-face. And it kind of begs another question, which is, well, somebody listening to this might say, look, I can't even get through to the buyer. I can't even get an email response. So how can I insist? and I suppose if you've got real traction with your brand and your product in a market that is growing and they really feel that you have got something that is going to allow them to explode some value they will unfortunately if they don't it's probably because it won't which is a bit

44:04Lisa King:harsh but it's kind of true you know there's definitely an advantage well a disadvantage not being from the local market but the advantage is we are from New Zealand and so I use that as an excuse to say I'm flying all the way from New Zealand. Yeah. I'd love to come and see you in person. Okay. That's great. And that works eight out of 10 times. And then, and then I really do have to fly all the way. What are the plans going forward? How big do you want this business to get before you, no, well, okay. You're not going to really answer that already before you sell it. How far do you think you can, can drive this business on your own?

44:40And are you going to stop with the UK or are you going to keep going into new markets? Are you just going to prove these three?

44:46Lisa King:I think for now it's proving these three. We've got quite a handful just with the US and UK. We still need to make UK a huge success. As you say, you can't just dump the product on shelf and expect that to go off by itself. So there's a lot we need to do in the UK. I think if we can prove out, you know, the UK and the US and also get the business to, things have changed a lot, I think, in beverage in the last couple of years. You know, before when we were first raising and we had, you know, Pernod on board, people were paying stupid multiples and getting in and, you know, it wasn't about profitability.

45:27Lisa King:It was all about top line growth. And now that has shifted for sure to that people want to see a path to profitability, that it's not just growing at all costs. So there's definitely been, you know, a bit of re-engineering of our business to get us towards that. What kind of multiples are you seeing at the moment? Probably like three to four. EBITDA? No, revenue. Jesus. Because there's not many beverages making positive eat but are you serious okay I thought there was lots of margin in canned beverages I think that's why for us you know particularly when you don't own your own manufacturing you can't compete with the big guys who are canning you know millions and millions of cans a day you know there's lots of big beverage brands in the US you know like Liquid Death they're doing hundreds of millions of dollars they're not profitable I just don't understand that I mean I'd have to sit down I haven't worked in a canned beverage business with a P &L in front of me you know so I can't talk from experience I can't imagine that because surely it's just water and flavorings and a can you know and the bigger the volume so what is it that drives that is it the fact that you've got so much marketing and in the states you've got all those different people to give a slice of the of the contribution to yeah so I mean you know say retail margins 35 to 40.

46:53Lisa King:In the States, you also have a distributor who can take anywhere between, say, 15 to 20. Do you still have the 35 to 40 retailer margin or does that come down? That doesn't come down. Okay. So you've got the distributor margin on top and then do you have a broker as well. And you have a broker and normally they're on retainer until your business is in size and then they might take, you know, two and a half to 5%. So basically you've got to make it work at a massive scale in the US or go home. Yeah. And I think that's why it's so challenging for so many brands. And you see these huge brands like Recess.

47:36Lisa King:I don't know if that brand's in the UK, but it's massive in the US. So it's like a trip, like a mood enhancing drink. They just raised, I think they raised something like it was either 30 or 70 million US dollars. And this brand has been in the market for ages and it's huge. It's everywhere, but they're still raising money. Yeah. That just screams scary to me. Listen, Lisa King from AF Drinks, thank you so much for sharing so much detail and incredibly insightful view of how the mechanics of all of this work in the States and your own journey. You're really brave. It's really inspiring how brave you are.

48:17And you're so calm. At least you come across as really calm and brave and grounded. And yeah, and we're wishing you all the very best of luck. UK LinkedIn CPG scene is so lively. So follow as many people as you can in there because you will learn so much about the UK scene through LinkedIn. It's like everybody's sharing all the time. And if you want to join our NextGen CPG WhatsApp group and join the other founders in the UK who are leaning into unlocking value from AI and how to lead their businesses going forward with that, then you're so welcome. I can connect with your team and send you an invite.

48:56Lisa King:Thank you so much. Well, maybe you'll come back on in a year and let us know where you've got to. We'd love to follow up with you. Yeah, absolutely. Okay. And thanks again for the samples. I really did enjoy, particularly loved your, what's the Campari one called? The April Spritz. The April Spritz. I loved that one. It was really good. Thank you so much, Lisa King from AF Drinks. Really enjoyed having you on the show. Thank you.

49:22Thanks so much to Lisa and the whole Free AF team. I was really, you know, delighted to talk about going into the States from a smaller country in a kind of a positive frame of mind. I mean, I know, yes, Lisa was talking about how much investment you need and how it's more expensive than you think it's going to be and how no brands over there apparently are profitable, no drinks brands. But so many times I hear stories of brands who just say, no, there's no point in going to the States. Forget it. It's not worthwhile. So personally, I was really interested to hear about a brand who is actually doing it and who is kind of facing up to the truths, the economic truths of what it's going to take.

49:57That was really great. I didn't talk enough about how nice these drinks are. There's so many different layers of flavor. You know, the kind of the heat and the burn that we talked about is really lovely. I really enjoyed them. So I highly recommend you try. If you want to follow Lisa and Free AF Drinks, all of the links are in the show notes below. and as always if you enjoyed this episode if you got anything out of it at all please do like, follow subscribe to the show on iTunes or Spotify or your preferred player share with a colleague share with a friend it really does make a huge difference to us and you know I pour my heart and soul into this podcast and so does the team if you want to the equivalent of buying us a coffee just subscribe and follow the show more often thank you so much loads goes into the planning preparation production and particularly editing and sound engineering around Brand Growth Heroes episodes.

50:46So my first thanks to my tech guru and sound engineer, Jip again of Bala Groove, and also to the rest of the Brand Growth Heroes team who all put in so much hard work to bring these episodes to you.