Snapple Beverage Corporation

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Snapple Beverage Corporation

P.O. Box 9400
East Meadow, New York 11554
U.S.A.
(516) 222-0022

Public Company
Incorporated: 1972 as Unadulterated Food Products, Inc.
Employees: 230
Sales: $231.9 million
Stock Exchange: New York
SICs: 2086 Bottled and Canned Soft Drinks and Carbonated
Waters

The Snapple Beverage Corporation is the leading American retailer of single-serving iced tea drinks and the second largest seller of fruit drinks. Started as a part-time business in the natural foods industry during the 1970s, Snapple grew dramatically after it introduced a new, better-tasting iced tea product in the late 1980s. Its subsequent explosion in growth, in which sales more than doubled every year, came as the American soft drink market shifted away from carbonated beverages toward a wider variety of noncarbonated drinks and fruit juices. This industrywide movement was fueled in part by Snapple’s introduction of healthy, all natural products.

Snapple was founded in 1972 by Arnold Greenberg, Leonard Marsh, and Hyman Golden. Greenberg operated a health food store on the lower east side of Manhattan. His boyhood friend Marsh ran a window-washing service with his brother-in-law, Golden. In the early 1970s, the three founded Unadulterated Food Products, Inc., to sell pure fruit juices in unusual blends to health food stores. Products were bottled at a small plant in the New York metropolitan area. The partners ran the business in their spare time while all three kept their regular jobs, and the enterprise plodded along until the late 1970s.

In 1978, Unadulterated Foods began to market carbonated apple juice. The company called the product “Snapple,” after purchasing the name for $500. In the first month of its introduction, Unadulterated sold 500 cases of apple juice. In the second month, the company sold another 500 cases of Snapple, and distributors started calling to request the product. When tops starting popping off bottles in the warehouse, Unadulterated realized that the growing popularity of Snapple might be related to the fact that the juice was fermenting.

Outside of this brief and unintended foray into the alcoholic beverage industry, however, Unadulterated’s legitimate business had begun to grow. In 1979, the company hired its first salesman and began seeking out franchised distributors. “One day we woke up. We realized we had a business,” Marsh later told Newsday. The partners began to step up their efforts. In 1980, Unadulterated expanded the Snapple line to include other all natural juices. In 1982, it added natural sodas. Despite their relatively high price of $1 a bottle, these products enjoyed some success in the New York, Boston, and Washington, D.C., areas in the early 1980s. The company’s three founders spent much of their time thinking up new flavors and names for their drinks. Each new variety of Snapple took from six months to a year to develop, as alterations were made in taste, color, and name. The company strove for memorable names that were not too gimmicky, rejecting, for instance, “guava nagilah.”

As a result of these efforts, in 1986 Snapple expanded its line to include fruit drinks. It was not until the following year, however, when the partners decided that Snapple needed a summertime drink, that the company hit upon the product that would allow its growth to take off: iced tea. In the past, iced teas had been manufactured in the same way that other drinks were, with flavor, derived from a concentrate, sugar, preservatives and soda. Unadulterated, however, spent three years working with a tea vendor and a bottler to perfect a method in which tea was bottled while hot, which allowed the preservatives to be eliminated. “We made the first ready-to-drink tea that didn’t taste like battery acid,” Greenberg later told the New York Times. “We came up with the first real brewed tea that was cooked.”

In 1988, Snapple introduced a lemon-flavored iced tea made with the new process. This product proved to be so popular that its sales continued even after the hot weather was gone. “It blew everyone away,” Marsh explained to Newsday. Driven by the popularity of the new iced tea product, which was soon supplemented by other flavors of tea, Snapple sales took off. By the end of 1988, Unadulterated’s sales had increased by 60 percent over the previous 12 months, to $13.3 million. This strong growth continued in the following year. Unadulterated expanded the Snapple line to include 53 different flavors, and, in the first six months of 1989, the company’s revenues from noncarbonated beverages increased by 600 percent.

By that fall, Snapple was unable to fulfill all the demand for its iced tea products, and the company had instituted an allocation system to distribute its drinks. Only after Unadulterated had contracted with a second bottling plant in upstate New York did it begin to catch up with demand. At the end of the year, total company sales had nearly doubled from the year before.

In 1990, Snapple built on these dramatic gains by introducing Snap-Up, its entrant in the isotonic sports drink market, which was rolled out in four flavors. In addition, in an effort to break out of the single-serving market, Snapple introduced a 32-ounce bottle of its beverages, to be sold in grocery stores and taken home. As sales of its flavored teas doubled over the course of 1990, Snapple became the market leader for this category in the New York area. In an effort to enhance that position, the company launched a $2 million advertising campaign featuring tennis star Ivan Lendl. The company hoped that Lendl’s active and physically fit image would appeal to consumers of its all-natural products.

In 1991, Unadulterated moved its headquarters from Brooklyn to Long Island, where its three founders had long lived. With strong returns from flavors such as mint, cranberry, and decaffeinated iced teas, Snapple’s revenues more than doubled to $95 million, with 55 percent of its sales in iced teas as the market for this product grew to $400 million. The company had attained a solid second place in this field with 19.3 percent of sales, behind long-time market leader Lipton, with 37.2 percent of the market, as it expanded its market beyond the East Coast, introducing Snapple products in California.

In order to expand its geographic reach further, Snapple needed an infusion of capital. Although the company had looked for a corporate partner for several years, its three founding partners were unwilling to relinquish control of Unadulterated, and they wished to keep all of the company’s operations intact, rather than shedding the less successful non-iced-tea product lines. Finally, Snapple reached an agreement with a Boston-based investment banking firm, the Thomas H. Lee Company. In January 1992, Lee formed the Snapple Holding Corporation in Delaware. Then in April, the founders of Unadulterated, Marsh, Golden, and Greenberg, sold 70 percent of Unadulterated to this company for $45 million. In doing so, they received guarantees that they would remain in charge of the firm and that salaries of $300,000 a year would be paid to each of them through 1996, along with several multimillion dollar bonus payments at the time of the sale of stock.

With this deal, Snapple gained the resources to pay for nationwide distribution of its products. In addition, the company geared up for major competition from the leaders of the soft drink industry, Coca-Cola and Pepsi-Cola. Taking notice of the explosive growth of the iced tea industry, Coke had teamed up with Lipton, and Pepsi with Nestea to market their own iced tea products, and industry observers predicted that their entry into the market in full force in the summer of 1992 would bury upstart Snapple.

In an effort to counteract the Coke and Pepsi challenge, Snapple began running a new line of advertisements in May 1992, which featured its trademark “made from the best stuff on earth” line in ads that spoofed earlier beer and sports drinks promotions; the ads received low marks from advertising industry observers. In addition, the company used its $15-million-a-year advertising budget to pay for a long-lived series of live radio commercials featuring controversial disk jockeys Howard Stern and Rush Limbaugh. At the end of the summer of 1992, Snapple conducted a five-week search for a new advertising agency that could better convey its corporate identity in preparation for a wider national push. Later that year, Snapple also signed tennis player Jennifer Capriati to endorse its products.

Despite the competitive threat from Coke and Nestea, which released its product in February 1992, Snapple’s market share continued to grow. In the first six months of 1992, the company sold nearly as much product as it had sold in all of the previous year. In an effort to expand its reputation for high-quality teas to its sports drink line, Snapple introduced tea-flavored Snap-Up, in August 1992.

With its infusion of new capital, Snapple had expanded its distribution to every major city in the United States by August 1992, and it signed new contracts with beverage distributors. The company owned no manufacturing facilities, but instead made agreements with more than 30 bottlers across the country. In this way, Snapple was able to keep its overhead low and its payroll short. The company administration consisted of just 80 employees, 50 of whom worked out of a modest office building on Long Island.

In addition to its efforts to expand domestic distribution, Snapple also began a push to sell its products in foreign markets in 1992. As a first step in this effort, the company began distributing its drinks to American military bases around the world. By the fall of that year, these moves had started to show fruit, as Snapple pulled ahead of Nestea to become the leader in the ready-to-drink iced tea market, earning 30 percent of all sales for the first eight months of the year.

With these strong results, Snapple announced that it would sell stock to the public for the first time in December 1992. In preparation for the stock offering, Snapple Holding merged into its subsidiary, becoming the Snapple Beverage Corporation. In the initial offering, 17 percent of Snapple’s stock was offered to investors, with the bulk of the proceeds going to pay off debts incurred when the company was first purchased from its founders. On December 15, the stock was first offered, at $20 a share. The offering was an immediate hit, as the four million shares were snapped up, and the company’s stock price was driven to $33. These results were reinforced at the end of the year, when the company posted annual revenues for 1992 of $231.9 million, more than double the previous year’s tally. Within six months, Snapple stock had been split twice, as revenues continued to grow, and the company’s founders had sold another eight percent of their holdings to take advantage of the bull market in the company’s shares.

With the introduction of Lipton Original ready-to-drink tea in the late spring of 1993, however, Snapple faced a new and aggressive competitor. The company tripled its advertising budget and unveiled a new campaign in an effort to maintain its standing in the market. As Lipton ran radio ads charging that Snapple’s product was made from reconstituted tea powder, it briefly passed Snapple in market share during the key summer months, before becoming unable to meet demand. By the fall however, Snapple had regained the lead in sales in larger supermarkets, earning a 39.4 percent share.

In addition to the threat from Lipton, Snapple’s franchise as a health food purveyor was threatened when the U.S. Food & Drug Administration began to question the use of the words “all natural” on some company labels, and California regulators became suspicious of the designation “brewed” on the company’s teas. In addition, Snapple confronted a bizarre series of rumors concerning its products. One tale had it that the company supported the Ku Klux Klan, perhaps because a small “K” on its labels indicated that its products were kosher, or because the background picture on its iced tea bottles, depicting the Boston Tea Party, with masked raiders in boats, had been misinterpreted. Another swift-moving rumor alleged that Snapple supported the extreme anti-abortion group Operation Rescue. Company officials guessed that the source of this misinformation was the product’s long-time advertisements on the Rush Limbaugh show.

Despite these worries, Snapple’s sales continued to boom. The company finished 1993 with sales up 119 percent from the previous year, as the company moved 55.6 million cases of beverage. This marked the third year in a row in which sales of Snapple drinks had more than doubled. One half of the company’s revenues were still contributed by iced teas, with the remaining portion made up by its 10 flavors of fruit drinks (45 percent) and its 23 flavors of natural soda, fruit juices, and Snapple Sport drink.

These gains continued in the first quarter of 1994, as Snapple reported three-month sales that had doubled from the year before. In order to strengthen its market share, Snapple embarked on a program in 1994 to expand its product offerings and to shore up its distribution system. In April, the company rolled out eight new flavors, including Mango Tea, three new sodas, and four new fruit drinks, including diet versions of popular offerings, such as Pink Lemonade. The company also introduced a larger, 15.5 ounce can. With these steps, Snapple hoped to shore up its fruit juice category, which Coca-Cola had recently entered with a line of “Fruitopia” drinks.

In order to display its products more effectively, Snapple unveiled a new glass-fronted vending machine, which showed 54 different beverages at once. The company rolled out 1000 of these to begin with, with plans to add 9,000 more in locations across the country. Snapple believed that the glass front of the machine encouraged impulse buying.

Snapple took steps to gain greater control over its domestic distribution in June 1994. At that time, the company purchased two of its long-time distributors, Groux Beverage Corporation, of Orange County, California, and Trinity Beverage Corporation, based in Texas. In addition, Snapple purchased a half interest in the Haralambos Beverage Corporation, based in Los Angeles. With these investments, Snapple was able to increase its percentage of direct distribution, in which wholesalers sold and delivered Snapple products directly to stores, rather than to other middlemen who ran warehouses. In this way, the company hoped to gain greater control over its retail presentation and to get more shelf space, as distributors themselves actually stocked the shelves.

By the start of the summer of 1994, Snapple had moved to a new headquarters building and increased its staff to 230 people. In an effort to maintain the superior quality that it believed would support its market share, Snapple increased the size of its quality-control department rapidly. The company contracted with 28 bottlers in the United States and 2 in Canada to produce its beverages. Earlier that spring, Snapple had also expanded its international distribution to Japan. Previously, sales had begun in Canada, Mexico, the United Kingdom, Greece, Norway, and Hong Kong. The company looked to Australia, Singapore, and the Phillipines for further expansion late in 1994.

By July 1994, Snapple had solidified its position as the fastest growing beverage company in the world and the second largest seller of single-serving juices, growing steadily larger in a market that continued to rapidly expand. Although the company faced significant threats from large and powerful competitors, its record of introducing popular new products boded well for its future success.