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ITEM 1. BUSINESS
GENERAL
National Beverage Corp. is an acknowledged leader in the development, manufacturing, marketing and sale of a diverse portfolio of flavored beverage products. Our primary focus is the United States, but our products are also distributed in Canada, Mexico, the Caribbean, Latin America, the Pacific Rim, Asia, Europe and the Middle East. A holding company for various operating subsidiaries, National Beverage Corp. was incorporated in Delaware in 1985 and began trading as a public company on the NASDAQ Stock Market in 1991. In this report, the terms “we,” “us,” “our,” “Company” and “National Beverage” mean National Beverage Corp. and its subsidiaries unless indicated otherwise.
Our brands include soft drinks, energy drinks and shots, juices, teas, still and sparkling waters and nutritionally enhanced beverages, and span both carbonated and non-carbonated offerings. In addition, we produce soft drinks for certain retailers (“Allied Brands”) who also promote certain of our brands (“Strategic Alliances”). We employ a philosophy that demands vertical integration wherever possible and our vertically integrated manufacturing model unites the procurement of raw materials, production of concentrates and manufacturing of finished products in our twelve manufacturing facilities. To service a diverse customer base that includes numerous national retailers as well as hundreds of smaller “up and down the street” accounts, we have developed a hybrid distribution system which promotes and utilizes customers’ warehouse distribution facilities and our own direct-store delivery fleet plus the direct-store delivery systems of independent distributors and wholesalers.
We believe that the combination of our business strategies and philosophies is key to giving us a greater competitive advantage and differentiating us from our competitors. These include the following:
Fantasy of Flavors - Throughout our product lines, we emphasize distinctly flavored beverages. Although cola drinks account for approximately 50% of the soft drink industry’s domestic grocery channel volume, colas account for less than 20% of our total volume. In the higher margin convenience store channel, flavors now represent 56% of soft drink sales and are growing significantly faster than colas. Our flavor development spans more than 100 years and originated with our flagship brands, Shasta and Faygo, each of which offer over 50 flavor varieties.
Regional Share Dynamics – This is our term for the philosophy we employ for the development and support of our brands that have significant regional presence. Because we tailor our marketing and promotion programs by locale, we believe many of our brands enjoy a regional identification that fosters long-term consumer loyalty and make them less vulnerable to competitive substitution. In addition, “home-town” products often generate more aggressive retailer sponsored promotional activities and receive media exposure through community activities rather than costly national advertising.
Quality-Value Ethic - We believe that consumers demand value as the purchase default option in volatile economic times, and we are intent on producing and developing products of the highest quality that appeal to the value expectations of the family consumer. We believe we can leverage our cost-effective manufacturing and distribution systems, and our efficient regionally focused marketing programs, to profitably deliver products to the consumer at a lower price-point than our national competitors.
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Creative Agility - In a beverage industry that is dominated by the “cola giants”, we pride ourselves on our ability to respond faster and more creatively to consumer trends than many of our competitors which are burdened by distribution complexity and legacy costs. We strive to build long-term brand value by developing creative marketing programs, propriety flavors and distinctive packaging. During the past year we have introduced 54 new flavors or package sizes, and have won various package design awards. During recent years, we have focused on developing innovative beverages tailored toward healthy lifestyles and introducing products and package sizes designed to expand distribution in the higher-margin convenience store channel. We believe that the most dynamic validation of our strategy is our competitors’ efforts to replicate our creative business model.
PRODUCTS
Our brands include the following:
Soft Drinks:
Juices:
Shasta®
Everfresh®
Faygo®
Mr. Pure®
Ritz®
Home Juice®
Big Shot®
Waters & Enhanced Waters:
St. Nick's®
LaCroix®
Energy & Sports Drinks:
Clear Fruit®
Rip It®
Crystal Bay®
Rip It Shots
Àsanté®
Mega Sport®
Mt. Shasta®
Other:
Sundance®
Ohana®
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Established more than 120 years ago and distributed nationally, Shasta is recognized to be a bottling industry pioneer and innovator. As our largest volume brand, Shasta features multiple flavors, including products targeted to the growing Hispanic and other ethnic markets, and continues to earn consumer loyalty by delivering value, convenience and unique tastes such as California Dreamin’, Very Cherry Twist and Fiesta Punch. More than one hundred years old, Faygo products are primarily distributed east of the Mississippi River and include numerous unique flavors including RedPop, Moon Mist® and Rock’n’Rye®. We also produce and market Ritz soft drinks and seltzers, primarily in the southeast U.S., and distribute Big Shot in New Orleans and the surrounding areas.
Rip It, our energy fuel which is available nationally in 17 flavors including five sugar free varieties, is the number one energy drink in the dollar-store channel. Building on the success of Rip It, we recently introduced two-ounce Rip It Shots in five flavors, including a new G-Force Extra Strength Formula. For consumers seeking vitamin-enhanced hydration, we offer Mega Sport in six reinvigorating flavors.
Everfresh and its sister brands, Home Juice and Mr. Pure, 100% fresh juice and juice-added products, are available in over 30 flavors including Blueberry Pomegranate, Kiwi Strawberry and Pineapple Mango. Originating in the Midwest over 50 years ago, these brands feature unique glass packaging targeted primarily for single-serve consumption. As the most agile regional juice company, we have been successfully expanding to new geographic areas through both independent and Company-owned distribution facilities.
With all natural ingredients, LaCroix has been outpacing the growing sparkling water segment that is fast becoming the alternative to traditional carbonated soft drinks. Containing no calories, sodium or caffeine, LaCroix has benefited from the support of major national chains and is the number one selling canned sparkling water in the U.S. as well as the number one domestically produced sparkling water. With new packages being designed for non-traditional distribution channels, we believe LaCroix is uniquely positioned to continue expanding its national footprint. Other products we offer the health-conscious consumer include Clear Fruit, a clean crisp all natural non-carbonated beverage; Crystal Bay, a zero-calorie combination of sparkling water and lively fruit flavors; Àsanté, a 50-calorie vitamin enhanced nutraceutical beverage; and Mt. Shasta, a natural spring water.
Our other non-carbonated products include the Ohana line of fruit drinks, lemonades and teas, and the Sundance line, which features brewed tea combined with great fruit flavors and reduced calories.
We refer to our portfolio of brands other than soft drinks as our “Power+ Brands”.
MANUFACTURING
Our twelve manufacturing facilities are strategically located near major metropolitan markets across the continental United States. The locations of our plants enable us to efficiently manufacture and distribute beverages to substantially all geographic markets in the United States, including 22 of the top 25 metropolitan statistical areas. Each manufacturing facility is generally equipped to produce both canned and bottled beverage products in a variety of package sizes. We utilize numerous package types and sizes, including cans ranging from eight to sixteen ounces and bottles ranging from seven ounces to three liters.
We believe that the innovative and controlled vertical integration of our bottling facilities provides an advantage over certain of our competitors that rely upon independent third party bottlers to manufacture and market their products. Since we control the national production, distribution and marketing of our brands, we believe we can more effectively manage product quality and customer service and respond quickly to changing market conditions.
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We produce a substantial portion of the flavor concentrates used in our branded products. By controlling our own formulas throughout our bottling network, we can manufacture our products in accordance with uniform quality standards while tailoring flavors to regional taste preferences. We believe that the combination of a Company-owned bottling network, together with uniform standards for packaging, formulations and customer service, provides us with a strategic advantage in servicing national retailers and mass-merchandisers. We also maintain research and development laboratories at multiple locations. These laboratories continually test products for compliance with our strict quality control standards as well as conduct research for new products and flavors.
DISTRIBUTION
We utilize a hybrid distribution system to deliver our products through three primary distribution channels: take-home, convenience and food-service.
The take-home distribution channel consists of national and regional grocery stores, warehouse clubs, mass-merchandisers, wholesalers and dollar stores. We distribute our products to this channel through the warehouse distribution system and the direct-store delivery system. Under the warehouse distribution system, products are shipped from our manufacturing facilities to the retailer’s centralized distribution centers and then distributed by the retailer to each of its outlet locations with other goods. Products sold through the direct-store delivery system are distributed directly to the customer’s retail outlets by our direct-store delivery fleet and by independent distributors.
We distribute our products to the convenience channel through our own direct-store delivery fleet and those of independent distributors. The convenience channel consists of convenience stores, gas stations and other smaller “up-and-down-the-street” accounts. Because of the higher retail prices and margins that typically prevail, we have undertaken several measures to expand convenience channel distribution. These include development of products, packaging and graphics specifically targeted to this market.
Our food-service division distributes products to independent, specialized distributors who sell to hospitals, schools, military bases, airlines, hotels and food-service wholesalers. Also, our Company-owned direct-store delivery fleet distributes products to certain schools and other food service customers.
Our take-home, convenience and food-service operations use vending machines and glass-door coolers as marketing and promotional tools for our brands. We provide vending machines and coolers on a placement or purchase basis to our customers. We believe vending and cooler equipment increases beverage sales, enhances brand awareness and develops brand loyalty.
In addition to foreign based customers, we distribute our brands outside of the United States through exporters and foreign locations of U.S. based companies.
SALES AND MARKETING
We sell and market our products through an internal sales force as well as select broker networks. Our sales force is organized to serve a specific market, focusing on one or more geographic territories, distribution channels or product lines. We believe this focus allows our sales group to provide high level, responsive service and support to our customers and markets.