A Founder of Odwalla Tries to Recapture His Mojo

2016-12-19 21:12:14

 

A Founder of Odwalla Tries to Recapture His Mojo

LOS ANGELES — For the past 20 years, Greg Steltenpohl, an avant-garde jazz saxophonist turned beverage entrepreneur, has worked to rekindle the magic behind his greatest hit — and make peace with a nightmare that led to an abrupt fall.

Mr. Steltenpohl started the juice company Odwalla in 1980, selling drinks out of his band’s Volkswagen van in and around San Francisco. Within a few years, the company was a multimillion-dollar business, flying high as one of the first breakout healthy drinks now commonplace in grocery aisles.

Then, in 1996, a child died and dozens were sickened because of contaminated apple juice produced by Odwalla, changing everything. About 90 percent of the company’s revenue evaporated almost overnight in the wake of the outbreak. With the company on the brink of bankruptcy, Mr. Steltenpohl and his partners were forced to sell a controlling interest in Odwalla to private equity firms, the equivalent — to him — of selling out to the devil. Not long after, the company was sold to Coca-Cola.

“Odwalla took him to the top of the world and then to the bottom,” said Berne Evans, his business partner today. “I don’t think he’s ever gotten over it.”

But now Mr. Steltenpohl, a gentle and avuncular 62, is once again near the center of beverage industry buzz as the head of Califia Farms, a nut milk business that is fast expanding into bottled coffees and other drinks. This time, he is taking advantage of a new trend sweeping the industry, as young beverage companies — empowered by changes in distribution and consumer tastes — are rising and competing successfully with titans like Coca-Cola and PepsiCo.

Today it’s possible for a company to develop a drink and cut a deal with an assembly line for hire to produce it, and negotiate another deal for someone to distribute it. Just a decade ago, it required far more capital and, eventually, a sprawling operation.

Only a few years after its founding, in 2012, Califia is on track to ring up $100 million in sales and is adding products at a fast clip. The company is considered one of the hottest young brands in the beverage world, leading to whispers about whether one of the big competitors will soon swoop in with a buyout offer that Mr. Steltenpohl and his partners can’t refuse.

Not this time, he insists. “I’ve had to sell out once,” Mr. Steltenpohl said. “That was enough.”

That’s easier to say than to do. A little more than a month ago, Ben Weiss, the founder of the flavored water company Bai, also brushed back talk of a buyout. “It’s called Bai, not Sell,” he said in an interview at the time.

His argument was not unique these days. He had already teamed up to a degree with one competitor. The company’s drinks, which it called “enhanced waters,” got some distribution from Dr Pepper. And Bai was outselling a competitor in retail stores: Over the previous 12 weeks, Bai had outsold Vitaminwater, a Coke brand, for the first time, Mr. Weiss said.

It was on track for $300 million in annual sales, outselling Pepsi and Coke on Amazon, internet sales that help many young beverage companies extend their reach to far corners of the country without giant distribution networks.

But on Nov. 22, all that independence went up in smoke as Dr Pepper announced that it was buying Bai for $1.7 billion. The same day, PepsiCo announced its acquisition of KeVita, which makes probiotic drinks.

There are more opportunities for young drinks companies than ever, as consumers who have abandoned sugary and diet sodas search for alternatives to plain water. Hint Inc., for instance, is on track to ring up $90 million in sales this year, having leveraged its early distribution in Google’s cafeterias into shelf space at Whole Foods, Target and other stores.

Last month, Cason Thorsby, a newly minted entrepreneur in Detroit, began selling in restaurants, bars and groceries there a line of sugar-free, naturally flavored, “superinfused” sodas branded with his first name. And new juice businesses like OnJuice, Misfit Juicery and Roots Juices, many of which start out selling their products online, come to life every month, or so it seems.

Duane Stanford, the editor of Beverage Digest, said a young beverage company today can buy its flavors from a flavor house, branding expertise from a branding expert and manufacturing from a producer on contract.

“You have this situation where these companies can become viable, robust, cash-generating businesses without the help of a big company,” he said. “They’re even getting creative at building independent distribution networks.”

Odwalla came together out of a necessity to eat. After graduating from Stanford with a degree in environmental sciences, Mr. Steltenpohl joined with some friends to start a band called the Stance. He also got hooked on the taste of fresh-squeezed orange juice, which his father made for him.

“We were a band of musicians who weren’t really that accomplished — or popular,” Mr. Steltenpohl said of himself and the band members, who became his partners in Odwalla. “We were broke and starving, and we figured if we started a juice business, we could live off the juice and maybe make a little extra.”

He read a book, “100 Businesses You Can Start For $100,” and the partners invested in a juicer and started making juice. They didn’t even try to break into groceries and convenience stores, instead stocking refrigerators in video stores and laundromats with Odwalla fresh juice each day. “Everyone who was a musician back then was basically living out of a VW bus,” Mr. Steltenpohl said. “We quit living in ours and began selling juice out of the back.”

For most of its early years, the Santa Cruz Community Credit Union financed the company. But as consumers cottoned on to its intensely flavored, wacky mixes of unpasteurized juice, it needed something more.

A friend introduced Mr. Steltenpohl to Bill Hambrecht, a founder of Hambrecht & Quist, the investment bank that financed some of Silicon Valley’s early start-ups. Hambrecht & Quist became Odwalla’s first institutional investor, and Mr. Hambrecht began serving as a sort of consigliere. “He helped us understand that anarchy isn’t the best business model,” Mr. Steltenpohl said.

In 1993, Hambrecht & Quist helped take Odwalla public, which allowed it to expand nationally and into Canada. By 1996, it had roughly $60 million in sales, a new plant and refrigerated delivery trucks to replace the VW vans.

Then the music stopped.

“I got a call from the King County department of health,” Mr. Steltenpohl whispered, tearing up at the memory. “Five or six people in Seattle had come down with what looked like E. coli poisoning, and the common element was apple juice, our apple juice.”

In the end, at least 66 people got sick after drinking Odwalla juice, and a child died. The brand’s claims about the healthiness came back to haunt it as reporters dug into its failure to heed warnings about food-safety lapses.

Odwalla ended up in the hands of private equity groups, and when it became apparent that the goal was to sell the company to Coca-Cola, Mr. Steltenpohl left.

“For Coke, the thinking was fresh juice is becoming important, we need a fresh juice, Odwalla will fill that need,” he said. “They never saw the enormous potential of the Odwalla brand and instead saw it as just another product in the juice portfolio.”

(Scott Williamson, a spokesman for Coke, said that Odwalla is an important part of what the company calls its “natural healthy beverages portfolio and that Coke would continue to invest in marketing and new products to grow the brand.”)

Mr. Steltenpohl then teamed up with Dee Hock, the founder of Visa, and started a payment system that rewarded loyalty to local businesses.

Then he collaborated with an African entrepreneur to develop Adina, a hibiscus tea business now owned by a Mexican beverage company. “It was a pretty ambitious project to source hibiscus from a women’s co-op in Africa and make it into teas,” he said. “There was a lot of prejudice, and it was difficult to get any margin on the product — it was so idealistic.”

In 2010, Mr. Evans, the owner of Sun Pacific, a California citrus producer, was looking for someone to make juice out of misfit Cuties, the tiny, easy-to-peel mandarin oranges that had brought new life to citrus sales. About 20 percent of the fruit had blemishes or seeds or some other disqualification, and Mr. Evans hired Mr. Steltenpohl to “find a way to make money out of it.”

Mr. Steltenpohl was charged with building and operating the plant that would squeeze the misfit fruit into juice. But just as construction began on the plant in Bakersfield, Calif., Mr. Evans’s partner in Cuties, the agricultural group now known as the Wonderful Company, backed out. “Without its clementines to run the plant, we couldn’t run it efficiently,” Mr. Evans said. “In other words, we overbuilt the plant.”

So Mr. Steltenpohl returned to an idea he had toyed with many years before.

Shortly after the E. coli contamination, Odwalla had tried selling a product called Future Shake that was made from almonds, oats and soy. But its texture was too thick, and it never took off.

More recently, Mr. Steltenpohl had watched the rise of WhiteWave, the soy and nut milk juggernaut, and Mr. Evans had connections with almond growers. He and Mr. Steltenpohl had decided to use the plant’s excess capacity to make almond milk when Mr. Steltenpohl learned he would need a liver transplant.

“At that point, I really wasn’t thinking of returning to the company at all,” he said.

But after the surgery, the hospital gave him a protein beverage to aid in his recovery, and the ingredients in it were so bad that he decided he had to make Califia work.

The first batch of almond milk rolled off the production line in 2012 and quickly took off.

The product had the advantage of its own production facility and what Mr. Steltenpohl had learned about distribution while at Odwalla. It also had the advantage of a far different retail landscape. When the Odwalla crisis hit, Amazon was in its infancy, and Whole Foods, which often serves as a sort of ambassador for new food and beverage brands, had just a handful of stores.

Today, Amazon is putting up its own grocery stores, and Whole Foods has nearly 500 stores. At the same time, convenience stores have become much bigger points of distribution for a wide variety of drinks.

And consumers are abandoning traditional soft drinks, both sugared and diet, in droves and searching for new flavors delivered in new ways.

In the last year, Mr. Steltenpohl has pushed almond milk drinks flavored with things like ginger, mocha and matcha. More recently, Califia is putting the almond milk into cold-brewed and nitrogen-infused coffees, a technique borrowed from the beer business. The nitrogen imparts a sweetness to coffee, helping to reduce the amount of sugar needed. According to data from Euromonitor, bottled coffee is one of the fastest growing beverage categories in America, and Califia’s cold-brewed version outsells the packaged Starbucks version.

Mr. Steltenpohl is also trying to avoid past mistakes. The plant is equipped with cutting-edge food-safety monitors that share alerts about problems as they happen with the entire senior management team. Josh Butt, who previously oversaw food safety systems at Danone, the big French dairy company, presides over the plant’s operations.

In the year ended Sept. 4, Califia’s sales more than doubled, hitting $85 million, according to data from IRI, which does not include the bottled coffee.

In other words, the company is big enough to be attractive to a larger player.

“As for big-brand interest, it would be accurate to say there has already been substantial interest — but as I’ve said, I really don’t want to go that route of selling while the company is so relatively young,” Mr. Steltenpohl said. “Finding ways to continue to grow the company into a major brand with a high degree of independence is a major lifelong objective.”

Private equity groups have also come calling. One year ago, the Stripes Group, a Manhattan-based private equity group that has a stake in the food delivery service Blue Apron, among other businesses, put up $50 million for a little less than 20 percent of Califia’s stock, giving the company a value of more than $250 million.

Mr. Steltenpohl and his executive team have options giving them the right to as much as a quarter of the company, and Mr. Evans owns the rest — a majority of the business — but “it’s really Greg’s company,” he said, adding that he was in no hurry to exit his investment. (Mr. Evans declined to comment on whether he earned money from the Stripes Group transaction.)

That said, the tried-and-true endgame of selling out to a big competitor could prove too inviting, particularly in the wake of Danone’s purchase of WhiteWave this year.

The advantages that deal brought to WhiteWave have caused some sleepless nights for Mr. Steltenpohl, even though sales of his competitor’s almond milk have been flat. Danone has the wherewithal to pay slotting fees to supermarkets to bump products into prime positions on the refrigerated shelves, regardless of how well they are selling.

“That makes it harder for us younger dogs,” Mr. Steltenpohl said.

But he said chains like Target and Kroger are relying more on what he called “fact based” assessment to determine where they put products on their shelves. And he hints that Califia will introduce a “cultured product” some time next year — read: something probiotic. Which may just give Danone reason to watch its back.

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