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The Fizzy Economics of La Croix and Other Trendy Sparkling Waters

Why are there a million kinds of sparkling water nowadays, anyway?

Up until the last decade or so, sparkling water was generally the beverage of choice for white-tablecloth dining occasions, uppity WASPs and Brahmin types, or something your grandparents kept on hand for cocktail mixers. Then La Croix came along — and for many, this strain of mildly flavored carbonated water has abated their addiction to the high-calorie colas and sugary drinks that pretty much everyone over the age of 15 was raised on.

So how does this whole, newish category of drinks work? How much does it cost to add bubbles and a bit of flavor to water and put it in a can? How do all those brands differentiate themselves? And why does sparkling water cost more than soda? Alongside Duane Stanford, editor and publisher of Beverage Digest, we’re popping open some answers.

Let’s be real… it’s just water with bubbles and a (very little) bit of flavor, isn’t it?

Pretty much! At least, that’s one way to look at it. The cost to make it is very, very low, but here’s the rub: The cost to get them into stores, and keep them there, can be rather high. (More on that in a moment.) Overall, though, the product itself is so cheap to make that volume sales are the way to make a lot of money at this. You might have noticed that the single-serve cans you find at convenience stores are larger, at 16 ounces, which are more profitable. And, like soda, sparkling water is commonly sold in multipacks. 

How big a business is it?

Huge. And people are drinking tons of it during COVID. According to Stanford and Beverage Digest, it grew faster than soda last year (nearly 20 percent growth in sales versus 10 percent for soda), as the pandemic kept people at home with well-stocked fridges. However, Stanford says that for beverage giants like Coca-Cola and PepsiCo, sparkling waters are still a pretty small piece of their pies. It’s an important and highly profitable category, but still small compared to colas and everything else they put in cans and bottles.

What’s up with that La Croix brand?

The brand was purchased nearly 30 years ago by National Beverage, whose flagship soft drinks, Shasta and Faygo, were B-list soda brands. For a couple decades, it stayed a sleepy brand. Then, to make a long story short, in the 21st century, National Beverage cannily looked at the health and wellness wave and rode it to amazing success with La Croix, a line of naturally flavored, sugar-free sodas with garish can designs.

About those can designs: They were reportedly the executives’ least favorite, yet they consistently scored highest in marketing tests for visibility. They obviously pop out in a store aisle or display, and visibility is pretty much the coin of the realm in soft drinks.

In addition to building its brand at places like Whole Foods, La Croix’s marketing was pretty innovative at the time. They didn’t do a huge national advertising spend like Coca-Cola would have — they didn’t have the budget for that. Instead, La Croix reached out to people on social media — pretty much anyone, no large followers necessary, and not necessarily influencers. If you tagged the product or mentioned it, La Croix gave out discounts. In this way, it became the beverage of the hip suburban mom (by their standards, at least) as it spread throughout their social networks.

In the past several years, La Croix had a rough go of things: Coca-Cola and PepsiCo entered the market with their own versions (AHA and Bubly, respectively), and every supermarket, including Costco, came out with a private-label (store-brand) version. La Croix didn’t respond as forcefully as they could have. Plus, a short seller tried to accuse the brand of having artificial ingredients. While their stock value tumbled for a few years, it’s since come back in a big way in the past year.

What about those fancy brands?

Perrier and San Pellegrino have gotten into flavored sparkling waters, too: La Croix was a tide that lifted all boats, even those pretentious European ones. Plus, it’s a chance for these brands to enter this hot market at a premium price! 

For real, why does sparkling water cost more than soda?

Supply and demand, buddy. Even though sparkling water grew faster than soda last year, the soda market is still larger than the sparkling water market. So, given that there’s not a huge difference in cost to make them, the fact that so much more soda is consumed (and made) means it costs less — for now at least.

So what’s the big deal about getting into stores?

“The battle is really being played out in store aisles because if you can help a retailer bring traffic into their store, that’s a really great relationship, and it gives you a lot more leverage in retail,” Stanford says. There’s just so little shelf space these days: So many brands and so many new items are constantly introduced that are fighting for your attention.

There are two models to do this, Stanford says: A warehouse model, or direct store distribution. Brands like La Croix do the warehouse model, in which the cans are manufactured at their own bottling plants, then dropped off at a supermarket’s own regional warehouses. That takes out the middleman: the beverage distributor. However, the direct-store distribution is what Coca-Cola and PepsiCo rule at. That’s where local bottlers make the product for Coke or Pepsi, then distribute it directly to the stores. These are totally different cost structures, so comparing the costs of each is like comparing apples and onions.

Stores charge a large fee just for shelf space and more for special displays. The price varies, but it can be in the thousands of dollars per visit. In the direct store distribution model, the beverage distributor bears this cost rather than the soda brand. This hugely eats into the profits of manufacturing such a low-cost item, and Stanford says the cost is often much higher for a new product, because retail stores know which products sell the best — in other words, which products bring customers into their store. Thus, they’re more lenient and welcoming of an established product that sells like crazy as opposed to some brand-new drink that may flop. 

In that latter instance, the distributor is taking a gamble on the success of a new drink. But shelf space is pretty much everything. “You could have the best marketing in the world and get people really jazzed about trying your product — but if they come to the store and it’s not there, then that’s the end of the game,” Stanford says.

Still, how the hell does this lemon-flavored water stand out from that one?

Stanford says people generally aren’t as brand loyal to sparkling waters as they are to colas, and so they’re more open to different ones. This is where can design is so important: It’s crucial to stand out. La Croix has come out with a premium line now, with unique flavors and skinnier cans. Same with price points — many people shop on price, after all, and all other things being equal, people will buy the cheaper one. After that, flavor is another way to stand out.

“Beverage companies and the flavor companies they work with are masters at flavor so that’s a pretty easy part of the mix,” Stanford explains. They’ll focus-group the hell out of each one, and this is where the big brands can stand out a little. Coca-Cola went for a stronger flavor profile with AHA — it even smells stronger when you crack it open. Then of course there’s the combination flavors: lime and watermelon, citrus and green tea, etc.

How long is this trend gonna last, and when will they run out of flavors?

That’s not actually the right question to ask. You see, in a volume industry with a bunch of similar products, growth is hugely important and that means expanding the market. One way to do that is by creating a new subcategory: caffeinating the water, as brands have recently started doing. It’s got the punch that someone who has a Diet Coke habit in the afternoon might be looking for. Or, say, coffee people who don’t currently drink the product at all. “Once you get into the market and start taking share, the whole category as it matures needs to figure out how to pull more people in who otherwise wouldn’t be consuming the category,” Stanford says.

This is how we end up with a million variations of a soft drink on the store aisle, and retailers paying thousands of dollars just for shelf space or those cardboard stands that clog up the shopping cart traffic. But at least these won’t rot your teeth or give you diabetes.