Jones Soda loses its cool

Not so long ago, Jones Soda was tres cool, but an ill-advised expansion has caused a need to lay off 40% of its staff.

The 21-year-old cult soda company's struggles are a microcosm of the challenges facing small companies in a weakening U.S. economy. With consumer spending down and credit tight, any misstep becomes a potentially fatal mistake.

"Given the financial crisis we're in, you have to preserve cash," CEO Stephen Jones said. "Cutting back people is a horrible thing to go through, but you do it as a result of strategy. And my strategy is to focus on the core of what Jones Soda is."

Although that statement lays the blame, predictably, on the economy, the problem appears to be that Jones tried to expand in ways that undercut the brand's image. First, the company, whose distinctive glass bottles were part of the brand appeal, introduced cans. Then they went head-to-head against Coke and Pepsi in the mass market.

Jones told FSB he would grow the brand more efficiently as it continued to penetrate big chain grocery stores, beefing up his company's distribution network and sales staff.

Unfortunately, those tactics - which included pushing Jones' canned soda into new markets - backfired in an already faltering economy and an industry that has seen better days.

The soft drink market is in decline -- three years in a row of declining sales. It might be better in such a market to be a niche product with a cool image that can command a premium price than to chase after volume. Time will tell if Jones can get its cool back.

History of diet colas

American Heritage magazine has an interesting story this issue on the history of diet colas. It points up the importance of smaller companies as innovators, since the first such drink did not come from the industry giants; it was a small (and now defunct) Brooklyn bottler called Kirsch Beverages that introduced No-Cal in 1952. It would be a decade before Royal Crown would introduce Diet-Rite, to be followed eventually by Coke and Pepsi.

At its heart the diet-soda industry reflects a larger American story—a wealthy and increasingly populous nation that is willing to pay for an edible product that does not offer even calories as a benefit.

Thursday quick notes

Del Monte is buying Milk Bone and other pet food brand from Kraft (which is in one of those "dispose of non-core businesses" moods that companies get in from time to time). Del Monte bought Meow Mix just a couple weeks ago, so it looks like pet food is becoming very much core for them.

If you think I'm negative about the newspaper industry, read this guy. "It was just a year ago that I predicted ... that most major newspapers would be dead or dying by the end of this decade. Apparently, I was being conservative."

A lawyer posts on the British supermarket investigation.

The soft drink decline is going to continue, according to this audio report from Ad Age, mentioning a 1% annual drop in sales.

Healthy eating

There have been several items recently indicating that health-consciousness among consumers is having a significant effect on both retail and manufacturers. Two days ago, we posted about Whole Foods' prediction that they will more than double their sales in the next few years, from $4.7b to $12b. Yesterday we posted that Wal-Mart is planning to double the space they devote to organic products.

Today, two more such items. First, this, a report that US cigarette sales dropped last year to their lowest level in 55 years (and, since US population has almost exactly doubled in that timespan, that means that per capita consumption of cigarettes has dropped to half what it was).

And then, this: Soft drink sales in the US dropped last year for the first time in 20 years.

"The carbonated soft drink business in the U.S. has basic fundamental problems," said John Sicher, editor of Beverage Digest. "This is the first generation of children that are going to grow up not viewing soft drinks as the ultimate treat. They're growing up on things like sports drinks, water and noncarbonated drinks. As these little kids move into late teens and early adulthood, their drinking habits are going to be different than past generations."

Among the five leading brands, Coke/Diet Coke and Pepsi/Diet Pepsi were all down, but Mountain Dew was up. Corporately, Cadbury Schweppes was up slightly, while both Coca-Cola and Pepsico were down.

Coke: Channel-stuffing and channel conflict

Coca-Cola's biggest bottler and subsidiary, Coca-Cola Enterprises, has been hit by a combo insider trading and channel stuffing lawsuit, alleging that a consultant and former top executive sold his stock knowing that the stock price was inflated by channel-stuffing.

The claims mirror those filed previously against parent Coca-Cola Co. That case is still pending. According to the new complaint filed in Atlanta: "By concealing CCE's rampant channel stuffing activity, defendants failed to disclose the existence of known trends, events or uncertainties that they reasonably expected would have a material, unfavourable impact on net revenues or income."

To add to the misery in Atlanta, a group of fifty independent bottlers have filed suit against Coke's plans to sell Powerade direct to Wal-Mart.

Coke bottlers fear the move would violate their territory exclusivity and make it easier for the company to move to warehouse distribution with other products. They also contend they’ve had a contract with Coke since 1994 that prohibits warehouse delivery of Powerade to retailers.

Classic channel conflict.

Update Thursday: Here's a more detailed report from Coke's hometown paper, The Atlanta Journal.

Morgan Stanley analyst Bill Pecoriello said the rift is broader than just PowerAde and Wal-Mart.

"While the PowerAde test with Wal-Mart is small, the bottlers worry that other retailers will be next and other product categories will follow, threatening their future relevance," Pecoriello said in a report. "Coke might have to resolve this issue through additional compensation to the bottlers or other structural changes."