Saving Jones Soda

| FROM THE PRINT EDITION |
 
 

In his quirky online corporate profile, CEO Stephen Jones says he joined soft-drink company Jones Soda because “it is the real deal, … not some corporate giant that hires a kid with a piercing and tattoo to be held out as a badge of cool.”

As a former executive with Coca-Cola, Jones (who has no relation to the name of the company) should know about corporate giants in the soft-drink industry. But what he may not have been prepared for was just how “real” his experience at Jones Soda was going to be. The fact is Jones Soda—the wild child of Seattle’s growing soft-drink industry—has gone flat and just may be in a fight for its retail life.

Best known for its unique advertising campaigns and outrageous holiday packs with flavors like Turkey & Gravy (yes, a soft drink that tasted like Thanksgiving dinner), Jones Soda exploded onto the investment radar in 2006 as its ambitious founder and CEO Peter van Stolk pushed to take the fringe company mainstream.

It was everything Wall Street wanted: both a potential demographic hit with the teen and young-adult crowd, as well as a cool, edgy appeal for the counterculture. The hype machine went into overdrive, stoked by van Stolk. Jones Soda was featured on all the investment shows and publications, and the company’s share price responded, jumping from about $8 in August 2006 to a high of $32.60 per share in April 2007.

But like most companies that benefit from a meteoric rise, Jones Soda ended up crashing just as fast. Hobbled by distribution and production problems, limited marketing and an inexperienced management team, Jones Soda never saw the jump in sales that it expected. The stock went into free-fall. Van Stolk was forced out and was replaced by industry veteran Stephen Jones as the business faced mounting losses and rising expenditures. By mid-September of this year, Jones Soda’s stock price hit a 12-month intra-day low of $1.25 a share.

While the quirky brand retains a strong following, and marketing ploys have generated almost unlimited free publicity, the problem appears to be that customers aren’t buying what Jones Soda has to sell.

Now, it’s up to Stephen Jones to stabilize the brand and bring much-needed structure to the organization before the company becomes just another in a long line of forgotten one-hit wonders on both Wall Street and Main Street.

Badass beginnings

Founded in Canada in 1987 by van Stolk—a ski instructor turned businessman—Jones Soda began life as the Urban Juice & Soda Co.

Initially, Urban Juice didn’t manufacture beverages, but distributed other lines, such as AriZona Iced Tea and Thomas Kemper sodas. In 1995 and 1996, the company launched two of its own brands—Wazu Natural Spring Water and Jones Soda—and made its entrance into the “New Age” or alternative beverage category, which includes energy drinks, sport drinks, single-serve-fruit beverages and premiums sodas.

From the beginning, the Jones Soda brand was unique. Instead of a standard, ubiquitous label, Jones Soda labels featured pictures sent in by consumers. These images changed regularly, depicting ironic slices of life that added to the brand’s hip status. Early distribution for the soda was just as unusual. Rather than focus on big chain stores, Jones went where its target demographic hung out: surf, skate and snowboard shops; tattoo and piercing parlors; and music stores. The company also began using independent distributors to get the product on retail shelves in convenience stores, delicatessens, sandwich shops and select supermarkets.

By 2000, Urban Juice spun off its hot new brand into its own company, and Jones Soda was born. The new company set up shop in Seattle and began to market its drink by using “guerrilla” techniques, such as poster, sticker and hat giveaways. They also asked consumers to send in their photos to be considered for a feature spot on a label.

In addition, the company launched a tour featuring two tricked-out recreational vehicles with flames painted on the sides. The RVs visited skate parks and extreme sports venues and—sometimes without permission—local schools, so Jones staffers could hand out samples.

Jones Soda officials then hit on what turned out to be a brilliant marketing ploy: brewing bizarre, attention-getting flavors—such as Mashed Potato & Butter and Dinner Roll—for special events and holidays. There was no national advertising, just point-of-sales promotions, samplings, guerilla marketing and soon, an online presence.

The ploys worked and Jones Soda quickly developed into a recognizable brand, and behind that brand was CEO van Stolk.

By all accounts, van Stolk was a leader willing to take risks and play by his own rules. He was a visionary, he was crazy, he was excited and he could sell anything to anyone, say former employees. But they also say for all his gifts, van Stolk lacked true business sense. Where the marketing excelled, the execution failed. Ironically, despite the fact that van Stolk began his soda career in distribution, getting Jones Soda on the shelves appears to have been one of his biggest downfalls.

A can without a plan

It was 2003 when Jones Soda first garnered a national audience with its holiday-themed soda flavor, generating an unexpected deluge of free media. Also in 2003, the company expanded beyond its local distribution channels to larger, national retail outlets. Two years later, Jones landed a place on the shelves of mega-retailer Target. Sam’s Club and Wal-Mart followed in 2007. Such success led van Stolk to seek a bigger market. By 2004, the company was looking to move beyond the $16 billion alternative beverage market and toward the $70 billion carbonated soft-drinks industry, dominated by Coke and Pepsi.

Known for its distinctive glass bottles, Jones also decided to add cans to its lineup. In 2004, as part of an exclusive agreement with Target, 12-ounce cans of Jones Soda began appearing on the retailer’s shelves. Two years later, as the deal came to an end, Jones—which by then had annual sales of about $39 million—took its can plan nationwide, signing an exclusive manufacturing and distribution agreement with National Beverage Corp.

Unfortunately, that is when the real troubles began to surface. Through the arrangement, the company was to identify the retailers, secure relationships and handle all marketing and promotions. National Beverage—makers of Shasta and Faygo—would use concentrate supplied by Jones to manufacture the soda and then sell it to the retailers. Sadly, it seems, it was a can without a plan.

“When you’re a strong regional business and you go national, it’s a very complex business,” says Stephen Jones. “You have to make sure you have a strong sales force, distribution source and strong merchandising, and the company didn’t have the infrastructure for merchandising the product inside the store.”

Instead, the company went to the retailers, paid the slotting fees that get the product on the store shelves, but didn’t have the local or regional sales force to make the execution happen. That lack of support meant Jones’ drinks were often hard to find or weren’t restocked regularly. Another important problem was that Jones Soda was more expensive than its competitors and there were few coupons or special offers in the new distribution areas to lower the price or attract interest.

The canned soda also proved problematic because, according to some observers, the packaging lacked the visual appeal of the bottles. More importantly, cans were being distributed nationally, into markets that had no familiarity with Jones Soda.

Nor was Jones doing much to introduce the product to the local market. No big brand campaign or street-level efforts supported the product’s launch. According to one former member of the team, requests for such promotions fell on deaf ears. In the end, it appears the cans beat the brand to the shelves.

The result was that instead of growing the brand and opening sales to a whole new market, the cans may have ended up cutting into Jones’ bottle sales. While Joth Ricci, Jones’ COO, and others argue that cans are helping broaden brand awareness, he acknowledges there are problems: “Between the combination of the decline in the soft-drink business as a category, the economy and premium beverage products—premium items in general are seeing some softness—and then the launch of cans, probably the combination of those three factors is cannibalizing our glass business.”

Losing its fizz

By the end of 2007, Jones Soda was in trouble.

After all the hype and the new distribution deals, the expected jump in sales never materialized. Revenues had grown from $39.5 million in 2006 to $45.3 million for 2007—a nice increase, but nothing near the rise Wall Street had expected. Jones Soda was beginning to look like a regional hit that couldn’t transition to a national success.

In January, van Stolk resigned at the board’s request and was replaced by industry veteran Stephen Jones, who has an exceptional résumé. From 1986 to 2003, Jones had served in various executive positions with Coca-Cola, including chief marketing officer, director of operations in Great Britain and president of Coca-Cola Japan. He also had a stint as CEO of Coca-Cola’s Minute Maid Co. More recently, Jones became the owner of Calabria Mia Fine Foods, an Italian food producer and distributor. He also founded and was CEO of Brand Ignition Group, which works with private-equity funds to identify and acquire emerging high-growth consumer products companies. In the months before taking over for van Stolk, Jones was president and partner at Denneen Jones and Co., a Boston-based strategy consulting company.

With that kind of background, Jones appears to be the right guy to sort out the drink company’s extensive woes, which includes the bottom-line reality that they simply aren’t selling enough soda. Sales for the second quarter of 2008 were up 5.7 percent to $14 million, compared to $13.2 million in the same period a year ago. Jones reported a net loss during the quarter of $2.7 million, or 10 cents per diluted share. During the same quarter a year ago, the company roughly broke even, with a net income of $40,726. Its net revenue for the second quarter of 2008 was $11.7 million, down about $1.3 million from the same period in 2007. The net revenue was reduced in part because $2.3 million was spent on promotional allowances and slotting fees. By comparison, the company paid about $250,000 in promotional and slotting fees during the same quarter the year before.

In their second-quarter financial report, company officials acknowledged that while overall business in the Northwest and Southwest is growing, case sales of 12-ounce bottles is down. Executives say that the decline of 12-ounce bottles in the Midwest and West was likely due to the introduction of cans in those regions. Meanwhile the company was (and still is) bleeding money into regional marketing campaigns—some of which have been successful, others of which seem to be questionable.

Take, for example, the company’s highly publicized five-year agreement with the Seattle Seahawks to be the sole soft-drink supplier at Qwest Field. While financial terms of the agreement are undisclosed, rumor has it the sponsorship will cost Jones millions of dollars over five years. In exchange, Jones gets pouring rights at the field and promotional opportunities.

To some businesses, the arrangement could be a bargain, but for a company whose expenditures exceed profits, engaging in what seems like an expensive—and very regional—marketing campaign may be questionable. For their part, Jones officials are pleased with the relationship. They even won a similar contract to be the sole soft-drink provider for the New Jersey Nets when the team moves into its new Brooklyn arena in 2009. Jones management maintains that the deals will give the company national exposure, thanks to the broadcasts of the games and other promotional opportunities. “An association with the Nets will bring the brand credibility and relevance, which is essential to attracting new drinkers,” says CEO Jones. “To see the [Jones Soda insignia] in a big public forum like that gives the brand credibility.”

One deal no one seems to question is Jones’ partnership with Alaska Airlines. In April of this year, Alaska began serving complimentary canned Jones pure-cane cola, sugar-free cola, lemon-lime and sugar-free cream sodas—with additional flavors offered periodically—on all flights. For Stephen Jones, it’s the ideal way to do sampling.

“They have about 26 million fliers each year, and about 16 million of them drink a soft drink, and they’re going to drink Jones, many of them for the first time in their lives,” the chief executive says.

Still, with so much marketing focused on regional programs, it begs the question of whether Jones can gain the kind of traction necessary to gain a national audience.

Can Jones Soda pop again?

So, can Jones Soda pull out of this tailspin?

Stephen Jones believes it can. He’s implementing a strategy to build the distribution program, strengthen and streamline the sales force, and put more focus on execution. He also promises to improve the supply chain, concentrate on marketing programs that drive purchases, and invest in the equipment and systems that make the business work. But overriding all these strategies is the company’s focus on cutting costs.

Jones Soda reorganized the sales team to marry the force that sold cans with the force that sold bottles. Regional representatives are merchandising the local market, making sure shelves are stocked, keeping cold cans in the cooler and going after other local retailers. So far, the program appears to be working. Of course, all this is going to take time and money, two things that Jones Soda can’t afford to waste.

“We said when we came in here that this was an 18-month turnaround,” COO Ricci says. “In order to grow a business, we knew we were going to have to invest in some areas to make this business viable long term.”

While the company has put itself into growth mode, Nicole Miller Regan, senior research analyst at Piper Jaffray—who used to cover Jones Soda—said earlier this year that revenues weren’t keeping pace with the increase in costs. “The strategy is taking a lot longer [than expected] and there’s really not a clear path to profitability right now,” Regan told Seattle Business in an August interview.

Clearly, the company is in a bind and has to sell more soda to survive. But can it afford a new marketing push to reach a larger audience? “It’s the marketing expenditures—which they’re using to build the brand—that are weighing on the company, but if they cut costs, then they potentially lose revenue,” Regan said. “Yet if they move forward with the way they’ve been spending, then there’s no profitability until sales increase.”

In fact, at the end of the second quarter, Jones recorded a depressing situation with its overall sales. Total case sales for bottles were 940,000, down 7,000 cases from the same quarter in 2007. But the whopper was that can sales for the same quarter fell to an anemic 679,000 cases, down almost 41 percent from the same period in 2007.

In addition to distribution issues and poor marketing execution, the company may also lack focus. Jones has more than 80 flavors spread across seven different product lines—bottled soda, canned soda, natural products, organic beverages, energy drinks, 24C (a multivitamin drink) and candy.

“I think they tried to do a lot of things at once,” says Regan. “I think they’re a lot more focused today, I’ll give them that, but they did have a lot going on, whether it was bottles and cans, cans and then an energy drink, an energy drink and then the organic tea drink—whatever that thing was—and I don’t think any one product line has ever reached maturity.”

Jones isn’t done yet. The company is going back to its alternative-beverage roots with its next venture: “Gaba,” an alternative drink that will incorporate a naturally produced form of the amino acid gamma-aminobutyric acid (GABA). This new product will be on shelves early next year. Gaba, which is patented by Mitsubishi in Japan, is said to increase focus and concentration. Because Jones Soda acquired two-year exclusive rights to Gaba in 2007, the company sees it as an opportunity to establish the energy drink category and really develop it. While this drink category is growing fast and is expected to exceed $10 billion annually by 2010, Jones will have to spend money promoting the product. Some observers wonder if this isn’t one more example of Jones spreading itself too thin as it enters yet another drink category.

Buzz + love = purchases?

As far as marketing goes, the company is still primarily focusing on the online world, which caters to the young demographic that is attracted to the soft drink.

But Jones is also trying new, more elaborate promotions, including sponsoring this summer’s Boom Boom Hawk Tour, with skateboard legend Tony Hawk. The tour went to 24 markets around the country.

At the same time, the quirky holiday packs that have been a staple of the company’s guerrilla marketing strategy will take a back seat to actually creating products that consumers want.

“The other things were fun and they did a great job of putting the company on the map, but we’re probably going to spend more time on developing flavors that people want to come back and drink,” says Ricci.

Whether new promotions and restructuring can help Jones get back on its feet, only time will tell. But shareholders’ patience may be wearing thin with weak sales and a falling share price.

Jones isn’t on life support, says a former sales person, but it could be. In fact, the best bet for the struggling company and its long-suffering investors might be for a major brand to step in and buy the label. Before that would happen, Jones has some work to do, says the former employee, who wished to remain anonymous.

“They’re a great brand with a great product and a cool label,” says the former employee. “It would help if they could stabilize the company and then sell it off to Coke or Pepsi. Those guys are notorious for buying boutique brands.”

Whatever final exit strategy may develop, Jones Soda hasn’t given up its roots as a promotional dynamo. Recently, in an attempt to generate buzz around its new “pure-cane cola,” Jones launched “Campaign Cola.” The website promotion (campaigncola.com) is selling limited-edition six-packs or single bottles that bear the pictures of Barack Obama, John McCain, Hillary Clinton and Ron Paul. Consumers can “vote” for their candidate of choice by buying the beverages. Jones officials estimate that the promo has generated more than $3 million in free media coverage.

“Our goal this year is buzz, love and purchases,” says CEO Jones. “We’ve been great creating buzz for years.”

To survive, Jones Soda is going to have to prove it can complete the other two parts of that equation, as well.

“They’re a great brand with a great product and a cool label.
It would help if they could stabilize the company and then sell it off to Coke or Pepsi. Those guys are notorious for buying boutique brands.”

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