Who Won in the COVID-19 Lockdowns - Beverage Makers

The downside of the coronavirus pandemic and how crippling it was to certain industries has been well documented, but it should not be overlooked that some companies benefited from lockdowns and a focus on healthier habits. Beverage makers, particularly those emphasizing health and alternatives to carbonated sodas, saw a spike in sales as consumers stocked up bottled water, sports drinks and more. Higher demand created an exceptionally attractive market climate and rising revenue for The Alkaline Water Company Inc. (NASDAQ: WTER)(CSE: WTER) (Profile), the U.S.'s largest independent alkaline water company, and its Alkaline88(R) brand. Bigger peers lent further credence to the trend, as evidenced by impressive financial reports from beverage makers such as Keurig Dr Pepper Inc. (NASDAQ: KDP), Celsius Holdings Inc. (NASDAQ: CELH), NewAge Inc. (NASDAQ: NBEV) and National Beverage Corp. (NASDAQ: FIZZ), many of which have leaned on acquisitions to fuel their growth.

• With sales surging 28% in full-year 2020 to $41.1 million, WTER is now the largest independent alkaline water company in America.

• Alkaline water is an emerging market forecast to reach $1 billion by 2022.

• On average, each American drank 43.7 gallons of bottled water in 2019, contributing to $34.6 billion in industry sales.

• NBA icon Shaquille O'Neal has become an equity partner in WTER; will serve as advisor, marquee brand ambassador.

The Dominant Player in Alkaline Water

In 2019, bottled water for the fourth consecutive year was the most popular beverage in America by volume, outselling carbonated soft drinks yet again, according to Beverage Marketing Corporation; sales in 2019 reached $34.6 billion. Data from market research firm Statista shows that 88% of Americas drink water every day, and 26% buy name brand water as part of drinking, on average 43.7 gallons, of bottled water in 2019. That's about 15.3 ounces per day for every person in the country.

The megatrend the water majors are now trying to capture is the increasing consumer health consciousness towards enhanced water as a replacement for sugary drinks, a trend that was emphasized by the pandemic. Fact is that people bought more of or were introduced to value-added water for the first time during COVID-19 lockdowns for any number of reasons, and many of those consumers have now incorporated these functional beverages as part of their lifestyle.

The Alkaline Water Company Inc. (NASDAQ: WTER) (CSE: WTER) is the largest independent player in the alkaline water market with expectations of reaching $1 billion by next year. As the name implies, the Scottsdale, Arizona-based company specializes in producing drinking water with trace minerals and electrolytes. Its "secret sauce" is in using technology to offer water with an alkaline pH of 8.8, compared to a neutral pH of 7.0 for regular drinking water. The higher pH is believed by advocates to have a bevy of benefits, potentially slowing the aging process, regulating the body's pH level (neutralizing acidity commonly presented in some diseases) and deactivating pepsin, a principal culprit in acid reflux, although WTER does not make any of these claims.

In 2019, WTER widened its portfolio beyond its flagship Alkaline88 brand with the launch of six flavor-infused products branded A88 Infused(TM). The products are sold in an estimated 75,000 retail stores, which while impressive, leaves plenty of head room for growth as it represents only 8% of all retail and hospitality outlets available to consumers. Management has a goal of reaching 90,000–100,000 retail locations in the next year. Any bigger peer looking for immediate market share could leverage WTER's existing distribution — plus its direct-to-store Delivery (DSD) platform that now reaches over 10,000 customers — combine it with their network and dominate the alkaline water market segment.

Customers Keep Coming Back for More

The idea of brand awareness and lifestyle changes related to water during the coronavirus pandemic was put on full display by independent data showing 31% of the people who drank Alkaline88 during the 52-week period ended March 6, 2021, were first-time buyers. Furthermore, the research showed that almost half (47%) of the people who tried Alkaline88 during that time span purchased the water a minimum of four times.

The Alkaline Water Company checks all the boxes with respect to social culture and brand loyalty today. Millennials and younger generations are passionate about ethos and factor that into decision making about purchases and sticking with brands. The company adheres to the most stringent industry guidelines enforced by individual states, Food and Drug Administration, Environmental Protection Agency and International Bottled Water Association (IBWA). WTER was the first company in the industry to offer environmentally friendly aluminum packaging and even redesigned its ionization system to use less power and water.

Shaquille O'Neal Joins the Team

Shaquille O'Neal is known for many things, including his Hall of Fame basketball career, humor and insight as an NBA analyst and business acumen that has resulted in a branded empire. He's widely sought after to endorse products as an A-list brand influencer with a fan base of millions of followers. Shaq is in a position to be selective as to which brands he chooses to endorse. He currently stars in commercials for the General, Icy Hot, Papa John's, Epson, Ring and Carnival Cruise Lines among other tier-one brands.

As he said in a 2018 interview with HBO Real Sports, O'Neal won't promote a product unless he genuinely likes it or uses it himself.  "If I am going to sell to the people, I have to be honest to the people," O'Neal said during the interview.

That speaks volumes for Alkaline88, as Shaq recently entered a three-year partnership with the company. According to the agreement, O'Neal is now an equity partner in WTER, advisor and marquee brand ambassador. "Alkaline88 is an innovative product in the water category and I am so excited to partner with The Alkaline Water Company to help raise their game to new heights," said O'Neal. "I am humbled by the opportunity to join the Advisory Board while also being a brand ambassador."

"[Shaquille's] reputation as an astute investor, larger-than-life brand partner, and phenomenal ambassador makes this partnership extremely exciting," said Aaron Keay, Chairman of The Alkaline Water Company. "We want to welcome Shaquille to the Company's advisory board and believe his positive presence and global outreach will enable Alkaline88 to aggressively push our growth trajectory even faster."

Growing Sales and a Multiple Story

With 47% customer retention, Alkaline88 can become a household brand through additional exposure. Shaq certainly brings that to the table as a strong complement to other partnerships and team additions being made. For instance, WTER recently partnered with Hensley Beverage Company for DSD throughout the state of Arizona.

All this is translating to improved sales, including reporting record numbers in the last full year. Q4 2020 revenue totaled $12.1 million, representing 51% year-over-year growth, while sales for all of 2020 were $41.1 million, 28% higher than 2019. These sales figure are particularly relevant in the food and beverage industry as a quantifiable metric of value. Beverage companies traditionally sell between four to six times gross revenue.

In Q3 fiscal 2021, which ended December 31, 2020, the company reported record revenue of $10.2 million, up 20% from a year earlier. Even factoring zero growth resulting from WTER's recent partnership announcements, which seems extremely unlikely, the company's FY 2021 forecast would be approximately $41 million, holding steady with last year's performance. Currently, WTER's market cap is an estimated $105 million, or 2.5x gross revenue. In a market that has seen segment leaders such as Core (see below) and Essentia (by Nestle) acquired at highly favorable multiples, The Alkaline Water Co. stands out as a potentially undervalued takeover candidate.