Niche drinks gain traction in U.S. market

By Martinne Geller

NEW YORK (Reuters) - Nine years ago, Seth Goldman walked into a Whole Foods Market Inc. store with an empty bottle bearing a mocked-up label and five thermoses of iced tea he brewed in his kitchen.

He walked out with a purchase order for 15,000 bottles, the first step of a journey that has transformed him from the marketing manager of a social investment fund to the chief executive of Honest Tea, a beverage company he said will have sales of nearly $25 million this year.

Honest Tea is one of many independent drink makers carving out space in the increasingly fragmented U.S. nonalcoholic drinks market, worth about $105 billion a year, to the detriment of established companies.

With hits including Glaceau's vitaminwater, which comes in rainbow hues, and Red Bull's energy drink, agile start-ups are gaining traction as consumers seek alternatives to the traditional soft drinks sold by the industry giants.

"Unfortunately, the consumer is not cooperating with big brands the way they have in the past," said Charles Frenette, a former chief marketing officer for Coca-Cola Co. and Miller Brewing Co..

He was referring to consumers' recognition that they have many options and that different drinks suit different occasions. "The consequence is they become more promiscuous -- people are now drinking dozens of brands."

Goldman Sachs analyst Judy Hong said the beverage industry is shifting from a small number of hit products toward a huge number of niche products, which often come from start-ups that rely on word-of-mouth or viral marketing, mediums that resonate better with young consumers than the television spots long favored by their deep-pocketed rivals.

"We have thousands of brands that are introduced in one year and some of them will stick," Hong said. "That's part of why we have been seeing strong growth from some of the upstarts at the expense of the larger competitors." She added that excess production capacity and third-party distribution made the drinks industry particularly welcoming for entrepreneurs.