Picking a winning investment in the widening beverage industry can be a lot like playing the slots: a substantial payout seems within reach, but more often the gamble doesn’t pay out. TSG Consumer Partners has a knack for surmounting those odds to pick winner after winner.
In 2006, the San Francisco-based firm collected $677 million by selling a 30 percent stake in glaceau, makers of vitaminwater and smartwater, to Tata Tea, Ltd. The sale recouped more than 17 times its initial $40 million investment. Last year, it invested in CytoSport, maker of athletic performance drinks Muscle Milk, Cytomax and Mighty Milk. In March, it added to its portfolio MonAvie, which produces acai berry products. Both are unique offerings that TSG says have the potential to be just as profitable and industry changing.
“Innovation is 100 percent of the reason to invest in a company,” says Charles “Chuck” H. Esserman, managing director and CEO of TSG Consumer Partners. “It’s the growth engine for the beverage industry.” Unfortunately, he says, it’s also increasingly tough to find as more and more manufacturers fall back on mimicking what more successful products have done.
Esserman co-founded TSG (then known as the Shansby Group) in 1987, developing it into the first U.S.-based consumer focused equity fund. He currently supervises all its potential and current investments.
We talked to Esserman about the firm’s hunt for true innovation in the beverage industry, and why celebrity spokesmen aren’t enough to vault a product to success:
BevNET Innovation: TSG has invested in a wide range of industries, but some of your biggest successes have been beverages. What’s so appealing about this sector?
Charles Esserman: Obviously, the beverage market is fairly large. It’s mostly been about marketing as opposed to real product innovation, which creates a great opportunity for companies who have developed those real innovations. Beverages also have a great distribution system, so you can achieve critical mass quickly if you have truly innovative products.
What do you mean by more marketing than innovation?
Historically, that’s been the case – that companies have been more focused on how they can market a standard product, rather than developing a new, innovative product with tangible consumer benefits. But innovation is the growth engine for the beverage industry, I’d say. So if you take a product that’s been around and try to market it in a different way, that’s very different than what we do – which is to align ourselves with companies that have created innovative products with real consumer benefits. With respect to vitaminwater, there are advantages to their product versus carbonated beverages. With Muscle Milk, obviously the protein supplements create lean muscle mass as well as aid in muscle repair. Cytomax has 80% less sugar than other performance drinks, and its Alpha-L-PolyLactate has been proven to enhance endurance. And with MonaVie, the products they produce have a very high level of antioxidants as well as ingredients like glucosamine that provide health benefits.
How have those previous and current beverage investments shaped your view of the market, and what you look for?
Products that have real innovation and consumer benefits are few and far between, not only in the beverage industry, but also across other segments of the consumer products industry. We’re focused on finding those traits.
TSG is known for accurate trend spotting. What’s overplayed at this point?
What’s overrated is trying to sell a product based upon its celebrity appeal, or lifestyle, as opposed to its benefits.