Vita Coco’s reinvention: How reassessing its customer base is paying off

Sitting in his New York City office just over a year after taking his nearly 20-year-old company public in 2021, Vita Coco Company co-founder and executive chairman Mike Kirban finds himself in an enviable position.

Vita Coco, best known for its namesake coconut water, has watched net sales grow more than $40 million through the first nine months of 2022 compared to the prior year despite losing out on sales from certain products being out-of-stock as a result of supply chain delays.

It’s solidly profitable amid soaring costs for labor, packaging, transportation and other expenses, and while its stock is down about 9% since its IPO following Tuesday’s market close, it’s held up far better than other firms, some of whom have seen their shares drop more than 80%.

“We fared far better compared to some of our peers,” said Kirban, decked out in Vita Coco-branded white sneakers and surrounded by bottles of his signature drink. “The brand and the category are connecting with consumers in a great way. It’s working.”

Vita Coco traces its roots back to a cold winter evening in 2003 when Mike Kirban and Ira Liran met two women from Brazil in a New York City bar.

Liran later sold everything he had, married one of the women and moved to Brazil. During a visit, Kirban found packaged coconut water as prevalent as bottled water on store shelves, and recognizing an untapped market back in the U.S., the friends worked to create the brand Vita Coco.

Nearly two decades later, the CPG known for its signature coconut water drink is setting its sights on dominating the healthy beverage space.

Today, the company’s Vita Coco coconut water is far and away the dominant leader in America retail with a 50% share — more if you include its private label business — of the almost $600 million in measured channel sales compared to 42% in 2020, according to the company. Net sales of $336 million through the first nine months of 2022 have already exceeded all of 2020.

‘We needed to reinvent ourselves again’

But coconut water hasn’t been without its share of growing pains. After years of rapid expansion, the category slowed in 2018 and early 2019 as some consumers turned to other trendier options such as hard seltzers, and retailers changed how they displayed offerings for the beverage.

In 2021, Coca-Cola sold its Zico coconut water back to its founder as the beverage giant prioritized focusing on brands that are growing and have the potential to achieve a large scale. And PepsiCo’s O.N.E. was divested in 2021 as part of the Tropicana sale. Both brands remain very small players in coconut water, each with less than 1% share, according to IRI data provided by Vita Coco, generating a small fraction of sales compared to the company’s other billion-dollar brands.

The decision by the beverage giants to withdraw or scale back how much they invest in the category meant the sudden loss of their marketing and promotion power that helped draw attention to coconut water, Kirban said. At the same time, it opened up an opportunity for Vita Coco to snag market share by accelerating innovation and reassessing who were the brand’s core customers.

Until this point, Vita Coco had focused on yoga moms and people who shopped at Whole Foods and natural specialty stores. It had proven to be a sound strategy, with sales growing to almost $300 million in 2019.

But Vita Coco hadn’t really understood its core consumer, Kirban said. The company soon found they were actually younger, urban and multicultural and pivoted its marketing approach. Today, more than half of its customers are nonwhite, a growing demographic in the U.S.

“We needed to reinvent ourselves again,” Kirban said.

Vita Coco put additional resources into giving people more reasons and occasions to drink the liquid.

The company noted people in colleges were turning to Vita Coco water to nurse hangovers, so the company built a whole campaign around similar usage occasions such as the Super Bowl and New Year’s. It touted the addition of the beverage to smoothies — a trend that picked up during COVID-19, and has stuck — and coconut milk as a replacement for its animal-based counterpart in coffee.

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“If people just kind of go sour on coconut water that would be very bad for this company, just because they’ve got most of their eggs in that one basket. But if I were one of the executives there, I don’t know if I would do anything differently because of how profitable it is for the business right now.”

Daniel McCarthy

Assistant marketing professor, Emory University

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But Kirban said one of the biggest opportunities for the company is in alcohol consumption occasions as a mixer, or as a component of cocktails on-premise. Vita Coco is working on getting coconut water stocked in bars, restaurants and clubs. It partnered with Diageo on a line of premium canned cocktails crafted with Captain Morgan rum and its coconut water that is launching this month.

“That’s the next leg of massive growth and new occasions and bringing in new consumers,” he said.

An itch for M&A

Daniel McCarthy, an assistant marketing professor at Emory University, praised the company’s profitability, strong margins and widespread distribution. McCarthy, a runner, says he uses the product and echoed broader consumer sentiment about coconut water being a flavorful, yet healthy alternative to water.

The risk for Vita Coco, which gets more than 95% of its net sales from its coconut water and oil products, is consumers sour on the beverage in favor of another trendier offering, he added.

“If people just kind of go sour on coconut water that would be very bad for this company, just because they’ve got most of their eggs in that one basket,” McCarthy said. “But if I were one of the executives there, I don’t know if I would do anything differently because of how profitable it is for the business right now.”

Michael Lavery, an analyst at Piper Sandler, said in a recent research note that his firm remains “bullish” on Vita Coco’s revenue growth, “driven by strong demand for its branded coconut water.”

Vita Coco has largely eschewed making acquisitions, instead building the company through the launch and growth of its own brands and innovation within its portfolio. But the process of starting a new brand from scratch and gaining wider distribution is time-consuming and risky, and it lacks, at least initially, the ability to generate meaningful revenue.

Kirban said one of the major reasons for going public was “to get currency, potentially to do significant M&A and start to roll up healthy beverage companies.” So far, that hasn’t happened. Elevated valuations for potential acquirers, extra shipping costs impacting Vita Coco’s margins and a low stock price that would be diluted if a transaction was consummated have proven to be a deterrent.

While conditions are improving, Vita Coco isn’t itching to do a deal, and instead is looking for a transaction that would have a meaningful “impact on the business.” Kirban said the company is targeting better-for-you beverages that have already amassed popularity in a region or retail channel that Vita Coco can quickly take and grow behind its own distribution heft.

“There are so many great little beverages out there. They don’t have the ability to do what we’re doing,” Kirban said. “We have this beautiful core business [in Vita Coco coconut water] that supports everything you see here and is growing at a great pace that gives us the time to be patient.”

A valuable learning experience

Vita Coco’s undisputed success in coconut water stands in contrast to mixed results across other brands in the company’s portfolio.

Ever & Ever, a premium water brand packaged in recycle-friendly aluminum, is expensive to produce, and its high price point makes it difficult to compete with commoditized bottled water.

Plant-based energy brand Runa, which Vita Coco purchased in 2018, was rolled out nationally soon after — a move Kirban said was premature in part because of its “somewhat polarizing” taste and insufficient marketing. The company pulled the brand back, overhauled the packaging and taste, and now is doing a more gradual rollout with some regional retailers that appears promising.

The experience proved to be a valuable learning experience for PWR LIFT, its protein-infused water, that is currently offered in Arizona and parts of North and South Carolina. Vita Coca is planning a larger regional test in 2023 that if it does well, could lead to a national rollout in 2024.

“Runa was a learning experience for us,” Kirban admitted. “Honestly, we would have done the same with Pwr Lift, and it wasn’t ready.”

Vita Coco has taken a more measured approach with its core coconut line too.

Even though the company has contemplated expanding into food categories involving coconuts such as yogurt, while it’s not “off the table,” Kirban said, its sights are focused for now on its core beverage offerings. Food products have different distribution and marketing costs, he noted, and they may venture too far away from how consumers view the brand.

“Our strength is we’ve realized that staying close to the core for the Vita Coco brand works really well,” Kirban said. “We have enough things in the pipeline.”