EQUITY RESEARCHINDUSTRY UPDATE

Health & Wellness

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Companies mentioned:

BRFH BuyTarget Price: $2.00Closing Price: $0.54Market Cap (M): 64Avg. Daily Volume: 54

FIZZ SellTarget Price: $40.00Closing Price: $95.16Market Cap (M): 4,434Avg. Daily Volume: 319

NBEV BuyTarget Price: $7.50Closing Price: $2.34Market Cap (M): 80Avg. Daily Volume: 322

REED BuyTarget Price: $3.50Closing Price: $1.78Market Cap (M): 27Avg. Daily Volume: 55

Anthony Vendetti(212) 895-3802avendetti@maximgrp.com

November 7, 2017

The Trend Towards Healthy Functional Drinks Representsthe Future of the Beverage IndustrySummary

• In this report, Maxim Group analyzes the non-alcoholic beverage industry, witha focus on the health and wellness trend within the space.

• Industry data shows that better-for-you beverage categories are growingsignificantly faster than traditional sugary drinks.

• In general, consumers are increasingly demanding beverages that are free ofunhealthy ingredients, and provide some level of function or health benefit.

• We believe we are on the cusp of a major secular shift in the market. In ourview, the beverage market should continue to evolve so that overall growth isdriven mostly by clean and healthy functional products.

• We delineate the market into 10 beverage categories and describe trends,brands, and points of differentiation that characterize each space.

DetailsHealthy functional beverages. Maxim Group covers the Health and Wellnessindustry, which is currently comprised of better-for-you food, snacks, and beverages.The focus of this industry report is on the beverage market, excluding alcoholicdrinks, and how the healthy functional trend has affected and continues to shape thestate of the industry.

Consumers are demanding healthier drinks. We believe the industry is in themidst of a secular shift away from sugary drinks towards better-for-you beverages.According to Beverage Marketing Corporation (BMC), carbonated soft drink (CSD)volume has declined every year since 2004, and is expected to decrease at a 1.6%CAGR through 2020. Other sugary drinks like juice and sports drinks are expected tobe relatively flat in the U.S., with estimated growth rates of 1.3% and 1.1% accordingto IBISWorld and Euromonitor, respectively. Meanwhile, sales of bottled water areexpected to grow at a 7.6% CAGR in the U.S. through 2021, according to Mintel, andit has already surpassed CSDs as the highest-volume drink in the U.S. according toBMC. Functional categories such as dairy-alternatives and coconut water are alsogrowing faster than the industry, with projected global growth of 13.3% and 26.8%,according to Allied Market Research and Technavio, respectively.

Function is now an essential part of beverages. The aforementioned growthrates illustrate that consumers, especially in developed countries like the U.S., aredemanding more from their beverages. For the health-conscious population, webelieve it is no longer sufficient to offer a good-tasting and hydrating product. In ouropinion, many consumers have evolved to not only require that their beverages befree of harmful contents, such as high levels of sugar or artificial ingredients, butalso demand additional function. Beverage companies, both large and small, havedeveloped and acquired products that provide a wide range of functional ingredients,such as electrolytes, antioxidants, and probiotics, as well as many other vitamins andminerals. Products now seek to provide energy, vitality, immunity, and cardiovascularhealth, and are advertised as organic, non-GMO, all-natural, sugar-free, low-calorie,and pH-balanced. We expect this trend to continue as consumers become moreeducated on the effects that their beverage choices have on their health.

In this industry report, Maxim Group explores 10 major categories within the non-alcoholic beverage market, estimated at $1.6 trillion, in order of estimated globaldollar share. We discuss the key trends, brands, and points of differentiation thatcharacterize each segment, and analyze how the health and wellness movement hasimpacted the market. The categories are: CSDs, water, juice drinks, dairy and dairy-alternatives, energy drinks, ready-to-drink (RTD) tea, sports drinks, RTD coffee,smoothies, and coconut water.

SEE PAGES 23 - 26 FOR IMPORTANT DISCLOSURES AND DISCLAIMERS

Industry Overview

The global non-alcoholic beverage industry was $1.55 trillion in 2015, according to Mordor Intelligence, and is

expected to grow at a 4.3% CAGR during 2017-2022 to a size of $2.03 trillion. The U.S. market was $195B in 2016

according to TechSci Research and is projected to grow at a 3.0% CAGR during 2017-2022 to reach $238B. According

to the June 2017 edition of Beverage Industry Magazine, the three largest non-alcoholic beverage companies in 2016

were The Coca-Cola Company (KO – NR), PepsiCo Inc. (PEP – NR), and Nestlé SA, with $41.9B, $30.1B, and $24.5B

of annual sales, respectively. Other notable companies that compete solely in packaged non-alcoholic beverages

include Danone Group, with $9.2B of 2016 revenue when accounting for its acquisition of WhiteWave Foods Company;

Red Bull GMBH with $6.5B; Dr. Pepper Snapple Group (DPS – NR) with $6.5B; and Campbell Soup Company (CPB –

NR) with $4.8B. The top brands by estimated value according to BrandFinance (Beverage Industry, June 2017) are

Coca-Cola ($34.2B), Pepsi ($18.9B), Red Bull ($6.5B), and PEP’s Gatorade ($4.1B).

Decline of unhealthy drinks. Maxim Group has observed a clear secular shift among consumers away from

beverages containing large quantities of sugar, significant calories, and artificial ingredients. We believe this change in

consumer attitude and buying patterns has led to stagnant or decelerating growth in traditional sugary drink categories

such as carbonated soft drinks (CSDs), juice drinks, and sports drinks, as well as for specific companies, brands, and

products that include unhealthy ingredients. In our opinion, this shift has already significantly impacted the market, as

bottled water, which is typically all-natural, zero-calorie, and sugar-free, has surpassed CSDs to become the largest

beverage category by volume in the U.S. according to Beverage Marketing Corporation (BMC). This healthy trend is

also reflected in the recent growth in popularity of organic beverages. According to Grand View Research, the global

organic beverage market is currently $18B, or just 1.2% of the overall beverage market, but it is expected to grow much

faster than the industry at a 13.1% CAGR, and to reach a size of $55B by 2025.

Sweeteners represent a key health issue. We believe that most traditional beverages are sweetened with either high-

fructose corn syrup (HFCS) or sugars like sucrose. However, consumption of these ingredients has been linked with

numerous health issues including obesity, diabetes, and heart disease. Artificial sweeteners like aspartame, often found

in diet beverages, are also widely considered unhealthy. We believe that this has led to a consumer shift, as 22% of

Americans now restrict their sugar intake and 52% avoid artificial sweeteners, according to Nielsen (Wall Street Journal,

10/16/17). In our view, this trend presents an opportunity for both unsweetened beverages and drinks sweetened with

healthy natural ingredients like stevia leaf extract. However, the challenge remains on healthy beverage brands to

formulate products with taste profiles that appeal to the consumer without using the unhealthy additives that were once

a staple of the industry.

Rise of functional beverages. We believe that consumers are not only avoiding potentially harmful beverage

ingredients, but are also demanding increased healthy function from their drinks. In our opinion, much of the population

now views non-alcoholic beverages as a means to improve personal health and fitness, rather than simply as a thirst

quencher. In our view, this shift has created significant growth opportunities within smaller pockets of the industry for

products that offer better-for-you alternatives to traditional drinks. Specifically, we see growth coming from beverages

that offer benefits such as increased energy, better gut health, efficient hydration, and a boosted immune system.

Increased acquisition activity. In our opinion, the health and wellness trend has also led to changes in the competitive

structure of the market. In an effort to keep up with the secular shift to healthier drinks and reinvigorate growth, larger

beverage companies have been systematically acquiring smaller, fast-growing, healthy beverage brands at premium

valuations. To illustrate, within the last 12 months, DPS purchased antioxidant beverage-maker Bai Brands for $1.7B,

PEP acquired kombucha brand KeVita for an estimated $200M, and KO bought sparkling water Topo Chico for $220M.

Although we believe that the major players in the industry are also focused on developing their own healthy beverages,

smaller brands appear to have had more success in gaining widespread consumer acceptance of their products. In our

opinion, many of these smaller companies have been more innovative with product development, and have been aided

by what we believe is a positive perception among health-conscious consumers for smaller brands that are independent

of large corporations. Therefore, we expect new better-for-you brands to continue to emerge, while acquisition and

consolidation should remain a theme within the industry for the foreseeable future.

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Carbonated Soft Drinks

Carbonated soft drinks (CSDs) represent the largest beverage category by dollar sales, both in the

U.S. and internationally. However, growth in the segment has been flat-to-down in recent years as in

our opinion the secular shift towards healthier beverages has created significant headwinds for

traditional CSDs. Although we expect this trend to continue, we do see opportunity for better-for-you

CSD brands to convert consumers seeking the familiar soft drink taste profile without the associated

health consequences. From a competitive standpoint, the segment is dominated by KO, PEP, and DPS,

which collectively hold an 87% market share according to German market research portal Statista. In

our opinion, the scale and investment behind the leading CSD brands present significant challenges for

any smaller competitors seeking to increase market share in the space.

CSDs are sweetened carbonated beverages offered in a wide range of flavors. According to British

business intelligence company Euromonitor (Beverage Industry, July 2017), cola is the most popular

flavor at 44.3% of 2016 off-trade CSD sales, followed by lemon/lime and orange, which represent 9.0%

and 5.5% of the segment, respectively. Other notable flavors include root beer, red soda, and a variety

of other fruits. Traditional CSDs are sweetened with either high-fructose corn syrup (HFCS) or sugar,

while low-calorie sodas keep sugar content in check by using alternative natural or artificial sweeteners.

Moreover, CSDs are often colored with natural or artificial dyes to both improve visual appeal and better

represent the specific flavor of the particular drink. Although the functional benefits of CSDs are limited,

the beverages often contain high levels of sugar and caffeine, which provide a form of energy to the

consumer.

Consumption of sugary soft drinks has been shown to result in several negative health outcomes,

which, according to Harvard’s T.H. Chan School of Public Health, include an increased risk of obesity,

type 2 diabetes, heart disease, and other chronic conditions. Moreover, the artificial ingredients in many

low-sugar and low-calorie CSDs are linked to additional health risks. We believe that awareness of

these negative side effects is growing, and that this is the primary cause of declining demand for CSDs.

In our view, this shift away from unhealthy drinks is especially evident in developed markets such as the

U.S. where consumers are generally better-educated on the health consequences of their food and

beverage choices.

The global market for CSDs is currently $359B according to Indian market research firm Mordor

Intelligence, and is forecasted to grow at a 2.7% CAGR during 2017-2022 to a size of $411B. Although

dollar sales have been slightly up for the segment, CSD volume grew at just a 0.1% CAGR during 2011-

2015 according to industry research firm MarketLine, further illustrating the headwinds facing the

category.

The U.S. market for off-trade CSDs was $39.4B in 2016 according to Euromonitor (Beverage Industry,

July 2017). According to information and measurement company Nielsen (Beverage Industry, July

2017), soda sales declined at a 1.1% CAGR during 2011-2016. Moreover, according to BMC, CSD

volume has decreased in each year during 2004-2016, and is expected to continue to decline at a 1.4%

CAGR during 2016-2020.

Major companies include KO, PEP, and DPS. These three companies comprise 87% of the market.

The CSD segment is dominated by the offerings of the big three soda companies, KO, PEP, and DPS,

which control 42.5%, 27.0%, and 17.3% of the U.S. market, respectively, according to Statista. Each

company sells a number of brands spanning a wide range of CSD types and flavors. In our opinion,

these three companies have utilized their scale and marketing capacity to elevate their portfolios’ brand

recognition and to create significant gaps between their brands and those of smaller-scale competitors.

As a result, we believe that other players in the space have positioned their portfolios to avoid direct

competition with these brands, with Cott Corporation (COT – NR) opting to produce primarily for private

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label, and National Beverage Corp (FIZZ – $95.16 – Sell) selling and pricing its CSD brands, such as

Shasta and Faygo, as discount versions of the more popular names.

Figure 1. Leading CSD Brands

Source: Amazon.com

Although all-natural soft drinks make up a small fraction of the CSD segment, they appear to have

bucked the overall downward trend and are growing at 16% annually according to Nielsen (Beverage

Industry, July 2017). Notable names in this subcategory include Reed’s (REED – $1.78 – Buy), which

produces all-natural ginger brews and craft sodas, as well as Zevia, which sells zero-calorie sodas

sweetened with stevia leaf extract. These brands face heavy competition within the CSD space, and we

believe that it is very difficult for them to gain significant market share. However, we believe that the

growth potential is incrementally higher for CSD brands that can provide the taste profile desired by

CSD consumers while also mitigating the negative health consequences associated with traditional

sodas.

Key factors for success include economies of scale, brand equity, and the perception of health

benefits. Because the CSD segment is so large, economies of scale play a major role in the success of

individual companies. Specifically, larger competitors can generally achieve significantly lower input

costs though bulk purchasing, gain prime shelf space for a broad range of products by leveraging

retailers, and build extensive brand recognition by allocating tremendous sums of money to their

marketing budgets. In our opinion, marketing is a critical factor. The major CSD companies have built

strong brand equity by investing significant advertising dollars behind their brands, and we believe this

drives consumers to their products even in the absence of a noticeably better quality product, taste

profile, or price point. Despite this, we believe that better-for-you CSD brands can still gain some

competitive advantage by offering incremental health benefits. However, we would expect this to be

partially offset by larger brands marketing less-healthy products as better-for-you. This strategy is

evident in the success of many diet and zero-calorie CSD products, which to a large degree have

attained the perception of being healthy, despite potentially being as harmful as, if not worse than,

regular CSDs.

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Water

Water is now the most popular drink in the U.S. by volume, according to BMC (Beverage Industry, July

2017). We believe category growth has been primarily driven by the secular shift towards healthier

beverages. Although most bottled water products do not contain functional ingredients, they are

typically free of any of the unhealthy ingredients contained in CSDs and other sugary drinks. Three

major beverage companies, KO, PEP, and Nestlé SA, own leading brands in the segment, but are less

dominant than the major players in CSDs with a combined 58.1% of flat water sales and 21.5% of

sparkling water sales, according to IRI. (Note: All IRI data referenced in this report is for multi-outlets

during the 52 weeks ended May 14, 2017). As a whole, the bottled water market is less heavily

concentrated, and a number of smaller, independent and niche brands control significant share.

Traditional bottled water can be differentiated on taste, purity, and price. Although water is essentially

tasteless, we believe that consumers do prefer certain brands due to relatively subtle differences in

taste profile. Moreover, we believe that certain water brands are perceived as more pure or clean than

others, often due to their source – tap, spring, or artesian – or their purification method – filtration or

distillation. Some brands also tout added functional benefits and features such as electrolytes,

probiotics, and pH balance. To a lesser extent, according to IRI, 88.7% of bottled flat water sales come

from single-serve bottles, with bulk multi-serve bottles making up the remaining 11.3%.

Sparkling water is a fast-growing subcategory of the bottled water segment, and it currently makes up

16.0% of overall water sales according to IRI. The carbonation in these beverages can be appealing to

health-conscious consumers seeking a more complex taste profile than still water. Moreover, many

sparkling water products are flavored, often with subtle natural or artificial flavoring that maintains the

purity of taste and clean label ingredients. However, some brands such as Sparkling Ice use natural or

artificial sweeteners to produce a more noticeable and intense flavor, resulting in somewhat of a hybrid

between traditional water and CSDs.

The global market for bottled water was $185B in 2015 according to Mordor Intelligence, and is

expected to grow at an 8.5% CAGR through 2022 to approximately $334B.

The U.S. market for bottled water was $16.5B in 2016 according to market intelligence firm Mintel

(Beverage Industry, July 2017), and is expected to grow at a 7.6% CAGR to $23.8B by 2021. Sparkling

water has outpaced the overall category, with 16.0% year-over-year growth according to IRI, compared

to 6.1% year-over-year for still water. BMC expects this trend to continue and projects sparkling water

growth of 20% in 2017.

Major brands for still water include KO’s Dasani and smartwater, PEP’s Aquafina, and Nestlé’s Pure

Life and Poland Spring. For sparkling water, leading brands include Sparkling Ice, FIZZ’s LaCroix, and

Nestlé’s Perrier and San Pellegrino.

Nestlé is the largest seller of bottled water in the U.S. with $4.22B of sales according to IRI,

representing a 27.7% share of the market. It owns numerous nationally- and regionally-distributed flat

and sparkling water brands including Nestlé Pure Life, Poland Spring, Deer Park, Ozarka, Ice Mountain,

Zephyr Hills, Arrowhead, Perrier, and San Pellegrino, each of which generated at least $100M of annual

U.S. sales according to IRI. KO controls 18.0% of the market with its Dasani brand, as well as through

its ownership of the Glaceau vitaminwater and smartwater brands. PEP holds 7.3% of the market with

its Aquafina brand, while Crystal Geyser has notable 6.5% share in bulk, despite just a 1.3% share in

single-serve. Moreover, private label plays a significant role in the category, making up 24.3% of flat

water and 20.2% of sparkling water sales.

Although most of these larger companies offer both still and sparkling water products, three of the top

five sparkling brands – Sparkling Ice, LaCroix, and Polar – are owned by relatively smaller companies.

Sparkling Ice, which holds 19.1% market share of the sparkling water subcategory according to IRI,

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contains added sweeteners. Therefore, we view it as more of a CSD/water hybrid than as traditional

seltzer water. However, both LaCroix and Polar, which control 14.5% and 5.6% of the subcategory,

respectively, offer a wide range of naturally-flavored sparkling waters with no calories or sweeteners.

These two brands were also among the fastest-growing, with 66.9% year-over-year growth for LaCroix

and 23.2% year-over-year growth for Polar, according to IRI. However, we expect the sparkling water

subcategory to become more concentrated as the major players in bottled water target fast-growing

sparkling brands for acquisitions. In fact, consolidation has already begun with KO’s October 2017

purchase of Topo Chico, the sixth-largest brand in the subcategory with $70.3M of sales according to

IRI, for a reported $220M.

Figure 2. Leading Still and Sparkling Water Brands

Source: Amazon.com

We believe that the health and wellness trend has driven consumers to bottled water in general, but has

also led to growth of the functional water subcategory in particular. For instance, we believe that pH-

balanced water is growing in popularity due to the perceived health benefits of drinking alkaline water

that closely matches the human body’s optimal blood pH. In our opinion, The Alkaline Water Company’s

(WTER – NR) Alkaline88 brand has benefitted from this trend, as evidenced by WTER achieving at

least 80% year-over-year revenue growth in each of its last four fiscal years (ending March 31) to reach

an annual run rate of roughly $20M. Functional waters can also contain added ingredients such as

probiotics, which are believed to improve gut health. Although probiotics are most frequently found in

dairy products or in fermented teas, New Age Beverages (NBEV – $2.34 – Buy), has developed a shelf-

stable probiotic water under its Aspen Pure Probiotic brand. Other functional additives include vitamins,

minerals, antioxidants, and electrolytes. We believe that functional waters will grow faster than the rest

of the category, as they offer consumers the purity and clean taste profile of water, plus the health

benefits that have traditionally only been provided by products in other beverage segments.

Key factors for success include price, purity, flavor, and function. Bottled water is relatively cheap to

produce and the differentiating factors between traditional brands are subtle. We believe this opens the

door for significant price competition and strategy. Brands generally choose to position their products as

either discount or premium water, and in the latter case, must justify to consumers the value added by

their product. These benefits include superior flavor, either through subtle differences in purity and taste

profile for traditional waters, or more noticeable taste differences among flavored waters. Function has

also become a crucial differentiator for premium brands, especially as more consumers seek additional

health benefits from their beverages.

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Juice Drinks

Juice drinks is another beverage segment that we believe has experienced slower growth due to the

secular shift away from sugary drinks. Although sweeteners are rarely added to juice drinks, the

beverages typically contain high levels of naturally-occurring sugar and significant calories. As we

observed in CSDs, the trend away from juice drinks appears to be most pronounced in developed

markets like the U.S., where current per capita consumption is high but forecasted volume growth is

low. The segment’s competitive landscape is controlled by four major beverage companies: PEP, KO,

CPB, and DPS, which own leading brands that collectively represent 67% of the market, according to

IBISWorld (Beverage Industry, January 2017).

Juice drinks are beverages created by extracting the natural liquid contained within fruits. The segment

includes products ranging from 100% squeezed juice to fruit-flavored beverages with minimal juice

content. Currently, orange juice is the most popular juice drink, representing approximately 37% of off-

trade volume sales in 2015 according to IBISWorld (Beverage Industry, January 2017). Other popular

juices include apple, grape, pineapple, grapefruit, and mixed fruit juice. We believe that consumers

have traditionally consumed juice drinks for their sweet taste, as well the perceived health benefits.

Many fruit juices do contain vitamins and minerals, most notably orange juice, which provides vitamins

A and C, as well as potassium, fiber, folate, and magnesium.

In our opinion, consumers are becoming more aware of the high sugar content in juice drinks and the

associated negative side effects. Therefore, we believe much of the health-conscious population is now

seeking the function they traditionally got in juice drinks from alternative beverage categories. We view

this trend as one of the primary factors contributing to the relatively flat growth in this segment, and we

anticipate that this shift will continue to negatively affect juice drink sales. Nonetheless, we believe that

certain premium juices have experienced better growth than the segment as a whole, specifically cold-

pressed juice, which is extracted from the fruit using a hydraulic press and is typically free of added

ingredients. The shift in product mix towards higher-priced premium juice led to a 2% year-over-year

increase in average unit prices for juice drinks in 2016, according to Euromonitor. In our opinion, this

illustrates that consumers are turning to premium offerings in their pursuit of better-for-you juices.

The global market for juice drinks was approximately $82.4B in 2015 according to Goldstein Research,

a U.S.-based market research and consulting company. According to market research firm IMARC, the

segment has been experiencing slow growth, with just a 1.6% CAGR during 2009-2016. Looking

forward, Goldstein Research projects a 3.4% CAGR during 2016-2024 to reach a size of approximately

$111B.

The U.S. market for juice drinks was $20B in 2016 according Mintel (Beverage Industry, January

2017). According to Euromonitor, per capita consumption has fallen significantly over the past 15 years

to 33L in 2016, from 47L in 2002. Going forward, IBISWorld projects a 1.3% CAGR for the category to

reach an implied size of $21.3B.

Major brands include PEP’s Tropicana, KO’s Simply Orange and Minute Maid, and Ocean Spray.

The juice drinks market is fragmented by product offerings from major beverage corporations including

PEP, KO, CPB, and DPS, which control 40.9%, 12.1%, 8.5%, and 5.3% of the juice drinks market,

respectively, according to IBISWorld. PEP owns Tropicana and maintains a partnership to sell and

distribute several Ocean Spray-branded juice products, while KO owns Simply Orange and Minute

Maid. Each of these brands generates over $1B in annual revenue, according to IRI. Other notable

brands include V8 and Bolthouse Farms, both of which are owned by CPB, PEP’s Naked Juice,

Welch’s, Florida’s Natural, and DPS’s Mott’s.

Smaller competitors have taken advantage of the increasing demand for premium juices. According to

BMC, sales of super-premium juice grew to $2.2B in 2016, from $582M in 2000, and it expects the

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subcategory to grow at a 9.8% CAGR to $3.2B by 2020. Notable smaller brands with premium product

offerings include Suja Juice and Daily Greens, which offer organic, cold-pressed fruit and vegetable

blends that are popular among consumers interested in a juice cleanse.

Figure 3. Leading Juice Brands

Source: Amazon.com

We believe juice has traditionally benefitted from the perception of being a relatively healthy drink due to

its relatively clean label and significant vitamin content. However, according to a June 2014 study in the

journal Nutrition, the average fruit juice contains the sugar fructose at 91% the concentration of the

average soda. Moreover, certain juice products like Minute Maid’s 100% apple juice contain more

fructose than popular CSDs like Coca-Cola and Dr. Pepper. This is especially troublesome for children,

which represent an important demographic within the category. The American Heart Association (AHA)

suggests that children aged two to 18 should consume under 25 grams of sugar per day, but orange

juice typically contains over 20 grams of sugar in an eight ounce serving, according to the United States

Department of Agriculture (USDA). In our opinion, consumers are becoming better-educated on the

harmful contents of the juices they purchase and consume, and we believe this has been a major

headwind for the category. We see juices losing the health-conscious consumer to bottled water and

other smaller niche healthy categories, in addition to losing the health-indifferent customer to CSDs.

Moreover, we believe low-sugar and low-calorie juices are difficult to produce due to the sugar and

calorie content that naturally occurs in fruit. Therefore, we expect growth of juice drinks to remain

relatively stagnant as the secular shift to better-for-you beverages continues to manifest.

Key factors for success include offering clean label and organic products, and selling differentiated

flavors. While sugar content continues to be a major issue for juice drinks, we believe brands can

partially address the health and wellness trend in other ways. Specifically, we expect 100% juice

products to outperform those with added ingredients as consumers trend towards clean label

beverages. Moreover, we believe brands can take advantage of the growing popularity of organic and

non-GMO food products. Finally, we believe juice manufacturers can better position their portfolio by

broadening their product lines with exotic fruit flavors as well as new juice blends. We believe these

features could allow brands to charge premium prices for their products in an effort to offset downward

volume pressures in the segment.

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Dairy and Dairy-Alternatives

Dairy drinks have experienced decelerating growth over the past several years, and we believe the

segment is losing share to increasingly popular dairy alternatives. We expect dairy drink sales to be

relatively flat over the next few years, due in part to an aging U.S. population. According to the Centers

for Disease Control (CDC), the nation’s fertility rate is 59.8 babies per 1,000 women aged 15-44 years,

the lowest number in the nation’s history. In our view, this could contribute to lower levels of milk

consumption, as children account for a large proportion of the dairy consumer base. On the other hand,

according to Mintel, segment growth has been largely driven by the rising popularity of non-dairy milk.

We believe that plant-based dairy-alternatives should continue to represent the growth opportunity

within the overall segment.

Dairy drinks are beverages primarily produced from the milk of cattle. Dairy milk can come in varieties

including whole, reduced-fat (2%), low-fat (1%), skim (0%), and lactose-free. Milk is a source of protein,

calcium, and vitamins as well as macronutrients such as phosphorous, potassium, riboflavin, and niacin.

Plant-based, dairy-free alternative drinks, such as soy, almond, coconut, and rice drinks have also

become popular as we believe consumers are growing more sensitive to environmental and

sustainability concerns surrounding dairy products. These dairy-alternative beverages are generally

made from plants and vary widely in their macronutrient and micronutrient compositions. However,

despite the rising popularity of dairy alternatives, dairy-based beverages still provide substantially more

nutrients, with one eight-ounce serving of milk containing eight grams of protein compared to only one

gram for almond milk.

While dairy drinks do offer the aforementioned health benefits, they do face a number of hurdles among

consumers. Specifically, according to the NIH, approximately 65% of the human population has a

reduced ability to digest lactose. Moreover, according to the United Nations Food and Agriculture

Organization, livestock accounts for almost 18% of global greenhouse gas emissions, more than

transportation. Moreover, the livestock sector is believed to be a major cause for land and water

degradation. We believe this has resulted in a shift away from animal products and towards vegan or

plant-based foods. In our view, although dairy-alternatives generally contain fewer nutrients than their

counterparts, they do offer some healthy benefit while also benefitting from this movement. Overall, we

believe the health and wellness trend has led brands to produce dairy and dairy-alternatives with added

functional health benefits, most commonly probiotics, which are perceived to improve overall health.

The global market for dairy and dairy-alternative beverages was approximately $80.4B in 2016. This

includes $70.2B in dairy sales according to Technavio, and this subcategory is projected to grow at a

3% CAGR to reach $79B by 2020. The market also includes $10.2B in dairy-alternative sales according

to Allied Market Research, and this subcategory is projected to grow at a 13.3% CAGR to reach $21.7B

by 2022.

The U.S. market for dairy and dairy alternative beverages was $16.8B, relatively flat year-over-year,

according to IRI. Dairy milk has declined at 1% CAGR during 2011-2016, according to Euromonitor.

Looking forward, Mintel expects dairy milk sales to decline at a 2.3% CAGR during 2015-2020. On the

other hand, non-dairy milk sales are expected to continue to grow faster than the overall segment.

According to Mintel, the market for dairy-alternatives is projected to grow at an 8.5% CAGR to reach

$3B by 2020.

Major brands include Dean Foods’ (DF - NR) Dairy Pure, Horizon, and Hood for dairy milk, as well as

Silk and Blue Diamond for dairy-alternatives.

According to Euromonitor, DF led overall dairy milk sales in 2016 and has become the top brand

through acquisitions, product development, and marketing campaigns. The dairy milk market is highly

fragmented with most brands only sold regionally. However, DF consolidated its regional brands,

Dean’s Mayfield and Garelick Farms, into national brands, most notably its market leading Dairy Pure

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that generated $2.6B of sales in 2016, according to Euromonitor. Danone’s Horizon and HP Hood’s

Hood brand are the other major national players in the dairy space. Notable innovative brands within the

dairy milk category have attempted to address lactose sensitivity and intolerance. These include

Lactaid, a lactose-free milk, and a2 Milk, which eliminates a form of proteins that cause the negative

reaction. The dairy-alternatives market is led by Danone’s Silk and the independent Blue Diamond

brand, which hold the top two spots on the market, according to IRI.

Figure 4. Leading Dairy and Dairy-Alternative Brands

Source: Amazon.com

Protein drinks represents a notable sub-category within the dairy segment, and are commonly marketed

as a workout supplement that aids muscle development. The most popular animal sources of protein

are whey concentrate, whey protein isolate, and milk protein. However, in our opinion, the vegan and

the health and wellness trends have led to the development of new protein drink variants. Specifically,

many animal protein drink brands are marketed as containing protein from grass-fed cows and free of

artificial growth hormones, and plant-based alternative proteins have also become more commonplace.

We see protein drinks benefiting from a shifting consumer base beyond hardcore bodybuilders and

athletes. According to the 2016 Food and Health Survey from the International Food Information

Council Foundation (IFIC), 64% of Americans sought to include protein in their diets, a statistically

significant increase over 2015. Therefore, in our opinion, there is a significant growth opportunity for

protein drinks to become a more popular drink among mainstream health-conscious consumers who do

not identify as athletes or bodybuilders per se.

Key factors for success include brand repositioning, highlighting health benefits, and diversifying

within the category. We believe the dairy segment has been hurt by the animal rights movement, as it is

important for brands to position themselves as humane producers. Moreover, we believe brands can

significantly grow their potential customer base by offering dairy products designed for lactose intolerant

consumers. We also believe it is increasingly important for dairy brands to highlight the functional

benefits of their products, especially compared to dairy-alternatives. However, the consumer trend

appears to favor non-dairy milk, and we expect the most successful companies within the space to offer

a diverse range of both dairy and non-dairy milk products to capture a wide range of consumers. In our

opinion, non-dairy brands can best capture market share by offering products across the wide range of

dairy-alternatives to appeal to a wider consumer base.

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Energy Drinks

Energy drinks have exploded in popularity in the U.S. since the turn of the century. According to

Euromonitor (Quartz, March 2014), U.S. energy drink sales increased 5000% during 1999-2013,

representing an approximately 30% CAGR over the 15 years. According to the National Center for

Complementary and Integrative Health (NIH), energy drinks are now the second most popular dietary

supplement among U.S. teens and young adults, trailing only multivitamins. From a competitive

standpoint, this segment is one of the few in which KO and PEP are not among the major competitors.

In fact, the market-leading companies in the space are narrowly focused on energy drinks and adjacent

products. We believe that the relatively recent and rapid growth in popularity of the beverages created

opportunities for well-positioned independent companies to beat out the established beverage giants

and gain widespread consumer adoption.

Energy drinks are beverages that contain significant quantities of stimulants intended to promote

alertness and physical performance for the consumer. They generally have more caffeine than coffee or

CSDs, and usually contain additional energy-generating ingredients such as guarana, taurine, ginseng,

B vitamins, and L-carnitine. These additives often have a bitter, sour, or tart taste profile, and brands

attempt to mask this by adding HFCS or sugar in traditional products, as well as other natural or artificial

sweeteners in low-calorie versions. As a result, most energy drinks have a relatively nondescript sweet-

tart flavor, which we do not believe is a major selling point for the beverages. Energy drinks are also

typically carbonated, although some brands do offer flat products.

In our opinion, the functional benefit is the most important factor for energy drink consumers, although

in this case, function should not be conflated with health. There are significant health concerns

regarding the rising popularity of beverages that contain large and concentrated quantities of caffeine

and other stimulants. According to the World Health Organization (WHO), energy drinks have a

potential negative effect on children, and could potentially cause a significant public health problem in

the future. Another health risk involves the combination of energy drinks with alcohol, which has

become a popular trend among younger demographics. This cocktail can lead to greater physical or

psychological effects, and can mask the depressant effect of alcohol allowing the consumer to remain

more alert and potentially consume additional and perhaps unsafe quantities of the drink.

The global market for energy drinks was approximately $43B in 2016 according to Grand View

Research. Looking forward, Technavio projects an 8.9% CAGR during 2017-2021, implying that the

market will reach a size of $65.9B. Grand View Research also provides a longer-term forecast,

estimating that the market will grow at a 7.0% CAGR through 2025 to reach a total size of $84.8B.

The U.S. market for energy drinks was estimated at $10.5B in 2015 by Grand View, and according to

IRI, grew 4.0% year-over-year to reach $11.1B. BMC (Beverage Industry, July 2017) projects 7.1%

CAGR through 2020, with the market reaching a size of $18.5B.

Major brands include Red Bull and Monster Energy.

According to IRI, 76.4% of the U.S. market is controlled by two companies: Austrian corporation Red

Bull GmbH and MNST. The Red Bull brand has a slight market leadership position at 38.7%, but also

maintains a major international presence. The company claims to have sold 6.062B cans of energy

drinks across 171 countries in 2016. Its products include its flagship self-branded energy drink, as well

as sugar-free, zero-calorie, and fruit-flavored versions.

MNST is Red Bull’s biggest competitor in North America, with its Monster Energy brand controlling

33.0% of the U.S. market. However, the brand’s presence outside of North America is limited. Monster’s

product offering is more diverse than that of Red Bull, with over 30 drinks across seven different product

lines. These lines include the traditional energy drink products, as well as energy drinks combined with

tea, juice, punch, or additional stimulants. Aside from the Monster Energy brand, MNST also owns Full

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Throttle and NOS Energy, which control 3.8% and 1.1% of the market, respectively. Other notable

brands include Rockstar and PEP’s Amp Energy.

Figure 5. Leading Energy Drink Brands

Source: Amazon.com

We believe that the health and wellness trend has led to increased demand for better-for-you options

within the energy drink segment. We believe the major brands developed sugar-free and low-calorie

energy drinks, which avoid HFCS or high sugar content, in an effort to target the health-conscious

consumer. However, most of these products still contain unhealthy natural or artificial sweeteners that

pose similar problems to those associated with diet CSDs. Therefore, we see opportunity for all-natural,

low-sugar energy drinks, as we believe they would provide health-conscious consumers with the energy

boost they require, while avoiding some of the negative consequences associated with sugary and

artificial sweeteners.

Key factors for success include function, as well as sponsorship of sports figures and events. In our

opinion, energy drinks are one of the few segments in the beverage market where taste is not a primary

concern. In our view, energy drink consumers are more concerned with the increased alertness,

performance, and endurance that the beverages are intended to provide. Therefore, we believe that

products providing a greater or more sustained energy to consumers would likely perform better than its

peers. We also see opportunity for brands to address adjacent benefits such as the calorie- and fat-

burning function provided by Celsius (CELH – NR) energy drinks. Moreover, we see healthier, all-

natural, and low-sugar versions of the beverage growing in popularity, especially if consumers perceive

that these products provide similar function to the traditional energy drinks. Finally, we believe energy

drink companies specifically target younger consumers who are active, athletic, or sports fans.

Companies in the industry have poured marketing dollars into athletic sponsorships, especially extreme,

action, and motor sports. Notably, Red Bull sponsors several professional soccer teams, race car

drivers, and extreme athletes like skateboarders and bikers. MNST sponsors the top series of

NASCAR, a number of mixed martial artists, and the X Games. However, we see opportunity for brands

to target other demographics including women and fitness-oriented consumers.

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RTD Tea

RTD tea has benefited from the health and wellness trend, in our opinion, as consumers seek natural,

better-for-you, functional beverage options. Although the overall tea market, which also includes hot and

bagged tea, has been experiencing relatively flat growth, we believe that RTD tea category is growing in

the mid-single digits. While some of the market leading brands contain significant sugar content,

emerging brands with healthier, organic, and functional ingredients are growing rapidly. Specifically,

according to SPINS, a market research provider focused on natural, organic, and specialty products,

only 3% of RTD tea sales are organic-related, but the subcategory contributed more than 80% of growth

in the segment.

RTD tea is a cold tea-based beverage that is brewed and packaged in cans, plastic bottles, or glass

bottles. Tea in general is the second most widely-consumed beverage after water according to The Tea

Association of the U.S.A., and it offers many perceived health benefits including longevity, potential

weight loss, improved heart health, and therapeutic effects. According to IBISWorld, the current RTD

tea market is comprised of 57.7% black tea, 22.5% green and white teas, and 19.8% herbal tea. Flavors

are available in the tea’s original, unsweetened form, as well as a variety of other flavors, including

lemon, peach, lychee, passion fruit, and mint. In our opinion, the growing demand for better-for-you

beverages has significantly boosted consumer demand for tea-related products. The convenience and

portability of RTD teas are important drivers for the category as it caters to the active lifestyles of

modern consumers, and the beverages can often be found in impulse purchase locations such as

convenience stores and vending machines.

While we believe that the health and wellness trend has helped the RTD tea category overall, it has also

led to heavier scrutiny of products with high sugar content. Although we believe this has hurt some

brands, it also provides others an opportunity to distinguish themselves with healthier offerings. In

addition to the shift towards better-for-you beverages, we also believe consumers are trending towards

the premium end of the RTD tea spectrum. In our opinion, RTD tea drinkers are increasingly demanding

that their beverages be brewed with actual tea leaves, rather than with tea extracts or concentrates.

One notable brand taking advantage of both shifts is Long Island Iced Tea (LTEA - NR), which is non-

GMO, sweetened with pure cane sugar instead of HFCS, and brews its beverages using hand-picked

tea leaves.

The global market for RTD tea is approximately $56.9B, according to Grand View Research, and is

expected to grow at a 5% CAGR to reach $84B by 2024. Beverage consultancy firm Zenith Global also

projects mid-single digit growth, observing that the RTD tea market has increased over 40% from 2011-

2016 (7.0% CAGR) and is expected to grow another 21% by 2021 (3.9% CAGR).

The U.S. market for RTD tea was $5.8B in wholesale dollars according to market research firm

Packaged Facts. According to IRI, the segment grew 3.4% year-over-year, and is expected to grow at a

6% CAGR during 2015-2018, according to Forbes.

Major brands include Arizona, PEP’s Pure Leaf and Lipton, DPS’s Snapple, and KO’s Gold Peak.

The RTD tea market is primarily controlled by Arizona Beverages, a privately-held corporation, in

addition to multiple brands owned by PEP, DPS, and KO. Collectively, these four companies control

75% of the market. The Pure Leaf, Lipton, and Brisk brands are distributed primarily in North America

by PEP under their joint venture agreement with Unilever (UN – NR). According to IRI, this partnership

held 37% of the U.S. market through these brands. The Pure Leaf brand, in particular, saw significant

sales growth, and we believe this was primarily due to the aforementioned premium trend. Unlike Lipton

Iced Tea and Brisk, both of which use a freeze-dried instant tea powder for a base, Pure Leaf is brewed

directly from tea leaves, making it more popular among consumers, in our opinion. Overall, we believe

the success of the PEP-UN joint venture can also be attributed to its differentiated brands that cover

various price points across the spectrum of the RTD tea market. Specifically, in 2016 Pure Leaf’s

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average unit price was higher than that of Brisk and Lipton Iced Tea by 70% and 10%, respectively,

according to Euromonitor. Arizona is the leading individual brand at 18% market share, while KO’s Gold

Peak and DPS’s Snapple hold 13% and 9% of the U.S. market, respectively, and private label accounts

for 6%, according to IRI.

Figure 6. Leading RTD Tea Brands

Source: Amazon.com

Probiotic beverages have become more popular as consumers have increasingly turned to beverages

to boost their digestive health. According to SPINS, sales of refrigerated probiotic functional drinks and

juices have increased 31.2% year-over-year, and BMC projects that the market will grow at a 19%

CAGR during 2016-2020. Kombucha is a tea-based probiotic beverage that is created by adding a

colony of bacteria in the form of probiotics and yeast to a mix of green or black tea and sugar. The

beverage is then mixed and fermented before being served. The perceived health benefits associated

with kombucha include improved immune system function, better digestion and liver function, and

prevention of certain forms of cancer. Notable brands include GT’s Kombucha and PEP’s KeVita, as

well as NBEV’s búcha, which we believe is the first kombucha product that is shelf-stable, with over

nine months of shelf-life compared to the 90-day standard. Another functional tea is matcha, a green

tea that is brewed from finely ground, powdered tea leaves. Matcha is considered a rich source of

antioxidants called polyphenols, which have been linked to slowing cancer cell growth, improved blood

sugar levels, blood pressure reduction, and anti-aging. Moreover, the beverage contains almost three

times more caffeine than the average steeped tea, and is more comparable in this regard to coffee. The

Matcha Love brand produces one of the most popular RTD matcha tea products.

Key factors for success include super-premium products, variable pricing, and perceived health

benefits. It is evident with premium launches such as Arizona’s Good Brew, PEP-UN’s Pure Leaf Tea

House Collection, SBUX’s RTD Teavana, and KO’s Gold Peak tea latte, the segment’s future success

is dependent on premium products. We believe it is also vital for producers to offer a variety of products

across the pricing spectrum to leverage their brand equity. In our view, the higher pricing associated

with better-for-you and premium products should drive both average unit prices and overall sales

growth.

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Sports Drinks

Sports drinks represent another segment of the beverage industry that is dominated by KO and PEP,

which together hold a 97% market share, according to IRI. While we do not expect any major

challengers to the top two competitors, we do believe that the secular shift to healthier beverages has

significantly impacted the industry. Specifically, growth in sports drinks appears to be slower than that of

other beverages primarily marketed for their function, such as energy drinks. In our opinion, the health

and wellness trend has been a primary contributor to this weak performance, as consumers are

becoming more aware of the high levels of HFCS, sugar, and artificial ingredients found in most sports

drinks. We believe this problem has been exacerbated by consumers calling into question the efficacy

of sports drinks in actually improving hydration and athletic performance.

Sports drinks are beverages designed to help athletes rehydrate their bodies more effectively by

replacing water and other nutrients lost through sweat. Specifically, they provide water, sodium,

carbohydrates, and electrolytes in an effort to improve performance, endurance, and recovery. Some

brands offer isotonic beverages, which attempt to replicate the concentrations of salt and sugar in the

human body. We believe that sports drinks are marketed as an ideal hydration option for athletics and

endurance. However, unless the consumer is participating in sustained exercise for multiple hours at a

time, sports drinks are unlikely to have a noticeable incremental effect on performance when compared

to water, in our opinion.

We believe that sports drinks have begun to be perceived by consumers as a non-carbonated soft drink

rather than as a highly efficacious functional beverage. Therefore, it may be more difficult for consumers

to justify the intake of calories, sodium, and sugar contained in sports beverages. Moreover, while it is

possible that these beverages are helpful when combined with exercise, it should also be noted that the

high levels of HFCS or sugar could result in negative health effects, similar to those observed in

connection with drinking CSDs, especially when consumed not in conjunction with exercise. While the

market leaders have introduced low-calorie and low-sugar versions of their products, we believe that

their taste is often noticeably inferior to the traditional flavors, and that the use of natural and artificial

sweeteners likely creates additional concerns for the health-conscious consumer.

The global market for sports nutrition was $28.4B in 2016, according to Zion Market Research, with

sports drinks making up the largest share of this category. Looking forward, Mordor Intelligence projects

a 4.8% CAGR for sports drinks over the next five years.

The U.S. market for sports drinks is $6.5B according to IRI, representing 4.7% year-over-year growth.

Euromonitor projects that the market will grow at a 1.1% CAGR from 2015-2019 to reach a size of

$7.3B. However, BMC (Beverage Industry, July 2017) has a more optimistic view on growth, projecting

4.4% CAGR of wholesale dollars through 2020.

Major brands include PEP’s Gatorade and KO’s POWERADE.

According to IRI, through its Gatorade brand, PEP controls 77.4% of the U.S. sports drink market, while

KO owns 19.7% with POWERADE. Gatorade was initially created in 1965 by scientists at the University

of Florida, before being acquired by PEP in 2000. It was designed to replenish carbohydrates and

electrolytes lost in sweat during exercise. The brand became iconic through significant marketing

campaigns featuring famous athletes. It now offers six lines of sports beverages that vary in flavor

intensity and function, as well as low-calorie versions that are sweetened and/or colored with artificial

ingredients. Gatorade also sells adjacent sports products including protein powder and energy bars.

POWERADE, on the other hand, is focused strictly on its core sports drink line that includes a wide

range of flavors and zero-calorie options. It differentiates from Gatorade specifically through the

additional B-vitamins contained in its beverages.

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PEP and KO are the dominant players in this segment, but we believe smaller competitors can

experience faster growth than the overall segment by positioning their products as healthier

alternatives. Currently, the only other significant player in the space with more than 1% market share is

BodyArmor, an all-natural sports drink with a coconut water base that is sweetened with pure cane

sugar rather than HFCS. It also contains lower levels of sodium, which may make it less efficacious in

replacing the salt content lost in sweat, but also makes it healthier for non-active consumption. Finally, it

contains significantly more added vitamins and minerals than the leading brands, as it contains

potassium, zinc, vitamins A, C, E, and all of the B vitamins. We believe that competitors like BodyArmor

are unlikely to match the brand equity or marketing capacity of Gatorade or POWERADE. Therefore, we

expect the greatest success for niche brands that differentiate their products as better-for-you to take

advantage of the health and wellness trend.

Figure 7. Leading Sports Drink Brands

Source: Amazon.com

Key factors for success include offering a wide range of flavors, containing healthier ingredients, and

gaining athlete endorsements. In order to capture and retain customers seeking hydration, sports drink

brands typically offer a number of flavors to attract potential buyers and create variety for regular

consumers. Specifically, we believe both Gatorade and POWERADE offer 20 or more flavors, including

zero-calorie or low-sugar versions. This progression toward a wide range of flavors also supports our

view that sports drinks are now widely perceived as non-carbonated soft drinks, and therefore taste and

flavor have become bigger priorities than typically expected for beverages with significant functional

benefits. Moreover, offering products with healthier ingredients is also crucial, in our opinion. We believe

traditional sports drinks can be an especially unhealthy option for less active sports drink consumers

who believe they are purchasing a better-for-you option, but are actually consuming significant sugar

content. However, like in CSDs, we believe the all-natural, better-for-you sports drink segment is

currently only a miniscule portion of the market. While we believe the subcategory represents the

growth opportunity in the segment, in our opinion, it will be difficult for upstart brands to mount a

significant challenge against the market leaders with a product that solely differentiates based on health

without significant brand equity and marketing resources behind it. Moreover, we believe marketing may

be the most impactful factor, as the top two brands in the space have heavily marketed to their core

demographic of athletes and sports fans. While energy drink advertising has focused on extreme

athletics, sports drinks have successfully won endorsements from mainstream traditional athletes. We

believe this is congruent with the general positioning of sports beverages, which are marketed as an aid

to athletic performance, albeit at a more moderate level than energy drinks.

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RTD Coffee

RTD Coffee is a small segment of the overall retail coffee market, which is estimated at $48B in the

U.S., according to the Specialty Coffee Association of America (SCAA). Although we believe that RTD

coffee makes up just 3% of overall coffee sales, it is still driven by trends in the broader coffee segment,

especially those relating to brand awareness. To illustrate, the North American Coffee Partnership

(NACP) between PEP and Starbucks (SBUX – NR) has historically controlled virtually the entire U.S.

RTD coffee segment with its Starbucks-branded beverages. However, in late 2016, KO partnered with

Dunkin’ Donuts (DNKN – $58.47 – Buy) to a launch Dunkin’-branded line of bottled iced coffees. We

believe the NACP’s dominant position was partially driven by the brand’s reputation in traditional coffee,

and for the same reason, we expect the new DNKN product to immediately become a major challenger

in the space by virtue of its strong brand equity.

RTD Coffee is a version of traditional coffee, a caffeinated beverage brewed from roasted coffee beans.

Coffee has become a daily staple for many consumers seeking an energy boost as, according to

Livestrong, coffee contains 12mg-30mg of caffeine per ounce, compared to Coca-Cola, which generally

contains just five milligrams per ounce. RTD coffee offers the same major function as the traditional

drink by providing energy to the consumer through its caffeine content, but it is served cold and

packaged in bottles or cans. The drinks typically consist of a coffee base blended with milk, sugar, and

often other flavors such as vanilla, chocolate, or caramel. Some brands offer a hybrid RTD coffee and

energy drink beverage that offers the taste profile of coffee but also provides a more significant energy

boost, typically through higher levels of caffeine as well as other stimulants typically found in energy

drinks.

We believe RTD coffee is appealing to coffee-drinkers primarily because it is offers convenience for

consumption while on-the-go. However, in our view, it also has a major disadvantage, namely the lack

of customization available to consumers when purchasing bottled coffee, compared to the options

available ordering traditional coffee at a foodservice establishment. We also see this as a weakness

from a health and wellness perspective because traditional coffee drinkers can typically decide how

much sugar, if any, to add to their beverages, while RTD offerings are already formulated and typically

have high sugar content. Therefore, while coffee can generally be considered a healthy functional

beverage, RTD coffee, in particular, should also be associated with the negative health outcomes linked

with the consumption of sugary beverages. Nonetheless, we believe there is a significant opportunity for

increased adoption of better-for-you RTD coffee products, especially with low-sugar offerings.

The global market for RTD coffee is currently $20.5B according to Euromonitor, up 13.9% from its

estimate of approximately $18.0B in 2015 (Denver Post, May 2016). Grand View Research estimates

that it will grow at a 5.7% CAGR to a size of approximately $32B by 2024.

The U.S. market for RTD coffee is $2.9B according to Euromonitor, and is experiencing 13.0% year-

over-year growth according to IRI. However, we believe that a significant portion of that is attributable to

the launch of the Dunkin’ Donuts RTD coffee brand, and that true organic growth is in the mid-single

digits. This is supported by Euromonitor’s growth projection of a 5.5% CAGR through 2020, with the

market reaching a size of $3.6B.

Major brands include Starbucks’ Frappuccino and Doubleshot brands, International Delight, and

Dunkin’ Donuts Iced Coffee.

The RTD coffee market is currently dominated by the NACP, a joint venture formed in 1994 between

SBUX and PEP that produces Starbucks-branded coffee beverages. IRI estimates that the Starbucks

Frappuccino brand generated $1.1B and the Starbucks Doubleshot brand had $646M in sales.

According to BevNet, the NACP holds a 97% market share in RTD coffee in the U.S. The next-largest

competitor in the space is International Delight, which was acquired by Danone through its recent

purchase of WhiteWave Foods. The brand’s flagship product is its line of flavored coffee creamers, but

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it also produces a refrigerated, multi-serve iced coffee that generated $63.7M in sales, according to IRI.

We do not believe it competes in single-serve RTD coffee.

Figure 8. Leading RTD Coffee Brands

Source: Amazon.com

In late 2016, KO entered into a partnership with DNKN to manufacture, distribute, and sell Dunkin’

Donuts branded RTD iced coffee. The product launched in February 2017, and already amassed $50M

in U.S. sales according to IRI. This positions it as the third largest brand for that period, and as the

second largest brand, behind only Starbucks, on an annual run rate basis. We believe that KO’s

significant resources in the beverage industry, coupled with DNKN’s strong brand recognition for

traditional coffee, should provide the necessary foundation for rapid growth and allow this venture to

become the first significant competitor to the NACP in the RTD coffee market.

The rest of the segment is controlled by private label products, which account for $27.4M of revenue,

and a number of smaller brands. Brands generating between $10M-$50M, according to IRI, include

Califia Farms, CPB’s Bolthouse Farms, Caribou Coffee, STōK, and High Brew. Although competition is

a major challenge in the space for smaller brands, we would expect products that offer low-sugar

alternatives to be more successful with health- conscious consumers, and we believe that the growth

opportunity would be significant as better-for-you RTD coffee is a relatively untapped subcategory.

Key factors for success include convenience, taste, and function. In our opinion, the primary reason

consumers choose RTD over traditional coffee is convenience. There is no wait time associated with

production of the drinks and they can generally be found at a wider range of retail locations such as

convenience and grocery stores, in addition to cafés and other foodservice establishments. Moreover,

RTD coffee is an attractive option for on-the-go consumption, as we believe re-sealable bottles, and

even cans, are easier to handle and less likely to result in spillage than lidded cups or mugs. Moreover,

when differentiating a product within the RTD space, brand recognition in the overall coffee segment is

crucial. In our opinion, consumers are more likely to purchase RTD brands that are associated with

better-tasting and more efficacious coffee, both in traditional and RTD subcategories. Finally, we

believe there is room in the segment for brands to differentiate on health and wellness factors,

especially lower sugar content, as in our view, better-for-you RTD coffee is underpenetrated and

represents the growth opportunity in the segment.

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Smoothies

Smoothies have been growing in popularity, in our opinion, as a result of emerging trends such as juice

cleanses for detoxification, as certain blends of natural fruit and vegetables are believed to help cleanse

the body. We believe that the increasing health consciousness and busy lifestyle of modern day

consumers have elevated smoothies from an indulgent treat to a convenient meal replacement option.

While we believe consumer demand has increased for both RTD and foodservice smoothies, we see

growth in the segment being hindered by the often high levels of sugar in these beverages. From a

competitive standpoint, the RTD smoothie segment is fragmented by a broad range of products from

major companies, including PEP, KO, and CPB, as well as other prominent foodservice vendors.

Smoothies are also available on a ready-to-make basis at food service establishments including quick-

service restaurants (QSRs) and juice bars.

Smoothies are thick beverages made by blending fruits and/or vegetables with a base, typically water,

ice, juice or milk, and other ingredients. The beverages often include functional ingredients such as

protein powder, nuts, seeds, tea, and antioxidants. Depending on the ingredients, they are typically

served either frozen or chilled. Like juice drinks, smoothies are generally rich in nutrients, vitamins, and

minerals, but also generally contain high levels of sugar. According to Technavio, the global smoothies

market was led by fruit-based smoothies, which accounted for 85% of the total sales, but the beverages

can also be vegetable-based.

In our view, consumers generally view smoothies as a better-for-you beverage option due to the

vitamins, minerals, and other functional ingredients often found in the drinks. However, because

smoothies also contain high levels of naturally-occurring sugar, we believe growth may be somewhat

curtailed as potential customers seek similar functional benefit from beverages without any harmful

ingredients. Moreover, we believe there is a trend within the smoothie market towards organic options

made with fruits and vegetables that are not artificially developed and have not come in contact with

pesticides or chemicals. In our view, many consumers have become less accepting of the genetic

modification of produce, and we believe they are often willing to pay premium prices for organic

products, especially if they provide greater function with additional vitamins, minerals, and antioxidants.

The global market for smoothies was approximately $15.0B in 2016, according to Technavio, and is

expected to grow at a CAGR of 8.6% to reach $22.6B by 2021.

The U.S. market for smoothies was $2.3B in 2016, according to IBISWorld, and has grown 120%

during 2010-2015, according Global Industry Analysts. Technavio projects the segment to grow at an

8.5% CAGR in the Americas over the next five years, implying a U.S. market of approximately $3.5B in

2021.

Major brands include PEP’s Naked Juice, CPB’s Bolthouse Farms, and KO’s Odwalla.

Naked Juice controls 64% of the U.S. RTD smoothie market, according to IRI. The brand was acquired

by PEP in 2006 for an undisclosed amount, and it currently offers a wide range of smoothie products.

Specifically, it offers fruit smoothies, fruit and vegetable smoothies, boosted smoothies with added

vitamins and minerals, and protein smoothies. The Bolthouse Farms brand, which was acquired by CPB

in 2012 for $1.55B, controls 23% of the market, while Odwalla, which was purchased by KO in 2001 for

$181M, comprises around 5% of the market, according to IRI. KO also owns a 90% stake in Innocent

Drinks, the UK and Europe’s number one RTD smoothie brand. Other notable brands that offer RTD

smoothies include Suja, SoBe, Dannon, and V8.

Smoothies are also very popular ready-to-make beverages offered in foodservice locations, and Jamba

Juice (JMBA – NR) is one of the premier names in that segment of the market. However, in addition to

operating over 800 locations, it also penetrates the grocery channel by offering take home frozen kits

that contain ingredients that consumers can put into their own blenders to create smoothies. Barfresh

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Food Group (BRFH – $0.54 – Buy) also sells ready-to-blend packs, primarily to foodservice operators,

but offers advantages such as better-for-you ingredients and packaging technology that simplifies the

blending process and reduces waste.

Figure 9. Leading Smoothie Brands

Source: Amazon.com

Key factors for success include quality of ingredients, pricing, innovative flavors, effective labeling,

shelf stability, distribution, and premium products. In our view, the smoothie market is subject to

constantly changing consumer demands and we believe brands must compete in terms of pricing and

product innovation in order to gain market share. The trend towards higher priced, premium products is

also evident in the smoothie segment as consumers look for all-natural, higher quality ingredients. On a

macro level, we believe smoothie producers have the opportunity to differentiate on organic ingredients,

reduced sugar levels, no added sugar, and/or functional benefits.

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Coconut Water

Coconut water has been rising in popularity over the past 10 years as a result of the health and

wellness trend. It is now a key battleground within the healthy functional beverage market, as the major

beverage companies and independents have fought for share in this fast-growing category. As

evidence, the market leader, Vita Coco, is a privately-held firm, while its two biggest competitors, O.N.E.

and Zico, are owned by major publicly-traded beverage companies.

Coconut water is the clear liquid extracted from coconuts that are harvested from the tree while still

green. In its pure form, it contains 19 calories and 2.6g of sugar per 100mL and is made up of 95%

water. Coconut water is available in its original, unsweetened form, as well as in a variety of flavors,

typically of a tropical nature. Vita Coco, the market leading brand, offers its core product line in original,

pineapple, peach and mango, lemonade, lime, and chocolate flavors. Moreover, select brands such as

NBEV’s Coco Libre also sell coconut water in other forms including sparkling and protein-infused

versions. The beverages are typically distributed in aluminum cans, paper cartons, and plastic bottles.

Coconut water can also be used as a base for other beverages, including sports drinks and other

electrolyte replacement beverages. Notable examples include BodyArmor sports drinks, ROAR

electrolyte infusion drinks, and NBEV’s PediaAde, which is expected to be launched in late 2017 as an

alternative to Abbott Laboratories’ (ABT – NR) Pedialyte.

We believe that the category as a whole has benefited from the secular trend towards functional

beverages, as coconut water provides a more flavorful alternative to plain water, but can be a healthier

choice for hydration than fruit juices and traditional sports drinks. Although it is often marketed as an

electrolyte beverage, it does not actually contain any significant vitamins, minerals, or electrolytes.

Rather, we view the beverage as a more flavorful alternative to water, and a lower-calorie alternative to

juice, sports drinks, and other sugary beverages.

The global market for coconut water was approximately $2.2B in 2016, according to Euromonitor. The

category has been growing rapidly at a CAGR of 20% during 2008-2016, according to Bloomberg.

These high levels of growth are expected to continue, if not accelerate, over the next five years, as

Technavio projects that the segment will experience a 26.75% CAGR from 2016-2020 with the market

reaching a total size of $5.7B.

The U.S. market is the largest consumer of coconut water, where it generated $778M of revenue in

2015, according to Technavio, representing 27% growth over its 2014 estimate of $612.5M. Going

forward, Technavio projects that the segment will grow at a CAGR of 25.8% through 2019, with the

market reaching $2.0B by 2020.

Major brands include Vita Coco, PEP’s O.N.E., and KO’s Zico.

Vita Coco is the flagship brand of All Market, Inc., a privately-held company based in New York.

According to Bloomberg, the brand has a 46% market share in the U.S., representing approximately

$400M of annual revenue. This is a dominant position for Vita Coco, which is three times larger than its

closest competitor. CEO and co-founder Michael Kirban has said that he expects the company to

approach $1B of revenue in 2017, driven by growth of its core coconut water product, as well as related

products including coconut milk and coconut oil.

According to a January 26, 2017 report by Reuters, the company hired JP Morgan to advise the

company on a potential sale. As the premier brand in this fast-growing healthy functional beverage

category, we believe All Market has piqued the interest of strategic acquirers, especially given that it

was profitable and paid a $30M dividend to investors in 2016. Specifically, PEP has reportedly been in

talks to acquire All Market, and, according to Reuters, made an offer of under $1B for the company in

May 2017.

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PEP already owns another major player in the space, O.N.E. Coconut Water. In 2010, PEP bought a

majority stake in O.N.E., before fully acquiring the brand in 2012. Moreover, PEP owns Naked Juice,

which produces coconut water, among other juice products, as well as Amacoco, a major producer of

coconut water brands in Brazil. KO also has a major presence in the coconut water market with top-

three brand Zico, in which it began investing in 2009 and eventually fully acquired in 2013.

Figure 10. Leading Coconut Water Brands

Source: Amazon.com

While we believe the big three brands control approximately 70% of the market, there are a number of

smaller brands that are competitive within the space. Specifically, according to market research

company IRI, brands that generated over $1M in revenue include: Goya, Foco, C2O, Harmless

Coconut, Parrot, Coco Libre, Grace, Zola, Taste Nirvana, Amy & Brian, and Conchita.

Key factors for success include maintaining a clean ingredients label, developing a popular flagship

unflavored product, and offering a variety of flavor and taste options. In our opinion, the appeal of

coconut water is primarily its status as a healthier beverage option that does not completely sacrifice

taste. As such, on a micro level, we believe coconut water brands have the opportunity to differentiate

on all-natural and organic ingredients, fewer calories, and lower quantities of sugar. We also see better

consumer acceptance of not-from-concentrate products, as well as non-GMO and organic certifications.

According to Beverage Industry, unflavored coconut water, which is the healthiest and purest version of

the beverage, dominates the U.S. market. In our opinion, brands that have better-tasting unflavored

products are more likely to win loyalty from the core health-conscious customer demographic. After

solidifying the unflavored offering, brands have opportunity to differentiate by offering additional

variations of the product, with natural flavors like pineapple, lemon, and chocolate, as well as with

versions such as sparkling, coconut milk, and protein. We believe this allows brands to attract less

health-centric consumers seeking sweeter and more familiar taste profiles, while still retaining some of

the health benefits associated with the core product.

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DISCLOSURES

Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17

$8$7$6$5$4$3$2$1$0

New Age Beverages Corp. Rating History as of 11/06/2017

Closing Price Target Price

I:Buy:$6.0005/04/17

Buy:$7.5005/22/17

powered by: BlueMatrix

Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17

$12

$10

$8

$6

$4

$2

$0

Reed's, Inc. Rating History as of 11/06/2017

Closing Price Target Price

I:Buy:$10.0012/09/15

Buy:$7.0006/06/16

Buy:$5.5004/25/17

Buy:$3.5008/15/17

powered by: BlueMatrix

Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17

$3.50

$3.00

$2.50

$2.00

$1.50

$1.00

$0.50

$0.00

Barfresh Food Group Inc. Rating History as of 11/06/2017

Closing Price Target Price

I:Buy:$3.0002/08/17

Buy:$2.0008/15/17

powered by: BlueMatrix

23Maxim Group LLC

Health & Wellness

Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17

$140

$120

$100

$80

$60

$40

$20

National Beverage Corp. Rating History as of 11/06/2017

Closing Price Target Price

I:Sell:$33.0005/03/17

Sell:$40.0009/08/17

powered by: BlueMatrix

Maxim Group LLC Ratings Distribution As of: 11/06/17

% of CoverageUniverse with Rating

% of Rating for which FirmProvided Banking Services

in the Last 12 months

BuyFundamental metrics and/or identifiable catalysts exist such that weexpect the stock to outperform its relevant index over the next 12 months.

80% 38%

HoldFundamental metrics are currently at, or approaching, industry averages.Therefore, we expect this stock to neither significantly outperform norunderperform its relevant index over the next 12 months.

17% 18%

SellFundamental metrics and/or identifiable catalysts exist such that weexpect the stock to underperform its relevant index over the next 12months.

*See valuation section for company specific relevant indices

2% 25%

24Maxim Group LLC

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I, Anthony Vendetti, attest that the views expressed in this research report accurately reflect my personal views about the subject security andissuer. Furthermore, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views expressedin this research report.

The research analyst(s) primarily responsible for the preparation of this research report have received compensation based upon various factors,including the firm’s total revenues, a portion of which is generated by investment banking activities.

Maxim Group makes a market in New Age Beverages Corp., Reed's, Inc., Barfresh Food Group Inc. and National Beverage Corp.

Maxim Group managed/co-managed/acted as placement agent for an offering of the securities for New Age Beverages Corp. and Reed's,Inc. in the past 12 months.

Maxim Group has received the non-objecting beneficial owners (NOBO) list from Barfresh Food Group Inc. which may have some valuefor the Firm's Wealth Management division.

Maxim Group received compensation for investment banking services from New Age Beverages Corp. and Barfresh Food Group Inc.in the past 12 months.

Maxim Group expects to receive or intends to seek compensation for investment banking services from New Age Beverages Corp.,Reed's, Inc., Barfresh Food Group Inc. and National Beverage Corp. in the next 3 months.

An affiliate of Maxim Group beneficially owns warrants/shares in New Age Beverages Corp. .

An affiliate of Maxim Group beneficially owns warrants/shares in Reed's, Inc. .

An affiliate of Maxim Group beneficially owns warrants/shares in Barfresh Food Group Inc. .

NBEV: For New Age Beverages Corp., we use the Russell 3000 Index (RAY) as its relevant index.REED: For Reed's, Inc., we use the Russell 3000 Index (RAY) as its relevant index.BRFH: For Barfresh Food Group Inc., we use the Russell 3000 Index (RAY) as its relevant index.FIZZ: For National Beverage Corp., we use the S&P 500 (SPX) as its relevant index.

Valuation MethodsNBEV: Our 12-month price target for New Age Beverages Corp. is derived using a 10-year DCF analysis and is supported by EV/revenue multiplescompared to its peers.REED: Our 12-month target price for Reed's, Inc. is based on EV/revenues multiples compared to its peers and is supported by a 10-year discountedcashflow analysis.BRFH: Our 12-month price target for Barfresh Food Group Inc. is derived using a 10-year DCF analysis and is supported by EV/revenue multiplescompared to its peers.FIZZ: Our 12-month price target for National Beverage Corp. is based on a GAAP P/E multiple and is supported by a 10-year discounted cashflow analysis.

Price Target and Investment RisksNBEV: Aside from general market and other economic risks, risks particular to our New Age Beverages Corp. price target and rating include: (1) aconsumer shift back to traditional unhealthy beverages; (2) the potential loss of major DSD customers; (3) inability to grow the business organicallyor via acquisition; (4) entrance of beverage market leaders into the healthy beverages sector; (5) volatility in input costs; (6) reliance on third-partyretailers to sell products; (7) potential loss of key executives; and (8) potential dilution from a capital raise.REED: Aside from general market and other economic risks, risks particular to our Reed's, Inc. price target and rating include: (1) increasedcompetition across product categories; (2) commodity and supply chain fluctuations; (3) changes in consumer preferences may render the productsobsolete; and (4) production and/or manufacturing issues at any of its facilities.BRFH: Aside from general market and other economic risks, risks particular to our price target and rating for Barfresh Food Group Inc. include:(1) failure to sign a national account; (2) inability to raise sufficient capital to reach profitability; (3) inability to protect intellectual property rights; (4)increased competition across product categories; (5) commodity and supply chain fluctuations; (6) changes in consumer preferences may renderthe products obsolete; and (7) production and/or manufacturing issues at any of its facilities.FIZZ: Aside from general market and other economic risks, risks particular to our National Beverage Corp. price target and rating include: (1)continued outsized revenue growth for its LaCroix brand; (2) potential success of new brands and products; (3) acquisition by a larger company ata premium valuation; (4) significant improvement in gross margin; and (5) increased sales of its discount brands due to an economic slowdown.

RISK RATINGS

Risk ratings take into account both fundamental criteria and price volatility.

Speculative – Fundamental Criteria: This is a risk rating assigned to early-stage companies with minimal to no revenues, lack of earnings, balancesheet concerns, and/or a short operating history. Accordingly, fundamental risk is expected to be significantly above the industry. Price Volatility:

25Maxim Group LLC

Health & Wellness

Because of the inherent fundamental criteria of the companies falling within this risk category, the price volatility is expected to be significant with thepossibility that the investment could eventually be worthless. Speculative stocks may not be suitable for a significant class of individual investors.

High – Fundamental Criteria: This is a risk rating assigned to companies having below-average revenue and earnings visibility, negative cashflow, and low market cap or public float. Accordingly, fundamental risk is expected to be above the industry. Price Volatility: The price volatility ofcompanies falling within this category is expected to be above the industry. High-risk stocks may not be suitable for a significant class of individualinvestors.

Medium – Fundamental Criteria: This is a risk rating assigned to companies that may have average revenue and earnings visibility, positive cashflow, and is fairly liquid. Accordingly, both price volatility and fundamental risk are expected to approximate the industry average.

Low – Fundamental Criteria: This is a risk rating assigned to companies that may have above-average revenue and earnings visibility, positivecash flow, and is fairly liquid. Accordingly, both price volatility and fundamental risk are expected to be below the industry.

DISCLAIMERS

Some companies that Maxim Group LLC follows are emerging growth companies whose securities typically involve a higher degree of risk andmore volatility than the securities of more established companies. The securities discussed in Maxim Group LLC research reports may not besuitable for some investors. Investors must make their own determination as to the appropriateness of an investment in any securities referred toherein, based on their specific investment objectives, financial status and risk tolerance.

This communication is neither an offer to sell nor a solicitation of an offer to buy any securities mentioned herein. This publication is confidentialfor the information of the addressee only and may not be reproduced in whole or in part, copies circulated, or disclosed to another party, withoutthe prior written consent of Maxim Group, LLC (“Maxim”).

Information and opinions presented in this report have been obtained or derived from sources believed by Maxim to be reliable, but Maxim makesno representation as to their accuracy or completeness. The aforementioned sentence does not apply to the disclosures required by FINRA Rule2241. Maxim accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability doesnot apply to the extent that such liability arises under specific statutes or regulations applicable to Maxim. This report is not to be relied upon insubstitution for the exercise of independent judgment. Maxim may have issued, and may in the future issue, other reports that are inconsistent with,and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analyticalmethods of the analysts who prepared them and Maxim is under no obligation to ensure that such other reports are brought to the attention ofany recipient of this report.

Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, ismade regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publicationby Maxim and are subject to change without notice. The price, value of and income from any of the securities mentioned in this report can fall aswell as rise. The value of securities is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of suchsecurities. Investors in securities such as ADRs, the values of which are influenced by currency volatility, effectively assume this risk. Securitiesrecommended, offered or sold by Maxim: (1) are not insured by the Federal Deposit Insurance Company; (2) are not deposits or other obligationsof any insured depository institution; and (3) are subject to investment risks, including the possible loss of principal invested. Indeed, in the caseof some investments, the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to paymore money to support these losses.

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST

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