How much do innocent smoothies cost

9 -805-031 N O V E M B E R 2 4 , 2 0 0 4

________________________________________________________________________________________________________________ Professor William A. Sahlman and Research Associate Dan Heath prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2004 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

W I L L I A M A . S A H L M A N

Innocent Drinks

Richard Reed was walking across the green AstroTurf floors of Innocent Drinks toward the Acorn Room, the office conference room. It was 10 am on a Wednesday (September 29, 2004), which meant that it was time for the weekly meeting between Reed and the other two founders of Innocent. The three of them were old friends from college, so the atmosphere of the meetings was usually light. Today, though, there was a bit more anxiety in the air than usual. The problem on the table was success.

In 1998, the three founders—Reed, Jon Wright, and Adam Balon—started Innocent, a London- based company selling prepackaged smoothies and juices to customers via channels such as grocers and convenience stores. (See Exhibit 1 for background on the founders.) In 2004, they were expected to hit £16 million in revenue. (Exhibit 2 shows Innocent's revenue growth.)

The founders had raised £235,000 to get started and not another dime since. They had managed to exceed the projections in their initial business plan, which, in the entrepreneurial world, was a rarity on par with sighting a bald eagle. With a winning Lotto ticket in its beak. Things had gone well so far for Innocent. And now, with expectations raised by success, they had to figure out what to do next.

Having grown at a compounded rate of 63% over the preceding four years, Innocent had earned a 30% share of the UK smoothie market, eclipsing the former leader, PJ. But the UK smoothie market was small—estimated at £50 million annually. For Innocent to continue its spectacular growth, they needed a market with more headroom.

One option for Innocent was to extend its brand, which had gained a devoted following in the UK, to other product lines such as ice cream or yogurt. Another option was to expand internationally, either to continental Europe or to the United States.

Richard Reed, vice-president of marketing, started the meeting: “We all know that for the last year, we’ve been trying to do everything—develop ice cream, open markets in Europe, expand the market here. I don’t think it’s working. I don’t think we’re making progress fast enough. I think we need to choose one option for growth and focus on it.”

Over the next two hours of discussion, the other founders’ positions became clear. Jon Wright was in favor of pursuing expansion in Europe. Adam Balon thought they should be patient and continue to do both. He said, "Once we start generating revenues in both markets, we'll know more about which option to pursue." There were other viable options that didn’t involve growth. Innocent had

For the exclusive use of A. ADEOSUN, 2019.

This document is authorized for use only by ADETOLANI ADEOSUN in Foundations of Entrepreneurship-1-1-1-1-1-1-1 taught by ALEXANDER MCKELVIE, Syracuse University from Sep 2019 to Jan 2020.

805-031 Innocent Drinks

2

attracted acquisition interest from other beverage companies. Was it time to sell? In addition, Innocent was capable of generating strong cash flow. The founders knew that, if they chose, they could put the brakes on growth and start harvesting some of the value they had created.

Reed was torn. He wanted to do everything. He hated closing off options but knew it was the right thing to do. The question was: Which options should be closed off?

Company background

Reed, Balon, and Wright met at Cambridge during their first week of school. The three became instant friends. Reed and Balon were roommates during school, and it apparently worked out, because the two would spend ten years as roommates.

After graduating from Cambridge, the three of them moved to London and started their careers. Reed spent four years at the advertising agency BMP DDB Needham. Balon spent two years at McKinsey and two years at Virgin Cola. Wright, who had earned a masters in manufacturing engineering, spent three years at Bain.

Despite the diverging career paths, the three friends stayed in touch and constantly bantered about starting a company together. In a sense, they had already worked together: They had organized events, both in college and afterward. In 1997 and 1998, for instance, Reed and Balon had organized a music festival in West London called Jazz on the Green, which drew over 20,000 attendees.

In March 1998, the three of them planned a weekend trip to France for skiing and snowboarding. As they drove through the Chunnel, the topic came up again: Wouldn’t it be great to work on something together?

Jon Wright said, “We’d had this conversation so many times. Finally, on the way to France, we said to ourselves: ‘We’re going in circles here. Let’s either figure out something to do or forget about it and be happy with our jobs.’ Everyone said, ‘Great.’ Then, we realized the problem: We weren’t sure what we were qualified to do.”

Their first idea was to start a “strategic marketing consultancy,” which built directly on the experience of the three. The idea was scrapped, according to Wright, after they concluded that they lacked the necessary experience, desire, and clients. This seemed conclusive. On to the next idea.

They began to discuss the things in life that frustrated them. Wright said, “We thought that people were prepared to pay for things that make life a little bit better and a little bit easier.” They had almost unconsciously made the leap to consumer products.

The first brainstorm involved bathing. Wasn’t it a pain, the founders thought, to get a bath to the right level and the right temperature? What if you could just press a button and have your bath drawn exactly the way you preferred? This idea, too, was nixed. Balon did not want to be a bath salesman, and Wright preferred not to work on a product that mixed electricity and water.

A second brainstorm that didn’t make the cut involved keyless door entry systems—applying security card technology to home users. No one seemed passionate about the concept.

The third brainstorm paid off. They talked about their lifestyles in London—working hard and playing hard. They had a desire to be healthier but didn't have much time to act on it. What about healthier food or drinks? They talked about their habit of buying juice on the way to work in the

For the exclusive use of A. ADEOSUN, 2019.

This document is authorized for use only by ADETOLANI ADEOSUN in Foundations of Entrepreneurship-1-1-1-1-1-1-1 taught by ALEXANDER MCKELVIE, Syracuse University from Sep 2019 to Jan 2020.

Innocent Drinks 805-031

3

morning—a little thing that made them feel a bit healthier. They were shocked that none of them could remember the names of the brands they were buying.

The pitch, as it evolved, was simple. According to Wright, “We thought that if we could come up with a more memorable brand, and with juice that tasted a bit better, that it could be a good business opportunity. No one could think of a reason that it couldn’t work. We put it to the Snowboarding Test – we said if we’re still excited about this idea on the way home, let’s do something about it.”

The strategic marketing consultancy had transmogrified into a juice company.

The juice and smoothie market

The market for smoothies was considered to be a subset of the much larger market for juices. Smoothies were blends of fruit that included the fruit's pulp and sometimes included dairy products such as yogurt. (For instance, the ingredients in one of Innocent's best-selling smoothies were: 1 ½ freshly squeezed oranges, 1 crushed banana, and ¼ pressed pineapple.) Smoothies tended to be thicker and fresher than regular juice. (See Exhibit 3 for a list of Innocent’s product line in fall 2004.)

Some smoothies were made on demand at a juice bar, such as Smoothie King or Jamba Juice in the U.S. Innocent did not compete in this market, but rather in the market for prepackaged smoothies. The UK prepackaged smoothie market was divided into two segments: premium and standard. Premium smoothies contained no water or added sugar and commanded a higher price point. Standard smoothies were made with water and added sugar and were closer in price to ordinary juice.

Most prepackaged smoothies were sold through three channels:

• grocery stores

• cafes and sandwich shops

• impulse retail (e.g., convenience stores and gas station minimarts)

In all three channels, smoothies were packaged in individual serving sizes ranging from 250mL to 330mL. Juice and smoothie buying patterns were distinct. A customer shopping at a grocer might buy a liter of orange juice to take home for the family and, while in the store, pick up a 250mL smoothie to drink on the way home. (In 2004, Innocent introduced a larger-volume take-home product, but the great majority of sales still came from individual servings.)

Competition

Adam Balon estimated the size of the UK smoothie market in 2004 to be £50 million. The pie was carved into four pieces, with rough market share figures as follows:

• Innocent: 30% market share

• PJ Smoothies: 25% market share

• Store own-brands: 25% market share

• All others: 20% market share

For the exclusive use of A. ADEOSUN, 2019.

This document is authorized for use only by ADETOLANI ADEOSUN in Foundations of Entrepreneurship-1-1-1-1-1-1-1 taught by ALEXANDER MCKELVIE, Syracuse University from Sep 2019 to Jan 2020.

805-031 Innocent Drinks

4

PJ had essentially created the smoothie market in the UK. When Innocent entered the market in 1999, PJ was the only branded premium smoothie player in the market. Only in 2004 did Innocent begin to eclipse PJ's market share. Innocent benefited from a higher-qualiity product and the customer perception of a hipper brand.

Store own-brands were tougher to compete against. Chains such as Prêt a Manger, a popular sandwich shop, formulated their own smoothies and were able to lock out the competition.

In the U.S., the smoothie market was more mature and the competition was fiercer. The size of the U.S. smoothie market was estimated to be $300 million. Odwalla, the largest competitor, was bought by Coca-Cola in late 2001 for $180 million.

Juice buying patterns across different countries, even countries similar demographically, were surprisingly idiosyncratic. (See Exhibit 4 for a comparison of juice buying patterns.) Germans, for instance, bought large amounts of juice per capita but had no true market for smoothies. Italians, on the other hand, bought very little juice, period.

Market sizing

The smoothie market was small compared to the overall juice market in the UK, which was an estimated £1.3 billion in 2004. However, the smoothie market had been growing rapidly – 30-40% annually for the three-year period from 2002 to 2004.

There were internal debates within Innocent about the "ceiling" of the UK smoothie market. How big was the market? How big could it get? It depended on how you defined the market. There was no question that Innocent could encroach on the traditional juice market, for instance by introducing larger-volume take-home products. Yet smoothies were, perhaps fundamentally, a niche product. The price per milliliter of a smoothie could be five times the price per milliliter of Tropicana orange juice. Switching from juice to smoothies was simply not an affordable option for many families.

Early developments and decisions at Innocent

Having agreed on a company concept in March 1998, the three founders spent the next five months investigating the idea and developing the business plan. Early on, they divided up roles. Reed, with his ad agency experience, took charge of marketing. Balon, with recent experience marketing Virgin Cola, wanted to take over sales. Wright, the manufacturing engineer, handled operations. They agreed that, rather than select one of them to serve as CEO, the three of them would jointly serve as leaders of the company.

Conducting a pilot test

Their homework on the smoothie concept led up to a crucial test run in August 1998. It took place at the Jazz on the Green Festival, which had been organized by Reed and Balon. The three founders set up a smoothie booth at the festival in order to gauge demand for the product. They squeezed the fruit themselves, borrowed bottles from a guy who made carrot juice, printed up 2000 labels, and set up a stand on some bales of hay.

They thought up a gimmick that doubled as market research. Next to their smoothie stand, they set up two trash bins, one labeled “Yes” and one labeled “No.” Above the bins was a question:

For the exclusive use of A. ADEOSUN, 2019.

This document is authorized for use only by ADETOLANI ADEOSUN in Foundations of Entrepreneurship-1-1-1-1-1-1-1 taught by ALEXANDER MCKELVIE, Syracuse University from Sep 2019 to Jan 2020.

Innocent Drinks 805-031

5

“Should we quit our day jobs and start a smoothie company?” The “Yes” bin overflowed. This would become the oft-told founding story of Innocent.

Pricing the smoothies

In the four months following the jazz festival, the founders made three key decisions that, in retrospect, proved pivotal.

First, the company had a challenge with pricing. The founders were emphatic that Innocent smoothies would not be made from concentrate, unlike the other alternatives on the market at that point. They believed freshness and quality would be a critical differentiator in the marketplace and the key to Innocent’s positioning against its competitor, PJ.

In 1998, PJ was the only important competitor in the smoothie market. PJ sold a line of 330mL smoothies made from concentrate. PJ smoothies were priced at £1.99, which was a premium price.

Innocent planned to beat PJ on quality and taste by making a fresher, more natural product. Freshness came at a price, however. After talking to potential suppliers, Wright learned some disturbing news about ingredient costs. For Innocent to make a reasonable margin on a 330mL product, they would have to charge over £2.50. This was considered a non-starter. There was simply no evidence that such a high price point could exist in the beverage market.

Wright said, “We were depressed. We thought, ‘This is it, isn’t it? The model just doesn’t make sense.” The three founders agreed that £2.00—matching PJ’s price—was the highest they could go. They also agreed that they couldn’t give on the freshness issue. There was only one variable left to adjust: volume.

A London design shop came up with an idea for a 250mL bottle that impressed the Innocent team. They decided to run with it. It was a risky move: Innocent planned to match PJ’s retail price while offering a third less juice. Balon said, “We were wavering. We didn’t know if we could get such a premium price. But our financial model told us we HAD to get that amount, so we stuck to our decision. At the time, we were scared. In retrospect, the price may have actually helped our growth by sending a signal that our drinks were something different.”

Finding a manufacturer

The second key decision made in late 1998 involved manufacturing. At the time, there were no British manufacturers set up to create the fresh smoothies that Innocent wanted. The manufacturers were certainly willing to adapt to earn a large account, but Innocent wasn't a large account. What manufacturer was going to make a big investment in new technology for a risky startup offering puny product volumes?

Wright said, “Nothing was coming together. Out of frustration, we started talking about building our own factory. We just felt like we needed to bring this issue under our control.”

In November 1998, Wright met with a small supplier in a rural area. The supplier was relatively dependent on a few key supermarket customers, so he liked the idea of diversifying his client base. More importantly, perhaps, he got along well with the Innocent team. He agreed to take a risk on them.

For the exclusive use of A. ADEOSUN, 2019.

This document is authorized for use only by ADETOLANI ADEOSUN in Foundations of Entrepreneurship-1-1-1-1-1-1-1 taught by ALEXANDER MCKELVIE, Syracuse University from Sep 2019 to Jan 2020.

805-031 Innocent Drinks

6

Wright said, “If we’d made it to Christmas without a supplier, I am sure we would have started building a factory. And I think it would have been a disaster. All the energy we put into the brand might have gone into reinventing ways to squeeze fruit.”

Raising investment capital

The final important decision was whether to raise money and, if so, how much to raise. Initially the founders had thought they could grow the business organically. When they began to run projections, they quickly realized that it would be impossible.

They considered small business loans, but found the paperwork terrifying. Also, banks were reluctant to lend to them due to a lack of assets. They pursued venture capital firms. They met with perhaps 12 investors and never got a second meeting. Said Wright, “They had no interest whatsoever. They’d say, ‘You're selling a drink?! Isn’t that one of the world's most competitive marketplaces? And, on top of that, it’s a chilled drink. Isn’t that a nasty distribution problem?’”

With no leads and mounting personal debt, they threw a Hail Mary. They sent an email to all their friends and acquaintances, asking if they knew anyone who was rich. A few responses trickled back. Wright had a friend at Bain who had worked with a man named Maurice Pinto, who had been an angel investor in other deals.

The team met with Pinto in October 1998. Wright remembers being surprised by Pinto’s approach to the meeting. “He didn’t ask detailed questions about our plan. He asked about our lifestyle, about how we’d make decisions, about where we were headed as people and as a team.” They learned later that Pinto had made search fund investments in the past and felt it important to evaluate individuals rather than products.

After more discussions, Pinto sicced two business students on Innocent, who grilled the founders about their assumptions and forecasts. In the end, an investment offer was extended: £235,000 for 20% of the company. The team accepted, and the investment was closed in January 1999. Three months later, the company received its first pallet of smoothies from the manufacturer. (See Exhibit 5 for a timeline of selected events.)

The Innocent brand

In the summer of 1999, Dan Germain was back in London after a stint teaching English in Thailand and Indonesia. He called up the Innocent founders, whom he had known since he was 18. He thought their juice business sounded fun, so he deferred a masters program he had been planning to start in the fall. He started by delivering juice to retailers in Innocent’s vans.

Germain and the founders were checking out the packaging of other beverages and someone commented on how boring labels were. The labels were dominated by minutiae. Why not make labels fun to read, like cereal boxes for kids?

They came up with the idea to print offbeat messages on the smoothie labels. One of the earliest messages, written by Richard Reed, was: “We’re not saying that there’s anything wrong with having a gym workout, it’s just, you know, all bit of an effort really, isn’t it? If I were you, I’d just have an Innocent smoothie instead. They’re 100% pure fruit, they’re made with fresh rather than concentrated juice and they contain no additives whatsoever. As a result they taste good and do you good. And you don’t need to take a communal shower afterward.”

For the exclusive use of A. ADEOSUN, 2019.

This document is authorized for use only by ADETOLANI ADEOSUN in Foundations of Entrepreneurship-1-1-1-1-1-1-1 taught by ALEXANDER MCKELVIE, Syracuse University from Sep 2019 to Jan 2020.

Innocent Drinks 805-031

7

The messages on the packaging became one of the hallmarks of the Innocent brand. The tone was offbeat, honest, irreverent, and often self-deprecating. It was non-corporate. For a company with very little money to spend on marketing, it became an effective way to create a buzz and earn customer loyalty. As the company grew, Germain began to take over as the unofficial voice of the Innocent brand—writing most of the messages on the labels, as well as the company newsletter and other customer communications.

Another example of the company’s guerrilla marketing tactics involved the company’s delivery vans. Like package labels, delivery vans were usually boring and generic. Innocent covered one of its vans with fake grass and dressed up another one to look like a cow (symbolic of the yogurt in the company’s dairy-based smoothies). (See Exhibit 6 for a photo of an Innocent delivery van.)

The press began to get interested in the Innocent story. In the fall of 1999, BBC Food & Drink called Innocent the “UK’s best smoothie.” The company, with its distinctive voice and innovative marketing, became a darling of the press.

Germain said, “I’d like to say that the witty labels and such were part of our master plan to dominate the industry. But I think the main reason we did those things is that the three founders and I were friends. We were doing things to make each other laugh. I think our customers could smell the fact that we were having fun.”

The labels, which may have started as a lark, have become an institutionalized part of the company’s marketing plan. In 2004, keeping up with the labels had become a major responsibility. For each product (e.g., the strawberry and banana smoothie), there were 10 labels in circulation at any given time. That way, people buying two smoothies from the same store would likely receive two different messages. In addition, the messages were cycled four times per year. Across about 20 different products, this yielded an astounding 800 labels per year in circulation. (See Exhibit 7 for sample communications from the company’s labels.)

Adam Rostom, Innocent’s Marketing Manager, said, “It’s very expensive and difficult to deal with. The obvious ‘corporate’ answer is to standardize them. But these messages are important to our brand. Standardizing them would send a very clear and very negative signal to our customers.”

Hats for bottles

In the summer of 2004, Innocent was preparing to launch seasonal beverages for the fall and winter. For the winter drinks, a graphic designer had added a winter hat to the artwork on the labels. Rostom thought: Why not use real hats instead? Something to cover the caps of the bottles “to keep the drinks warm in cold weather,” he said. The quirkiness of the idea appealed to him and seemed consistent with the Innocent brand.

Rostom said, “In trying to figure out if this was a viable idea, I was wondering, ‘Where do we get the hats?’ We could source them from China, but what’s the point of that? So we decided to have English grannies knit them.” (See Exhibit 8 for a photo of the smoothie with a knit cap.)

The company mentioned the idea in its customer email newsletter, which has a circulation of 5,000. Within a few weeks, they had signed up 40 grannies. The grannies agreed to knit the caps for free, in exchange for a 20p donation, per cap sold, to charities trying to keep the elderly warm.

For the exclusive use of A. ADEOSUN, 2019.

This document is authorized for use only by ADETOLANI ADEOSUN in Foundations of Entrepreneurship-1-1-1-1-1-1-1 taught by ALEXANDER MCKELVIE, Syracuse University from Sep 2019 to Jan 2020.

805-031 Innocent Drinks

8

Traditional marketing versus guerrilla marketing

As the company grew, it incorporated more traditional marketing approaches, such as bus and subway advertisements. Rostom, who was recruited from Unilever in April 2003, said, “I think of our marketing approach as a ‘see-saw.’ On one side is Big Brand and on the other side is Little Brand. We’ve got to balance Big Brand stuff, like bus ads, with Little Brand stuff, like the knit caps. We may have a row of shelf space in a big supermarket chain, which looks like Big Brand. But then next door at the café, there is an Innocent fridge covered with fake grass. That’s Little Brand.”

One of the challenges with non-traditional marketing approaches was that it made it difficult for the company to track what was working and what wasn’t. As an example, in August 2003, Innocent created Fruitstock, a “free festival for nice people.” The company spent one-third of its marketing budget on the event, which was held in a public London park and included outside food vendors and live music. By the time of the second event in Aug 2004, it was attracting over 80,000 attendees.

Richard Reed said, “This event cost about £200,000 to put on. At this point, I can’t prove that it was a good investment. From a hard numbers perspective, maybe we’d have been better off hiring new salespeople. But we are doing things that are hard to quantify. From a hard numbers perspective, why waste time on labels? There are important secondary benefits to things like Fruitstock: We had customers in the 'VNP1 area' having a great day with their families. Employees could come with their family and friends. It’s not just about advertising—it helps with recruiting, PR, and other areas.”

The growth options

In 2003, as Innocent’s sales continued to grow sharply, investor Maurice Pinto gave the founders some advice. He felt it was time for the Innocent team to start thinking about opportunities for growth. As Reed recalls, he said, “You guys should think like a chef. You may spend most of your time working on the main dish, but you’ve always got something cooking, some kind of side dish, on the back burners.”

The founders agreed that the two best growth options were (1) taking the Innocent product line to Europe; or (2) extending the Innocent brand to other products in the U.K.

Expanding to Europe

The Innocent team believed that its prospects in Europe were strong. The motivation to pursue continental Europe was so strong internally that an informal mission statement had caught on among employees: Innocent would be “Europe’s favorite little juice company.”

The case for expansion into Europe was simple: Find more customers for the same juice product, while keeping the supply chain intact. The founders believed that they could expand into a new country with only a small sales and marketing team on the ground.

An early experiment in Ireland had gone well. By the end of 2004, 7% of Innocent’s revenue came from Ireland with only a couple of employees working in the country. In fact, on a per capita basis, Ireland was more successful than Britain. 1 "Very Nice People"

For the exclusive use of A. ADEOSUN, 2019.

This document is authorized for use only by ADETOLANI ADEOSUN in Foundations of Entrepreneurship-1-1-1-1-1-1-1 taught by ALEXANDER MCKELVIE, Syracuse University from Sep 2019 to Jan 2020.

Innocent Drinks 805-031

9

However, Europe was, of course, a collection of very different markets. In Germany and Italy, for instance, most of the juice sold was “ambient,” meaning it was non-refrigerated with a long shelf life. Selling premium refrigerated smoothies into such a marketplace would be no small feat. In some European markets, Innocent would have to establish the smoothie category, as PJ did for Innocent in the UK.

Will Hartley, international sales manager and a former employee of Odwalla in the U.S., said that Innocent’s target markets within Europe would be locations with big urban populations, high disposable income levels, strong demand for eating and drinking outside the home, and strong demand for juice (though not necessarily smoothies specifically). According to Hartley, the countries that best fit these criteria were Sweden, Denmark, Norway, the Netherlands, and France. (See Exhibit 9 for the size of the juice market in selected countries.)

With the exception of France, however, these markets were significantly smaller than the UK market. And the company’s progress in achieving a presence in France had been disappointingly slow.

In thinking about the opportunity in Europe, the founders analyzed the size of the chilled juice market in three promising countries—the Netherlands, Belgium, and France. (The chilled juice market is a small subset of the overall juice market.) Then, they applied Innocent's market share growth from the U.K. to the new countries. They thought that the chilled juice market was a good proxy for the smoothie market, since not all countries tracked smoothies as a separate category.

Using this approach, the founders estimated that the project to expand into Europe could yield over £10,000,000 in revenue by the third year. (See Exhibit 10 for the founders' analysis.) The costs were relatively low, with the bulk of the investment coming from the salaries of several employees on the ground in each country. One cost that was difficult to forecast was the price of advertising. If the Innocent brand could spread by word of mouth, as it did in the U.K., advertising cost might be quite low. On the other hand, if the brand did not translate well, or if the smoothie concept did not grow as quickly as in the U.K., then Innocent might have to make a substantial investment in each market.

Another cost that was difficult to calculate was the distraction of management attention. (This cost also applied to the product line expansion.) New ideas, with prospects for new growth, naturally drew the attention of the top performers in the organization. Could Innocent, having just eclipsed the smoothie market leader, afford to lose focus?

Expanding into the United States

The United States was easily the world’s largest market for smoothies. The smoothie category in the U.S. was well-established, having been pioneered by Odwalla about a decade earlier.

The team’s concern about the U.S. was not the market size, it was two other factors: (1) intense competition; and (2) the need to build an entirely new supply chain. The juice and smoothie market was crowded with competition, and unlike the UK, much of the competition had long been offering fresh juices.

The founders knew it was feasible to build a supply chain in the U.S., but they were daunted by the amount of management attention it would consume. For a small company to build a distribution network in one of the world’s largest countries, from 3000 miles away, it would be a challenge.

In the summer of 2004, the three founders had traveled to Las Vegas for Richard Reed’s bachelor party. They used the opportunity to meet with some key potential partners while in the U.S. They

For the exclusive use of A. ADEOSUN, 2019.

This document is authorized for use only by ADETOLANI ADEOSUN in Foundations of Entrepreneurship-1-1-1-1-1-1-1 taught by ALEXANDER MCKELVIE, Syracuse University from Sep 2019 to Jan 2020.

805-031 Innocent Drinks

10

were taken aback by the positive response. Buyers from some of the U.S.'s most prestigious national retail chains expressed strong interest in carrying Innocent smoothies. The founders were torn: The U.S. market was a tough one to enter, but could they walk away from interest by such marquee companies?

Other product lines

"Europe's best little juice company" was one vision for the future. Another vision was a UK "natural brand for healthy lifestyles." In this vision, Innocent would extend its brand into other categories, such as ice cream or soup, much as Odwalla (U.S.) eventually added nutrition bars and bottled water.

The ice cream business was their first target. Lucy Ede, Innocent's Head of Recipes, had been leading the effort to develop an ice cream product. Her team had made substantial progress in the past year, but because they needed to devote most of their time to new smoothie flavors and seasonal changes, they had not yet completed the ice cream development.

The lure of other product lines was clear: Customers loved the Innocent brand. It was the company's biggest asset. Reed wondered, "When we talk about expanding into Europe, we are emphasizing our product over our brand. No one in Europe has heard of Innocent. And I think our brand is an enormous asset."

Jon Wright was the least excited of the three founders about this vision. He said, "Yes, we get to keep our customers. But we'll need a whole new supply chain, and we may have different buyers at the retail level. For me, I want to keep things simple, keep things the same, and just scale them up. We do certain things well, let's do more of that. But I know the argument isn't quite that easy. I think what we do well is distribute chilled drinks. But the other guys argue convincingly that what we do well is give customers a feeling of healthiness."

The founders worked on a rough analysis of the market opportunity in their first two target categories: ice cream and frozen yogurt. If they were able to launch the products in early 2005, they believed they could grow the business to £8 million by the third year. (See Exhibit 10 for their analysis.) The founders agreed that the ice cream and yogurt products were, in a lot of ways, riskier than the European expansion. They simply could not guarantee that demand for their product would be there.

However, they considered the move into ice cream a first test of the "healthy lifestyles" vision. It had value as an indicator for the overall strategy. It would also be powerful evidence to a potential acquirer that the Innocent brand was a valuable asset with room to grow.

Financial issues related to growth

Adam had spoken extensively with James Davenport, the financial controller. From a finance perspective, the two options were remarkably similar. Adam gave the overview to Richard and Jon:

From a 'cash needs' perspective, the options aren't too different. Looks like it will cost us roughly £500,000 up front to pursue either option—that's made up mostly of salaries and a bit of marketing. Cap ex is not a big issue: in Europe we'd use our existing infrastructure, and with the ice cream and yoghurt products, we'd outsource the manufacturing. As for working capital, we'll need to invest a bit in either scenario for extra inventory in the system, but that is built into my £500,000 figure.

For the exclusive use of A. ADEOSUN, 2019.