March 26, 2010 Co-Pack Competence

Volume 6 | Issue 1

Nor-Cal Beverage Co., Inc. was a large regional bottler of soft drinks for 70 years until the company ditched its whole business plan to bec

The family is the same. Only the business has changed.

The Nor-Cal Beverage Company story encompasses the past, present and future of the U.S. beverage industry as told through the stewardship of the Deary family. Nor-Cal has been a family-owned business in West Sacramento, Calif. since 1937 when Roy Deary became a Hires Root Beer bottler. Roy died in 1963, but the company lived on and diversified into additional brands and expanded into contract packing.

The company was hugely successful and grew to employ around 800 people including three generations of Dearys. Revenues easily topped $100 million annually.

But 70 years after it opened in a tiny motorcycle repair shop, the company made a dramatic and daring decision to drop out of its main business lines and totally transform operations.

By 2007, the soda industry had become so competitive and profit margins so slim that President and Chairman Don Deary, Roy’s son, concluded something had to give.

“The big guys – Pepsi and Coke – are fighting for market share and started lowering prices to almost ridiculous lows, $5 per case (of canned soda),” Deary said. “Our markets were squeezed. There was no light at the end of the tunnel. We made a decision to sell and get out of the carbonated soft drink business and into the contract packing (co-packing) business, which we had already been in for a number of years and knew a lot about.”

The attraction of co-packing was clear: No trucking. No worrying about escalating prices of soda extracts from parent brands, no fighting for co-op advertising dollars or for shelf space with grocers.

The company sold off franchises including Cadbury Schweppes. Nor-Cal exited the franchise manufacturing and distribution side of the business and refocused on contract manufacturing for other beverage brand owners, particularly the popular health-conscious and new age brands.

To understand the magnitude of the move, it’s helpful to get a sense of how the soft drink industry works.

“The brands that people are familiar with are awarded franchises from the parent companies,” explained Pete Grego, director of contract manufacturing and new business development for Nor-Cal. “The bottlers are all established franchises that were given the rights to bottle, produce and distribute those brands in a geographic territory.”

Nor-Cal held more than 15 franchised brands and covered a 28-county territory in central California with brands such as Dr. Pepper, Squirt, Canada Dry, Orange Crush, Hires Root Beer, Snapple, Vitamin Water, and many others.

“Those 15 brands represented a sizeable business model of ours – it was the largest division of our company. When we saw that the soft drink business was weakening in overall volume due to concerns over soft drinks contributing to obesity, we decided to shift gears. We took the money from the sale of those franchises and drove that back into plant innovation,” Grego said.

The production investment is estimated at nearly $50 million in state-of-the-art, automated, energy-efficient hot pack operations. Grego and Deary agree that, despite the coinciding economic recession, the move was right for the company.

“We have a history of being out front on things and this was the big one, with all the cards on the table,” Grego said.

“It was a tough decision because my dad started the company. We’ve been raised in this business. But the family has never looked back,” Deary said of the decision to severe its root beer roots.

OUT OF THE FIZZ BIZ

The company’s reinvention is a response not just to the declining profitability of the soft drink industry but also to other market changes.

“In our industry they say people in good times and bad consume beverage products. That is true. But we started to see a shift in buying habits. Much like anything else when times get rough financially people will migrate from a national brand to private label. We started to see a shift in that area as well,” Grego said of the company’s new focus. He noted that regions of California were not well supported with co-packers, presenting a clear opportunity.

“We’re not the only producer in the area but we are the only one with capabilities to do a majority of the business. One of the things in our co-packing world is you have to have the ability to produce and store product in a warehouse,” he noted of the company’s scale advantage.

Production is heavy at the new plant which operates at significant or total capacity depending on the season. (The beverage industry is highly seasonal with summer spikes.)

The new customer base is diverse, made up of familiar anchor customers like Coca-Cola’s Minute Maid brand, Nestle, Hansen’s Natural, AriZona Tea and Monster energy drinks. Smaller niche brands also turn to Nor-Cal, such as Function energy drinks, Roaring Lion, Bing, EX and other western and national players.

The new facility in Northern California focuses on hot fill beverage processing for these new age drinks, energy and performance drinks, teas and enhanced waters. The company is also diversified with some brands of its own along with a beer distribution business. It also runs a large southern California plant in Anaheim. But with the new investment, its core competency is in producing beverages with natural ingredients like juices that require complex hot pack operations.

“Now we produce products for other companies,” Grego said. “A lot of top beverage companies exist only by their name – they don’t have an infrastructure or they own plants so they need to rely on companies like ours – co-packers across the country to survive.”

Nor-Cal acts as the expert and high-volume producer for the beverage brand owner.

“When AriZona or Hansen’s comes up with a new beverage product, they walk in our door with a published recipe or formula with a batching instruction behind it,” Grego said. “Our job is to take that document and produce to that specification.” The company manufactures and stores the inventory and releases it based on the customer’s shipping orders, typically to distributors.

It all hinges on advanced production equipment and capabilities. Inside the West Sacramento facility are nine state-of-the-art production lines. These include three hot fill lines for small can production, a large can line, and a combination plastic and glass bottle line. Those are the workhorse operations, representing a large portion of Nor-Cal’s production.

Hot fill is the thermal processing that is done in lieu of adding preservatives. “If you want to produce a natural product and you don’t want to have a preservative then that hot filling sterilization occurs prior to filling to eliminate microbial growth and make the product shelf stable,” Grego said.

In addition, at the same facility are four aseptic lines for drink boxes, plus two pouch lines.

The quality as well as the quantity of production is awe inspiring. Sacramento features an advanced, automated blending room and operations are ultra energy efficient with heat recovery processes, electric forklifts, even targeted-use boilers programmed for efficiency. The plant is run with sophisticated control panels to manage the formula and batching instructions for each SKU for the customer. An industry gold standard Allen-Bradley control platform orchestrates the plant.

“Let’s say you have five flavors of a particular brand. Those have their own distinct ingredients and flavoring,” Grego said. “The computer control panel has all that information locked into it. The blender assimilates all those ingredients, putting them in the batch tank, blending them and preparing them to be filled.”

Sacramento has the capacity to produce about 25 million cases of beverages per year. And the company can double that output through its second plant in Anaheim.

SOUTHERN CAL, TOO.

Nor-Cal’s 10-year-old Anaheim plant is located just a few blocks from Disneyland. It focuses on bottled production of chilled juices and new age beverage products for clients including Coca-Cola’s Powerade and Minute Maid brands, Hansen’s, AriZona and other clients.

Recent expansion and upgrades in Anaheim bring it to a total of six production lines. Here’s the breakdown: Nor-Cal has two, single-serve hot fill lines that accommodate a range of different sizes in PET plastic bottles. A multi-serve hot fill line handles larger containers like 64- to 128-ounce (gallon). The company runs three chilled gable top container (“milk” carton style) juice lines for things like refrigerated orange juices and various varietal juices like pomegranate.

As Grego mentioned, customers supply the ingredients but there are some exceptions. For instance Nor-Cal supplies some items added at the time of filling like sweeteners or powdered ingredients, ascorbic acid or low-volume components.

And of course the water. Both plants use reverse osmosis to purify water from municipal sources. RO essentially scrubs the water via a series of rods and filters through a nano-filtration system.

An interesting area of specialization for the company is in creating the variety of elaborate drink container shapes and sizes that energy and health beverage companies demand. Both plants have diverse capabilities in drop sleeve, shrink sleeve, new bottle and can sizes, resealable containers, and other approaches to attracting consumers.

“With evolving packaging proliferation there is always a need for new styles of bottles and closures,” Grego said.

Among the challenges in packaging is the need to reduce environmental impact by making plastics that are lighter in weight.

“Taking the weight out of the bottle seems right environmentally but it creates problems in trying to fill the containers. Some won’t stand up in a commercial environment,” Grego said. The company has some solutions including lightweight blends.

“We are looking toward staying ahead of what is happening in our industry and have positioned ourselves to handle a variety of packages and new technologies,” he said.

In addition to Nor-Cal’s extraordinarily diverse capabilities and operations, the company is also a western U.S. beer distributor for breweries including Anheuser-Busch, and Mexican brands such as Corona, Modelo and others. With the new company focus, the beer division is the only business unit with significant direct store delivery, mostly in the foothills of the Sierra Nevada and Northern California.

Nor-Cal also produces its own specialty drink brands including Go-Girl and Molotov Energy Brands.

A HAPPY BEGINNING

So how are things going in the new, traditional beverage business at Nor-Cal?

Sure, the recession presents a challenge as it does for nearly all companies. The enhanced brands now manufactured by the company are more expensive for consumers so sales are down for customers. But premium beverages also have a higher profitability despite being hurt by the overall economy. And a new focus on reducing obesity rates and improving children’s health is a promising backdrop for the reoriented company.

Although business is seasonal, production is running at high capacities overall.

“While some brands we are producing for have lowered their projected volumes, there is definitely a demand right now for what we classify as better-for-you products in the market,” Grego said.

“We have a state-of-the-art plant. We are very proud of it. It looks terrific,” Deary added about the company’s conversion. “The economy hit and that hurt us some. But it will definitely eventually all pay off. We’re all very happy here.”

That’s a good formula for a family and a business.

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