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On innovation in drinks
My wife and I have recently had our youngest child, and every day one of us walks him for his afternoon nap. On my walks, I listen to a podcast or two. Recently, while on my routine nap-walk, I listened to This Week In Startups by Jason Calcaneus with David Friedberg. My mind melted.
During the walk, I had to constantly stop, rewind, pause, consider the implications, rewind, and repeat. An hour interview took me three to complete. In the end, I listened to it twice.
The innovation David and Jason discussed has the potential to disrupt a large subset of very valuable, entrenched companies. At this point, public response to the podcast seems to be minimal, but I have no doubt that it will be truly transformational for many, and devastating for some companies that won’t see this change coming. At first they’ll belittle it, then it’ll be a nuisance when it starts rolling out, and eventually these companies won’t be able to react to it when it scales.
First they ignore you, then they laugh at you, then they fight you, then you win.
I’ve been lucky to meet all kinds of business builders, doing all kinds of things, throughout my career. But it’s rare for me to leave any kind of interaction and think that my counterpart is building something truly revolutionary. A pronounced improvement in some parts of the Internet, perhaps, but a revolutionary change to billions of people and major parts of the economy? Generally not.
On the episode Jason brought on David, who runs The Product Board (TPB), a platform for launching businesses focused on hard-tech problems that require serious R&D investment to validate. The idea David covered is a machine from Cana, a TBP company, that uses 80 compounds which, when mixed together in the correct quantities and with the right amount of water, sugar, and ethanol, can reproduce the smell, taste, and mouth feel of virtually any drink on the planet.
An inkjet printer for drinks.
Using Cana’s touchscreen you can tap in your order, choose what you want to drink, and voila - it’ll be poured for you. The device has a water cooler inside so it’ll be served at the perfect temperature. The compounds come in a cartridge, which you replace as you run out.
A cola? You got it. You’d like a Duckhorn Cabernet Sauvignon 2004? No problem. Coffee? Exactly how caffeinated would you like it? We’ve got it.
Many analysts talk about the future of the world after the internal combustion engine and the impact of driverless, electric cars. There are the first order changes, the obvious shifts, like long-haul coast-to-coast trucking jobs will decrease. Millions of people are employed directly by the industry, and millions more in restaurants, garages, service stations, and so on, that service them1. But then there are the second order changes. Humanless cars shuttling themselves from coast-to-coast will require fewer pit stops in middle America, which leads to falling demand in traditional servicing like gas stations. This means a reduction in jobs, of course, but also trickles down to less obvious outcomes like a reduction in cigarette sales; half of those sold in the USA are transacted in gas stations2.
What led to the rewind-pause-consider-repeat process of listening to the podcast was my fascination with the second order effects of the Cana product. During the episode, Jason asks the classic Venture Capitalist question of “what happens if this works?”. The following presupposes that Cana (or another company) does get this thing to work. David mentions that the initial machine will be prohibitively expensive, but by version three they'll be more mass market. Let’s assume that version three happens.
This is such a big idea I can only cover a tiny fraction of the impact it’ll have, but below I consider eight factors: retail, transportation, venues, the environment, Coca-Cola, Amazon, creators, and general life.
Let’s imagine Cana - or a version of it - works. What happens now?
Retail: the at-home disintermediation
While people will buy drinks for on-the-go consumption, a huge reduction in purchasing for the large family weekly/fortnightly shop will occur.
Stores will be able to reuse the real estate they currently dedicate to drinks - often several aisles - for other goods. The amount of warehouse space required will reduce. Both impacts will allow them to reduce their physical footprints.
Maybe retailers start having a Cana in-store, and consumers buy empty two litre bottles, self-serving their designer drinks; this is already starting to happen, with Coca-Cola introducing a bring-your-own-bottle vending machine in Japan, and the wine service Vagabond trialling similar ideas34. Perhaps micro stores will start to appear, unstaffed, giving consumers access to a Cana machine - a vending machine for tailor made drinks.
Stores will lose revenue because of the machines - although they may sell replacement cartridges, they’ll lose out on high margin drinks and alcohol sales. In this new reality, 6,000 square foot off licences will be replaced with a single machine5. Worth mentioning that I’m writing this as a Brit, where alcohol is sold in grocery stores, which isn’t the case in the US/Canada6.
Transportation: lightweight, cleaner, and cheaper
Planes that currently take large amounts of beverage stock into the sky just need to take a water tank and a Cana machine, allowing them to convert the water into whatever drink the customer desires. The amount of plastic used to wrap the drinks, and the amount of aluminium and cardboard used to house them, won’t be required. At the scale of flights internationally, this will be an enormous weight and waste saving.
This means that the waste produced by a flight will decrease impressively, and turning planes around at airports will take less time. Not to mention that fewer staff will be required to process the rubbish.
American Airlines famously saved $40,000/year by removing an olive from each salad plate7. Imagine how much an airline could save in kerosene with fewer refrigerators needed to keep drinks cool?
Will airline tickets become cheaper because of Cana?
Venues: more choice, smaller space, fewer staff
Mixer-taps in bars, nightclubs, bowling alleys, and cinemas will continue to exist, but rather than connecting to cardboard boxes containing plastic bags of syrup, they’ll draw directly from a machine that’s using the right compounds.
If venues have the choice of which route to invest in - hundreds of cans of different drinks, wrapped in cellophane, with large refrigerators to keep them cool, and staff to load/unload delivery trucks - or a single machine connected to a water line and a cartridge of spare compound, they’re definitely going to choose the Cana.
And with such a rightful focus on the environment, regulation of new bars, pubs, and nightclubs may require venues to use the machine. Councils might even raise rates if a venue doesn’t use one.
Environment: dramatic reduction in waste
The data is staggering; 400 million tonnes of plastic are produced each year, 40% of which is single use89. Coca-Cola alone produces three million tonnes of plastic packaging per year, nearly one percent of the global plastic production10.
While many organisations, including those in the beverage industry, have been pressured into reducing the usage of plastic in packaging, we’re far from a plastic-free reality. And the continued increase in demand for plastic-packed products - driven by population increases - will create upward pressure on their usage of plastic.
Much of the plastic used by the drinks industry has to do with transporting the drinks to consumers; the branded plastic-wrapped crates of drinks come in, cellophane wrap around bottles and cases of drinks, etc. And drinks are heavy and take up space. They require large diesel-fueled trucks and trains to transport. Cana’s device leapfrogs this - it’s already in the consumer’s home; it has direct access to buyers, completely skipping the transportation step.
Presuming that the compounds are easy to retrieve or create, the environmental benefits of this device are mind boggling.
Coca-Cola: ceasing all bottling operations
Coca-Cola operates through two corporate identities. The Coca-Cola Company owns all the recipes, and produces syrup concentrate, which bottlers - the other constituent - are responsible for marketing, producing, and distributing. Given their global reach, The Coca-Cola Company owns various bottling companies throughout the world11.
Through these operations, The Coca-Cola Company has become the world’s number one producer of plastic waste12.
Cana offers a radical alternative to classic production models. They’ve already ‘done’ the work of shipping and logistics, making any drink under the sun readily available in people’s homes and venues. All that Coca-Cola and other companies like it would need to do in a Cana-filled future is digitally distribute recipes via a website, right to people’s homes.
What does innovation look like for a brand like Coca-Cola in this new potential world? Do they become ultra high margin formula companies? Do they shed their logistical bottling and shipping operations, or at least pivot and focus only on marketing activities?
Consumer sentiment continues to shift to be more focused on environmental issues13. Companies that continue to deal in plastic bottling and distribution will be severely disrupted. What do they do in a future where consumer choice will drive down usage of disposable drink containers?
While I’ve focused on Coca-Cola throughout this section, the lessons are applicable for all large drinks producers and bottlers; hundreds of billions of dollars of enterprise value is ready to be disrupted.
Amazon: the category owner?
Here’s my prediction: Amazon will buy Cana. They’ll go vertical on beverage production, already owning the relationship with the customer. The device will come free with a Prime subscription and because Amazon already operates a huge third-party marketplace, they can leverage their existing brand partners - who already know how to produce formulas, lotions, and potions. In this new reality, Amazon partners just shift their focus to this new consumer channel Amazon controls. It’s a slam dunk. There are only a few markets large enough to really stretch Amazon to the next trillion dollars in enterprise value. By purchasing Cana, Amazon becomes the largest distributor of drinks overnight; nearly a $2 trillion market including alcohol14. It’s a big enough offering for Amazon execs to jump out of bed for.
Amazon doesn’t like shipping heavy, low margin products - they’re harder to ship, take up a lot of room, and are relatively low value; drinks are the opposite of what Amazon likes to distribute. Shipping high-value lightweight cartridges full of compounds is right up Amazon’s ally. And of course, they know how to build hardware: the Kindle, Echo, Ring, Fire TV, Eero. Yes, this is a more complex product, and one that is based on significantly more detailed science, but they have the capabilities and human and investment capital to quickly get to grips with it.
If Amazon doesn’t try to purchase Cana, I predict that they’d try to create the product themselves. Though you’d imagine there’d be some considerable IP protection work going on inside TPB/Cana my pretty comprehensive search on LinkedIn only showed one person with a legal background working at TPB - and seemingly no one at Cana. I suppose science is Cana’s current core competency, but I expect IP (protection and defence, and attack from incumbents) will become their long-term protector of value.
Creators: everyone becomes a drink brand
In the episode, Jason and David speak about what’s clearly to come, but hasn’t been announced yet: an App Store for drinks running on the Cana touchscreen. Companies will be able to move out of the physical ingredient and drink logistics business and focus solely on brand and marketing execution, pushing their product to consumers through bits and bytes, not trucks and cellophane wrap. Presumably Cana will take an App Store-like clip of sales; 30% of the gross cost.
With this in mind, drinks brands will need to continue to attain the appropriate regional and worldwide licences and certificates to sell soft/hard drinks, and I’d imagine that some kind of approval process will be required to be featured on the Cana platform. But wow… the distribution channel potential with the low setup costs is incredible.
Imagine being able to change the composition of your drink with no retooling (albeit, likely requiring licensing and certificate reapproval). With Cana, companies will be able to launch new drinks brands with just a formula and zero inventory. It’ll radically change the landscape of available drinks.
Famously, consumer goods companies like Coca-Cola, Unilever, and P&G do not have access to the end consumer; they’re disintermediated by the retailer (supermarkets, convenience stores, pubs/clubs etc.). Despite the fact that Unilever have 2.5 billion daily users of their products, they really don’t know who the vast majority of them are or what drives them to purchase15. If Cana passed back more information about the end user to the brand after purchase, they could rapidly become the preferred sales channel for brands.
As a data nerd, the new reality could be hugely beneficial to disintermediated brands: in a future state, Cana might collect demographic data on their users to build algorithms that provide recommendations to their customers - “gym goers of your age like XYZ beverage after working out”. Frequency and preference of drinking, number of people in the household, rough ages (maybe age bands), gender? Data driven brands could leverage this data in ways that are currently impossible. Imagine the targeting capabilities - it’s the targeting capability of Facebook from 2010-2020 all over again.
Brands will move from earning thin margins - especially when selling to wholesale - to earning software-like margins. Their Costs Of Goods Sold (COGS) transferred to the customer who pays for the compound cartridge. Presumably we see their other main contributor to COGS, the Cana App Store take-rate reduce with time, scale, and competition.
People will have profiles of how they like to drink coffee. They’ll store them in the Cana network, and share them with their friends when they visit their houses. Their friends will love their specific recipe and ask if they can have the formula. Soon they’ll be wondering, “Maybe other people would like my coffee formular too? … Maybe they’d pay for it?”. Soon enough, your dad will have his own branded coffee on the Cana network.
I wonder if some brands with huge existing bottling operations will start innovating in new ways. Maybe they’ll start creating drinks with fresh fruit in them, something that can’t be replicated through the machine. Will Orange Juice with Bits become the top selling juice at retail because other juices are made through the machine, at home?
Will drinks as we know them now, bottled in plastic, aluminium, glass and otherwise, be relegated to something people buy because of their novelty? A bit like how, in a future world of electric-only vehicles, internal combustion engine cars will be a toy for the rich and the reminiscent, only accessible to those with the means who go out of their way to purchase them. Or the way records are treasured for their crisp sound and nostalgic reference to a world gone by.
Will you go to friend’s houses and marvel at the fact they offer you a Coke in a glass bottle, bought from a shop? “It’s more expensive, and I had to go to three different stores before I found it, but I think it just tastes more authentic” they’ll say, while trying to remember how to use a bottle opener.
In the episode that sparked this article, David mentioned Cana’s product roadmap and the fact that this initial version of the product is very much version one, and that in the future lots more will be added. Something that wasn’t discussed, and I think will have a massive impact on the adoption of this product and it’s beverages, is packaging: how can I take my lemon ice tea with me on the go? A disposable container won’t cut it: it won’t make this invention better than the status quo. We’ll need a sustainable way to transport the drinks themselves.
Homes will produce less rubbish - fewer plastic and glass bottles, cans, and so on. Less fridge space will be required to store drinks. Palettes will be widened, and people will try drinks they’d never usually reach for, just because they can.
I can imagine a world where new homes come with these machines, in the same way they come with air conditioning or solar panels or built-in speakers right now. Home builders will become a sales channel for Cana.
This machine has the power to reset our expectations of what products can do. It’s straight out of science fiction - The Replicator in Star Trek16 - and it’s going to pull the future forward. Our children’s children won’t know what it’s like to go to a store and see hundreds of plastic and glass bottle options.
All in, this is an invention that will radically, and I think rapidly, change the world. The next challenge for Cana - aside from shipping this science fiction device and reducing the cost to make it affordable for the majority of the world - is of course food, an even larger market.
PS. Just as I finished this article, Cana launched their product - there’s a new This Week In Startups episode to watch, and I can’t wait.
Disclaimer: these are of course only ideas of things that may happen, projected from various readings and learnings. All rights belong to their respective owners.
See this excellent essay by Ben Evans on the topic: ben-evans.com/benedictevans/2017/3/20/cars-and-second-order-consequences
20-30% margins for beer, 50% for wine, according to eposnow.com/uk/resources/liquor-store-profit-margins
For more details on US laws related to alcohol sales, see thegrocerystoreguy.com/why-dont-grocery-stores-sell-liquor