EDITOR’S NOTE: This is an article from the co-founder of the company, who happens to be a value investor. Very interesting concept and story here.
“In business, I look for economic castles protected by unbreachable moats.” – Warren Buffett
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As investors, a business with a moat is a great operation to be involved in, because the company has an edge that others will have a very hard time penetrating. If you think about Coca-Cola or Pepsi, they have a number of moats working to benefit them, including their distribution capabilities and marketing expertise. In fact, Pepsi sees itself as a distribution company that just happens to be selling soda. This is why Pepsi sells and distributes much more than just beverage products.
While these moats protect a business, they also increase the incentive for others to breach them. The greater the profits they can demand because of the moat, the greater the reward to those who can breach them.
uFlavor is an Indianapolis based company that has taken a very different approach towards breaching the moats surrounding these companies. Their founders have found a way to eliminate the factory that is helping protect the moat of distribution and production. They have taken the entire factory and shrunk it down to fit inside of a vending machine. The process of filling a soda, placing a label on it, and placing a cap all occur inside of the vending machine. They are decreasing the barrier to entry by removing the large capital expenditure needed to create a beverage factory.
Coke and Pepsi typically design their processes around large batch productions for the same drink. This means that they need be selling large quantities of a drink before they can turn a profit on that drink’s brand. On the other hand, uFlavor’s process is designed around producing 1 single beverage at a time. In terms of production, they will be able to turn a profit on the production of a single unit rather than being required to produce thousands. The result is that uFlavor can cater more closely to an individual’s desires.
Howard Moskowitz is best known for the benefits he found in segmentation for spaghetti sauce. He discovered the challenge of producing a non-segmented product and said this, “If I make one group happier, I piss off another group. We did this for coffee with General Foods, and we found that if you create only one product the best you can get across all the segments is a 60—if you’re lucky. That’s if you were to treat everybody as one big happy family. But if I do the sensory segmentation, I can get 70, 71, 72. Is that big? Ahhh. It’s a very big difference.”
Howard suggested that maybe instead of producing a single product for the entire population, it should be segmented. uFlavor does just this, and takes it to the logical endpoint of individual segmentation. They are able to provide the best beverage for the individual’s desires at the precise moment of consumption.
The most exciting part is how they actually mix the drink inside. They’ve stopped using a pre-mixed syrup. Let’s take root beer as an example: Root beer is a mixture of vanilla, licorice, and wintergreen. Instead of storing syrup of the 3 already mixed, the uFlavor vending machine stores the individual flavors. In fact, it can store 100 flavors. If root beer is a mixture of 3 ingredients, uFlavor can mix them in thousands of possibilities by varying their quantities. And when you think about the other 97 ingredients, you can all of a sudden create millions of combinations. Each of the ingredients can even be varied in small dosages, so root beer can be catered to each person because one person may like a different amount of vanilla than another. They’ve created a machine that can now produce millions of drinks. It’s almost like YouTube, but for the beverage industry.
Companies like Pepsi and Coke have moats surrounding their economic castles, but technology focused companies like uFlavor are always going to work on finding a way to take a stab at their moats. uFlavor has created a business with economics that will be very different and allow them to have a competitive advantage due to their technological advantages.
Disclosure: I am one of the partners in this business.