By Sierra Jiminez, contributor
FORTUNE -- If you've ever played mix master at the convenience store soda fountain, you know just how rewarding it can be. Indianapolis-based startup uFlavor wants to take that concept and bottle it. The company offers 42 flavors on its website, which consumers can mix and match, customizing sweetness, carbonation and even caffeine levels. uFlavor's ambition is to make its product available in soda fountain machines as well. The idea is clever, but helping it take off may be difficult.
The $74.2 billion soda industry is more or less dominated by the Manichean struggle between Coca-Cola Co. (coke) and PepsiCo (pep). Coca-Cola holds about 42% of the market share and Pepsi 29%. "What you have is essentially a duopoly between Coke and Pepsi. So, it's a real challenge for startups to get any sort of shelf space," says Michigan State University Assistant Professor and food retail specialist Phil Howard. For a beverage startup, partnering with one of the two inevitably starts to look like the only guaranteed way to grow.
For now, uFlavor is trying to make it on its own. "For us, the dream is to make this an entirely different flavor experience. I would hate to see that not come to fruition because we sold to a large company," says uFlavor Chairman Michael Cloran. Cloran and his team officially launched the company in December. The company says it plans to allow consumers to personalize their soda flavor and bottle design by the end of 2012. And within the next 18 months, the company says it will have a soda personalization vending machine available that can combine and bottle beverages on demand. The firm is self-funded and distribution of online orders occurs from its Indianapolis headquarters.
Growing beyond there may be difficult, according to Honest Tea co-founder Seth Goldman. In 1998, Honest Tea was in a similar predicament. Goldman's wife was delivering the product to stores on her way to work. And his business partner Barry Nalebuff operated a distribution center out of his garage. "If you read our original business plan, what [is] glaringly missing is any discussion of the importance of distribution. We were just stuck. And this is where so many beverage companies have a challenge," Goldman says.
The company had put together a patchwork distribution method. Not quite successful enough to be picked up by any major beverage distributors, Goldman and Nalebuff turned to natural and gourmet food distributors to get their products on store shelves. "At that point, we'd been at it for 10 years, and our goal wasn't to be a beverage distributor, it was to be a brand," he says. So Coca-Cola approached Goldman with a proposition: invest in a minority stake of the company and allow Honest Tea to use the beverage giant's distribution manpower. By the time Coke fully acquired the brand in 2011 for an undisclosed amount, Honest Tea had jumped to more than 75,000 retail accounts, up from 15,000 three years earlier. By the end of this year, Goldman says the company will be five times its size before partnering with Coke.
All brands haven't fared so well. Besides Red Bull, Jones Soda Co. (jdsa) is one of few firms that has managed stay independent and growing. Hopes for Jones Soda were actually pretty glum between 2007 and 2010, with revenue stagnating. After a leadership switch in 2010, the company managed to improve its distribution tactics. The key, says President and CEO of Jones Soda Co. Bill Meissner, is to make a unique product, not just another energy drink or cola. When Meissner joined Jones Soda, he also brought with him a team of ex-Vitamin Water and SoBe veterans -- both firms that were acquired by Coke or Pepsi.
The goal was to strengthen Jones's position as a craft soda company. The Seattle-based company has two key businesses. MyJones, the its individual bottle personalization service, allows customers to order beverages with a home photo and message on the label through the company's website. It makes up about 8% of the company's total revenue, Meissner says. (Jones also rotates about 15,000 personal home photo submissions from its customers in regular national distribution each year.) While the company is still underdeveloped in retail, its overall online sales have managed to carry the brand. Meissner estimates Jones will make more than $100 million in sales by 2016, up from $20 million last year. "Premium soda just isn't a category big players like Coke and Pepsi can do well," Meissner says.
Coke and Pepsi have been aggressive about acquisitions. Most recently, the companies have turned their sights to the latest beverage craze, coconut water. In 2009, Coke bought a 20% stake in Zico Beverages for an undisclosed amount. Around the same time, O.N.E. coconut water signed an investment agreement with Pepsi in exchange for use of the company's distribution arm. Despite the help of industry leaders, Zico is number two coconut water brand based on sales and O.N.E. is number three. The lone holdout? Vita Coco. Instead it partnered with the Dr Pepper Snapple Group (dps) for distribution only. It then turned to stars like Madonna, Demi Moore, Matthew McConaughey, and Rihanna for capital. The company says acquisition is still a possible exit strategy -- just not yet. "When you're acquired by one of those big companies you lose a lot of the entrepreneurial spirit that drives and creates a brand," says co-founder Michael Kirban. For uFlavor, meanwhile, it seems like there aren't many different avenues to success.