Executive Summary
I. THE COMPANY
A) Summary
Who’s Your Daddy, Inc. (“WYD” or “Company”) develops, produces, markets and distributes energy drinks and energy shots. “Who’s Your Daddy®” is a statement readily recognized from sports, music, fashion, television, movies, celebrities, and everyday life. Millions of dollars have been spent around this phrase, making it one of the most recognized phrases in the U.S. and around the world. The Company owns trademark rights to this name for beverages and apparel and is able to benefit from this “top of mind” awareness with its brand name, starting with the Company’s “King of Energy™” beverages.
WYD believes that it has pioneered the “Flavor Generation” of energy drinks that provide an energy lift from a good-tasting beverage, in contrast to the unpleasant taste of most other energy drinks and we’re going to do it again with our new energy shot.
Who’s Your Daddy’s Sport Energy Shot not only promises energy, but we go above and beyond to carefully select natural energy boosts (Ginseng & Guarana), Vitamins (B3, B4, B6 B12), Antioxidants, and Amino Acids (L-Arginine). The Sport Energy Shot enhances muscle strength and endurance by using key ingredients in its formula.
The business strategy behind Who’s Your Daddy® focuses on maintaining the edge, energy and humor behind the WYD brand, while continuing to build brand awareness and recognition. The WYD brand is designed to be positioned within mass-market retail outlets, offering high quality, cutting edge products with eye-catching packaging.
Our mission is to develop a brand that blends style with authority to transcend demographic barriers around the world.
The synergy between a rapidly growing energy drink sector and our brand has been instrumental in our efforts. Through relationships with established industry leaders, we have been able to increase distribution, lower our production costs, and develop flexible and attractive marketing programs. Our brand and product line has gained recognition from distributors and retailers and we now find more opportunities for retail placement than ever before.
The path for WYD has not been without challenges, but the Company is now well-positioned to establish distributors nationwide as well as relationships with world-class production facilities.
While there are established energy drink brands such as Monster (Hansen’s), Red Bull and Rockstar, it is estimated that over 20% of this market is fragmented and available to WYD. Even a 1% to 2% share of this market translates into $50 million to $100 million in annual revenue.
WYD, a Nevada Corporation, has designed and licensed products featuring the label “Who’s Your Daddy®” since its founding in 2001. The Company holds various trademark rights under the Who’s Your Daddy® label in the United States and Europe, and is currently in the process of obtaining similar trademark rights in various areas around the globe for beverages. On April 1, 2005, the Company entered into a reverse merger with Snocone Systems Inc. and became a publicly-traded company under the ticker “WYDI” and the Who’s Your Daddy name.
II. THE INDUSTRY
A) General description of the industry
Energy drinks are beverages with legal stimulants, vitamins, and minerals that give users a lift of energy. Common ingredients are caffeine, taurine, ginseng, sugars, and various amounts of vitamins and minerals. The product is consumed by individuals who are explicitly looking for the extra boost in energy include college students, the on-the-go average person, and those seeking an alternative to coffee. Over the last few years, the United States energy drink sector has witnessed strong growth of over 40% in 2006 to $5 billion dollars in the U.S., and is projected to reach $8 billion by 2009, according to Beverage Digest.
At a time when most energy drink brands are publicizing new, bigger cans, it turns out that the biggest profits are actually coming from the smallest packages.
Energy “shots,” concentrated two-ounce versions featuring the same basic energy mix of caffeine and b-vitamins as their larger brethren, are riding a wave of runaway sales multiples that echo the frenzied growth of first-generation energy drinks like Red Bull and Monster.
The leading brand is 5-Hour Energy, which staked out its prominent role thanks to its ubiquitous TV commercials that make somewhat lurid claims of five-hours sustained energy in contrast to the spike and crash of sugar-laden energy drinks.
Last year, just three years after the introduction of 5-Hour Energy, Nitro2Go, ZipFizz and their ilk, the category grew to nearly $100 million. With new brands and new distribution avenues coming on-line, however, the category is expected to reach a new level by the end of the year. According to at least one beverage executive, by the end of the next year, energy shots could be a $500 million business.
B) Industry characteristics
Energy drink industry leaders achieved their position through unconventional means – not through massive ad campaigns or national print. Full Throttle, by The Coca Cola Company, was the only brand that tried the conventional marketplace approach. After investing millions in the initial marketing campaigns, the launch has failed to live up to expectations. Red Bull proved that this industry responds well to guerilla marketing, about being ahead of everyone else, about approaching and becoming intimate with the end user through non-traditional, edgy, and very creative activities. The success of this strategy has been so overwhelming that the consumer now expects nothing less and rejects traditional means of marketing as a driving force in new product introduction.
C) Industry trends and growth opportunities
In recent years, retailers that used to allocate 1 to 2 shelves to energy drinks in the past, now set aside full refrigerator doors, end caps and weekly circulars. Chain stores engage in advance planning by including energy drinks in their schematics and planograms. The latest development is that some grocery stores are now designating and labeling full isles as New Age Beverage.
Wall Street has certainly taken notice of these trends. Hansen’s is a great example of the impact that a successful energy drink can have on business valuations. Their lead energy drink, Monster, was introduced four years ago with just a few million in sales, now commands annual revenues of over $700 million and is still growing. Largely driven by sales growth and profitability of its energy drinks, Hansen’s has seen stock appreciation in excess of 9,000%.
Energy shots appeal to a slightly different group of consumers than core energy drink users, but they also have significant overlap. Energy shots tend top appeal to a category of older consumers which is mostly men looking for a quick source of energy who may not be inclined to drink energy drinks targeted to teens. Energy shots also appeal to females looking to use the product as a dietary supplement to aid with weight loss.
In their ability to satisfy consumers’ need for energy, the shots offer retailers a product that complements the energy category, but they don’t fight for cooler space with the traditional 16 oz. and 8 oz. drinks. For some consumers, they are an add-on product to go with their energy drink in a kind of shot-and-chaser strategy; however in some case the shots are have their own target market.
To date, the growth of the energy shot has largely centered around 5-Hour Energy, which in one year grew from $13 million to $59 million in convenience stores and from $6 million to $26 million in grocery, drug and mass channels, according to Nielsen and IRI numbers.
According to marketers, energy drinks and the country’s massive coffee culture have pushed the notion of energy into the mainstream. But energy shots represent a new evolution, which is one that distills the energy boost of caffeine into one of its most direct forms of get-up-and-go._
Hansen’s Energy Drink Revenues and Stock Price
Market Share for Energy Drinks
Red Bull 42%
Monster (Hansen’s) 17%
Rockstar 12%
Full Throttle (Coke) 7%
Sobe No Fear (Pepsi) 5%
Other/Open 17%
Source: Information Resources Inc. for 12 months ending May 20, 2007
III. PRODUCTS AND SERVICES
A) History of product and brand development
Who’s Your Daddy initiated the development of the King of Energy™ energy drink in the Summer of 2005. Our objective in development of our products were to actively lead the new trend in the energy drink market of the “Flavor Generation,” to provide an alternative to the ordinary unpleasant taste of most other energy drinks, and to appeal to the target demographic group of 13 to 26 year old males.
One of the most important factors in the success of a product is the development stage and properly formulating and packaging to match the demand of the consumer and fit the brand. After testing and experimenting with flavors and subjecting approximately 50 different formulas to a number of “blind” taste tests, we selected the cranberry-pineapple flavor for our flagship product. By far, this formulation was found to enjoy the broadest consumer appeal with the target demographic group, tastes good, eliminate the after-taste, and provide a solid “hook” for the consumer and retailer.
Our Green Tea product was introduced in the first quarter of 2007 and it was one of the first green tea energy drinks on the market. Our objective with this flavor was to target a broader demographic market, including women and a more mature age group, who are interested in the antioxidant, cleansing and weight loss features of green tea. Introducing a green tea product also allowed us to benefit from the millions of dollars spent to establish awareness of the benefits of green tea by companies such as Lipton and Starbucks. This introduction expands the type of retailers who would be carrying our products, such as Whole Foods, Henry’s Markets, delis, coffee shops, and other non-traditional retailers who do not generally carry energy drinks.
Our packaging development involved an extensive market study and sampling of opinions from distributors, retailers, and consumers. The energy-drink industry has moved toward darker packaging colors and, in some instances a black can, the effect is the blurring of brands and inability on the part of the consumer to distinguish one product from another. Our approach was more scientific and we utilize the top two proven colors in product marketing: our flagship product – dominant yellow, followed by our second product – distinctive red. Just like many marketing campaigns, our decision was based on attracting the eye; and, on a shelf filled with darkly colored products; our cans literally pop right out. Our designs found strong support from consumers, retailers and distributors.
One of our most exciting products is the Who’s Your Daddy Sport Energy Shot, which is a concentrated two-ounce energy drink, designed to provide a zero calorie, sugar free, rapid and lasting energy boost, which enhances muscle strength and endurance. One of the important ingredients in the energy shot is L-Arginine. Arginine in an amino acid and is essential for optimum growth and in the regulation of protein metabolism. It is well established that Arginine facilitates the release of growth hormone (HGH), stimulates the pancreas for insulin production, and is a component in the hormone vasopressin produced by the pituitary gland. HGH-release by means of Arginine may offer benefits in the treatment of injuries, as well as strengthening the immune system, building lean muscle, burning fat. Arginine is also required by the body to carry out the synthesis of nitric oxide, a compound that, working through cGMP, relaxes blood vessels and allows more blood to flow through arteries. It has been hypothesized that taking extra Arginine will increase nitric oxide levels and increase blood flow. The energy shot was made available to the retail and wholesale market in mid-November 2008.
C) Quality Control
For the production of our Sport Energy Shot, we use the original facility that manufactured 5-Hour Energy. Custom Nutrition Laboratories is a leader in the development and production of scientifically validated dietary supplements and nutraceuticals. Because of their extensive manufacturing and analytical expertise, Custom Nutrition Laboratories is recognized as a leader in the area of new product development.
Who’s Your Daddy’s energy drink is produced at facilities utilized by known national brands such as 7-UP, Coca-Cola, Pepsi, etc. We use bottlers based in areas strategic to our distribution network. We also utilize premier American canners – Ball in the West (the largest canning company in the world) and Rexam in the East (one of the largest canning companies in the United States). Beverage companies much larger than our organization dictate the standards of production at these manufacturers. This allows us to utilize the existing established high standards without expenditure of funds on developing our own unique standards. In addition, to eliminate inconsistencies in the product itself, we have decided to retain our flavor company to provide the actual formulation.
The company considers meeting the industry standards and the expectation of consumers to be critical to its success. To ensure that these standards and expectations are met, established and leading service providers are exclusively used to manufacture components and assemble the final product.
IV. MARKETING, SALES AND DISTRIBUTION
A) Marketing and Selling Strategy
We have established a two-prong approach of using distributors to service geographic territories and of selling directly to selected retail chain stores. Direct sales to retailers will open up new territories where we do not have distributors and add to the customer base for our current distribution network.
Our concept is to actively assist distributors in their marketing efforts, instead of creating a rigid marketing plan that does not take into account the unique features of the distributor’s geography. Our distributors are adamant about their product launch capabilities – after all, it is their business. The argument is very simple: what works in Orange County, California, may not work in Salt Lake City, Utah. The local distributors know these differences better than anyone else.
Distributors like this concept because we are entering their territory without preconceived plans, with an open mind, allowing them to guide the product launch with their existing and tried methods. These include incentives to in-house reps and retailers, samplings, sponsorships of events and nightclub promotions, sponsorships of local sports teams and clubs, wrapping delivery vans, and participating in industry related charity events.
Since we define our distributors as clients, we build our marketing programs with an acknowledgement that their specific territory must be approached in a unique way. This has been the most successful approach we have tried and has delivered the best relationship with the client, as well as expanding sales.
Direct sales to retail chain stores were initiated in the third quarter of 2007 and provided us with multiple sales locations with a single point of contact.
We have redesigned our website to be investor and retailer friendly while still maintaining a level of fun for the general public. For example, you can view our latest financial reports as well as pictures from our latest special event; you can read up to date press releases or view humorous designs using the Who’s Your Daddy catchphrase.
Potential retailers and distributors can access information regarding sales minimums, pricing and marketing support by filling out a short vendor questionnaire located on the home page of our website.
We are directing customers interested in making online purchases of our product to online retailers such as Amazon.com and Drugstore.com to help generate more sales of our product on their site.
B) Sales Relationships
The Company maintains in-house sales representatives as well as independent brokers with established relationships with distributors, national retailers, U.S military, vending as well as non-traditional beverage retailers such as automotive stores (ex. Napa Autoparts, Pep Boys) and home improvement stores (ex. Home Depot, Lowes.) In addition, we also leverage the relationships of existing distributors and large retailers, giving us the ability to expand our network. The most successful means of growing distribution has been through executive management’s efforts in contacting and conducting face-to-face negotiations with distributors and chain stores. Existing distributors have been instrumental in this effort, providing multiple leads and personal recommendations, sharing proprietary information with their peers, and making themselves available for detailed insider interviews.
C) Market Positioning
As the pioneers of flavored energy drinks, Who’s Your Daddy is intimately attuned to the needs of the consumer. To the young, the energetic, the hip, or even the “wan’-a-bee,” Who’s Your Daddy® King of Energy™ represents a good tasting alternative to the bad tasting energy drinks, coffee, and other energy supplements. The Who’s Your Daddy® King of Energy™ brand also fits well within the club atmosphere, where young adults are looking for a hip product that can be both a conversation piece and a tasty treat. The company is extending this club and party atmosphere to wherever the consumer may be. No longer is an energy drink a bad tasting medicine. There is now a good tasting flavored alternative - the Who’s Your Daddy® King of Energy™. With the introduction of our Sport Energy Shot at store registers, we intend to continue this trend.
D) Means of product differentiation
Taste – Who’s Your Daddy® King of Energy™ is pioneering the flavored energy drink and energy shot sectors. The company specifically concentrates its flavors within the broadest acceptable palate preferences.
Brand Image – The Who’s Your Daddy® brand defines the attitude that the consumer wishes to project; and, the King of Energy™ places the product at the top of the pecking order among the competing brands. It is not only a conversation piece at parties, but a statement of humorous superiority, style, and attitude.
Packaging – The Company decided to break with the direction of the market and choose colors that were bright, to make the product stand out from its competition on the retail shelf. The colors chosen for the flagship products were red and yellow – the top two colors in advertising. Likewise, the red tab was selected to make it stand out from the aluminum gray of the can top. In every way, including cases, 4-pack boxes and shot display boxes, bright colors are used to make the product more visible than the competition.
E) Relative Importance of specific factors
Customer Service
There are very few requirements for providing customer service to the consumer outside of basic information available on the website. The company generally does not field customer service calls other than those related to distributors and retailers.
Customer Relationships
While we have very little interaction with the consumer outside of our marketing efforts, we place a great deal of emphasis on our relationships with distributors, chains and brokers. The company maintains an “open door-open line” policy towards all and will attempt to maintain this policy through the expansion period. Our goal is to establish a feeling of partnership and friendship, fostering an unyielding loyalty to the brand.
Price
Even though retail price is important in any market, outside of just a few brands, we have not witnessed any price erosion since introducing the products in 2006. The majority of retailers shun lower retail priced products, as they also reduce the income potential for the retailer. This industry has developed a range of retail pricing where the majority of competitors fit. At a suggested retail price of $2.99 - $3.49 for the two-ounce energy shot and $1.99 - $2.39 per 16-oz can, our strategy follows the market trend.
Distributors enjoy very competitive pricing packages based on volume that meet and exceed market trends. We are highly competitive in distributor pricing, as this has a direct impact on the level of promotional activity by the distributor and sales volumes in retail.
