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by Charles Orton-Jones - Thursday, 30th August 2007

Give me the good stuff! Velocity comes in three flavours – original, lemon & lime, cranberry.   Key orders in US and Middle East. Undercuts Red Bull by two-thirds, pricing Velocity at 34p a can. Raised £70,000 in unsecured bank loan. Then £0.5m from contacts.

When we first heard about a 24-year-old with an energy drink we were, quite frankly, bored. So what? There are 1,200 energy drinks. To make a real impact you need big money. The sector’s leader, Red Bull, spends £400m a year on marketing. Coke and PepsiCo have their own products. Richard Baister’s got a feeble half a million quid to lavish on Velocity. We figured this naïve lad would be bust in six months. And then Baister’s PR mentioned the sales figures. And we couldn’t believe what we were hearing. From zero to £123m in one year. Our jaws dropped. It was time to check this guy out.

 

How did he achieve thermonuclear levels of sales growth in one of the toughest, most commoditised markets in the world? A self-confident, well-built Geordie, he calmly introduces himself and makes himself comfy, before confirming the exact state of his order book. “Velocity will have guaranteed minimum sales of £123m at wholesale prices over the next twelve months. This comes from distribution deals signed with importers in the US and the Middle East, plus we’ll be selling the drink in the UK and in other markets.” At a profit? “I can’t calculate it exactly, but we’ll make a profit unless we do something daft, like start a space programme.”

 Baister’s sales will come from two massive orders. The first is a £66m deal with Callaway Trading of California. “This sales level is a minimum annual amount for six years. After then it becomes a rolling deal.” The other deal is with Trafco, a Bahraini importer. “Trafco will oversee the sales and distribution of Velocity throughout the Middle East. It’s a region where alcohol is mostly forbidden, so energy drinks have huge potential.”

These deals will take Velocity’s income to a tenth of the industry’s giant, Red Bull. With a majority global share, Red Bull has a 47 per cent share in the US, and up to 75 per cent in many markets worldwide. Dietrich Mateschitz, who founded the sector in 1987 when he adapted a Thai drink called Red Water Buffalo, has a $2bn personal fortune, and has just splashed out on an F1 team – Paul Stoddart’s Minardi, which he’s renamed Scuderia Toro Rosso. So far Mateschitz has repelled the legion of imitators, leaving them all scrabbling over low single digit percentage market shares. For Velocity to snap up 10 per cent would be a stunning coup. So what is this new drink’s secret? Baister believes his product has two USPs. The first is the taste. “Unlike Red Bull our product has no ‘energy drink’ chemical aftertaste. We worked with a lab to remove it.” The second is his flavoured approach. “Velocity comes in three flavours, original, lemon and lime, and cranberry. This is unusual in the industry.”

And there’s the marketing. “When I was a law student at Northumbria University I spent a lot of time in nightclubs and Velocity’s marketing is precisely targeted at urban youth. I’ve got a good feel for that lifestyle. I don’t see us competing with Red Bull. We are linking the brand to music, not sport.” Baister’s guerilla marketing involves sponsoring music events such as Creamfields and rap artist 50 Cent. He also stages his own promotional tours, with Radio One’s music guru Trevor Nelson hosting branded music nights in the UK’s towns and cities.

Baister’s also been careful to avoid production glitches that have plagued rivals. Even Red Bull spent six months off the shelves in Germany when output failed to meet demand. “Velocity will be made at two sites in Holland and Poland. We are unusual in that we don’t leave it to these filling plants to source our ingredients, which is what other energy drinks do. I personally work with the flavourings house Rudolph Wild and Rexam to ensure we get the right ingredients and stable supply lines. This guarantees quality.”

This approach illustrates how fast Baister has learnt about the industry. As a student he made a few bob from importing jeans from Pakistan, selling to Sainsbury’s and Arcadia. He then diversified into gray imports of Coca Cola and Capri- Sun. “Customers would ask me what price I could do for Red Bull. That made me realise the size of the market.”

On a trip to see his father in Holland he got talking to a family friend, who worked at a canning factory about the energy drinks market. “He could supply the production capacity and lab technicians for a new energy drink. I got thinking about flavours and branding. I approached HBSC to borrow £70,000 to pay for start-up money. I put my idea for Velocity to them, and they bought into it. The loan was unsecured. Then I worked with the lab technicians to produce three flavours of my energy drink. Through trial and error we refined the flavour, removing the chemical after taste. When I’d got the three flavours just as I wanted them, I ordered a quarter of a million cans of each. It was a gamble, as I had no buyers lined up. But if you can’t gamble when you are young, when can you?” Baister’s idea was that when clients bought Coke and Capri-Sun, he’d try and flog them a few cans of Velocity on top of their regular orders. “I thought it would be a tertiary product. It quickly became clear it was A-list.”

With sales building, Baister looked for more capital. Instead of giving up equity, he secured £500,000 in loans from personal contacts, paying a premium interest rate (“not crazy, but above bank rates”). He built a management team which includes a sensible FD and David Evans, an old PepsiCo executive, handing over 10.5 per cent of the firm to his new nine-man crew to ensure their long-term loyalty.

At no point did he commission market research, hire consultants or use anything other than gut instinct to determine strategy: “Why would I need some consultant from PWC to tell me how to run my business?” he barks, sounding like a young Alan Sugar.

But the real stroke of genius is his pricing strategy. Throughout our interview he refuses to discuss margins, saying “I don’t want to give away anything market sensitive.” Yet the maths of his US deal says it all. He’s supplying 192m cans a year for £66m. This means he’s charging 34p a can wholesale, a stonking two-thirds cheaper than Red Bull. At this price his margins will be wafer thin. But so what? He’s got low fixed overheads – a team of nine, a warehouse and office in Newcastle, and no capital investment. With no shareholders to please, he can spend all his leftover on marketing. In six year’s time, when his export contracts can be renegotiated, he will be in a position to ramp up his prices. Unlike Coca Cola, which needs to produce quick results, Baister is content to go for market share, not short-term profits.

Understandably Baister is reluctant to confirm this strategy, terrified that someone will copy his plan. Instead he’ll shy away from front-page interviews and concentrate on execution. “We may have these big deals, but we want to sell more than the minimum. There are also other markets, like Germany and the Far-East, where we’ve got to roll-out the product.”

As Baister makes clear, £123m is just a starting point. And when you look at the market you can see why. In 1997 Red Bull’s sales leapt from 1m cans to 300m in a year, and then hit 1bn by 2000. The Austrian firm now sells 1.9bn cans a year. The energy drinks market is expanding by 20 per cent a year. Baister’s got all he needs to soar after his flying start. Watch out Red Bull. This guy’s got wings.

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