Earnings Call Transcript - ZVIA Q3 2022

Operator, Operator

Greetings and welcome to the Zevia PBC Q3 2022 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Amy Taylor, President and Chief Executive Officer; and Denise Beckles, Chief Financial Officer. By now, everyone should have access to the company’s third quarter 2022 earnings press release and investor presentation filed this morning. This information is available on the Investor Relations section of Zevia’s website.

Amy Taylor, CEO

Thanks, Reed, and good morning everyone. Welcome to the Q3 2022 earnings call for Zevia PBC. Zevia continues to experience strong category-leading consumer demand, adding well over 1 million new households, growing consumption, and delivering dollar and volume growth well ahead of the category, even in the midst of a challenging macroeconomic environment. We are realizing price in the market and materially reducing cost in our business, resulting in recovery of gross margin. Further, we see a positive contribution to profitability from our mix shift, reallocation of promotional spend, and our initial supply chain adjustments, along with our company-wide cost reduction. We continue to realize the Zevia mission with a focus on global health for people and planet, removing another 3,500 metric tons of sugar from the diets of our communities and replacing 52 million plastic bottles in our market in the quarter. In Q3, we delivered net sales of just over $44 million, representing a 14% increase in our prior year-end revenue growth and 2.3% volume growth. This does fall short of our guidance as we faced short-term headwinds in shipments as retailers and e-commerce operators manage inventory down. We noticed a divergence between shipments and scanned sales in the quarter. Scanned sales, or sell-through to the consumer, remain very strong and ahead of category growth as is true in recent October reads as well. I will discuss the drivers of this for the channel detail in a moment. Gross margins are returning to historical levels, and we are paving a path to profitability with a strong run rate of improvement on the EBITDA line. Cost control, a disciplined promotional approach, and a strong price increase implementation have set new precedents for Zevia with a focus on quality growth. I will go into more detail now with a focus on consumer base evolution and our learnings from syndicated data. Zevia's household penetration for the 12 months ending Q3 grew again on a sequential basis to 6.3% from 6.1% for the 12 months ending Q2 ‘22, adding 1.3 million more households to the brand versus last year. Brand spend per household also increased in the last 12 months by 10% versus last year, driven by increases in dollars per trip and consistent purchase frequency rates. Total Zevia grew 19.8% in measured scan dollar sales for the quarter, continuing to outpace total nonalcoholic beverage growth at 12% and total carbonated soft drinks at 14%. Zevia grew equalized volume by 14% in scanned data in a period where nonalcoholic and carbonated soft drinks are declining at 2% and 3%, respectively. Zevia's brand remains very healthy, and same-store sales are robust, driven by volume and price as scanned data demonstrates. The Zevia shopper is highly desirable and less price sensitive at all income levels, demonstrating resilience in a fluctuating economy. We remain a home-stocking brand, which continues to fare well from a consumer and brand health perspective, winning new consumers and sustaining household spending levels. Zevia shoppers spent 31% more and made 24% more frequent trips for total beverages than the average U.S. soda category shopper in the quarter. Consumer retail spending in Q3 was driven by a mix of organic velocity growth and continued increases in new store and new item distribution growth, paired with an accelerating consumer household base expansion. Velocity was the primary driver. Retail sales growth was split between 67% from velocity and 33% from new distribution and new items. New packages are driving growth largely due to new distribution. The Warehouse Club channel drove growth in the quarter and continued to deliver incremental households to the brand and incremental shoppers to the channel. 70% of buyers of Zevia in-club over the last 12 months were new to the Zevia brand. Additionally, 68% renewed to purchasing in the carbonated soft drinks category at Warehouse Club. In grocery, 12-packs drove much of the growth, marking the first time a new item has been introduced on top of 6-packs in some chains, replacing 10-packs in others with greater profitability and sustained consumer trade-off. Our kids product continued to perform well in new outlets, including grocery and mass channels, and our single-canned soda sales have started to drive incremental presence, contributing growth and driving trial. Zevia Kids buyers spent 52% more and made 17% more trips versus the average brand buyer in the last 12 months. The role for kids is clear, and driving distribution will be key. Our new single-can soda gained 2,400 new stores in the quarter and is driving impressive units per store per week, doubling when merchandise cold. This will be a key strategic initiative to drive trials going forward. Single-can sodas in a sleek can have strong potential for the business, still only in single digits in terms of percentages of units sold for Zevia at this stage. Moving on to velocity, the consumer shift to larger packages continues as the improved lift from more efficient promotional executions in retail for Zevia. Dollars sold on promotion were 5 points lower than a year ago in the latest read. Yet lift from promotions was 6 points higher, driving both velocity and profitability. Stock-up options are driving growth category-wide as well as for Zevia as APCs and larger packages now constitute more than 50% of our business in measured channels. We described the impact of the Warehouse Club channel, with 8-packs in the mass channel and 12-packs in grocery also contributing to velocity growth as consumers trade out from the 6-pack and as retailers switch from the 10-pack to a more profitable and standard 12-pack. We have experienced short-term disruption in volume moving from 10-pack to 12-pack with one major retailer, presenting a transitory impact on volume in favor of quality growth. In the most recent scan data as of October 4, Zevia dollars grew at an impressive 19% versus a year ago on a four-week read, consistent with growth through the summer. Volume in this period shifted from 15% to 10% on the fourth-week read versus the prior year, slowing by 5 points month-to-month. This remains strong growth following a 10% price increase that went into effect at the end of Q3, compared to flat volume growth for the category. Zevia remains an outlier with double-digit volume growth at the register in retail. Similarly, in e-commerce, we saw record sell-through for Zevia in the quarter. Shipments show, however, that we are not entirely immune to the current economic climate. A few customers managed inventory down in the quarter, yielding a transitory impact on our net sales, which we expect will continue through the balance of the year. I will wrap with a big picture before turning it over to Denise, our CFO, who has been with us since May. We are a new leadership team, establishing several fundamentals to drive profitable, sustainable growth at Zevia: the right packs in the right channels, stronger pricing to support our model, and our premium but accessible positioning, alongside better cost controls organization-wide. Consumer health metrics and our strong scan sales across channels demonstrate we are on the right track. We are further evolving strategic channel management with recent changes under our new Chief Commercial Officer, and we will further drive costs down through a full supply chain network optimization to be implemented in the coming months. These changes are disruptive, especially for the top line in the midst of economic headwinds, but they are right for the brand long term and in anticipation of a 2023 brand refresh. While we will not be providing guidance on profitability, we note that our return towards historical gross margins and sequential improvement in EBITDA are an indication of our improved outlook and our path to profitability. 2022 is a transitional year for us, and 2023 will be critical as we refresh the brand, build on a foundation of quality growth, and reap the benefits of increased organizational capabilities. I will now turn it over to Denise to walk us through our financial results and speak to our Q4 outlook.

Denise Beckles, CFO

Thank you, Amy, and good morning everyone. I will begin with an overview of our third quarter financial results and then speak to guidance for the year. In the third quarter of 2022, we delivered net sales of $44.2 million, growing 13.6% versus the prior year at the same time. Volume growth was up 2.3% on an equivalized case basis to $3.6 million in the period, and we also benefited from higher price realization. You may recall that our price increase of 10% on average was taken across the soda category effective August 1, 2022. Our price increase contributed $2.2 million to our net sales growth in the quarter. Our gross margin continued to show sequential improvement in the year, with our strongest margins yet this year at 43.3% for the third quarter, marking our first return to margins above the 40% mark. The gross margin of 43.3% was down from 45.6% a year earlier, primarily due to the impact of inflation on manufacturing costs, partially offset by pricing. On a sequential basis, our gross margin continued to improve and is the strongest yet this year, up 158 basis points and 90 basis points versus Q1 and Q2 2022, respectively. Please note, we have reclassified our third-party logistics costs from cost of goods sold to selling and marketing expenses to better align with standard industry practice. Our margin before this reclassification of third-party logistics repacking costs to selling expenses was 40.8% for the third quarter, compared to 43.6% during the same time last year. Gross profit delivered in the period was $19.2 million, an increase of $1.4 million or 7.9% versus a year ago, reflecting growth in net sales, partially offset by higher cost of goods sold. Selling and marketing expenses decreased by 5% to $12.9 million, reflecting lower freight and warehousing costs of $200,000, driven by pricing and efficiencies and a reduction of nonworking marketing costs of $500,000. General and administrative expenses totaled $8.3 million or 18.8% of net sales in the third quarter of 2022, compared to $7.7 million or 19.8% of net sales in the third quarter of 2021, marking a 1-point improvement as a percentage of net sales. The year-on-year dollar increase was driven by higher employee headcount costs to support our growth, partially offset by decreases in public company costs due to expense optimization initiatives. Stock-based compensation, a non-cash expense, was $6.8 million in the third quarter of 2022, of which $3.8 million represents accelerated restricted stock unit awards related to the retirement of legacy senior management employees. Our net loss was $9.2 million compared to a net loss of $49.8 million in the third quarter of 2021, and a net loss of $14.8 million in the second quarter of 2022. This marks an improvement of $40.6 million or 81.5% compared to the third quarter of last year, and a sequential improvement of $5.6 million or 37.8% compared to the second quarter of 2022. Loss per share was $0.17 per diluted share for Zevia Class A common stockholders, compared to a loss per share of $0.75 in the third quarter of 2021. Adjusted EBITDA loss was $2.1 million, compared to an adjusted EBITDA loss of $3.5 million in the third quarter of 2021, a year-on-year improvement of $1.5 million or 41.7%, showing progress towards managing profitability. On a sequential basis, adjusted EBITDA improved by $6.2 million or 75.2% and $4.3 million or 67.7% compared to the first and second quarters of this year, respectively. Our balance sheet remains strong with $49.2 million in cash and cash equivalents and no outstanding debt, as well as an unused credit line of $20 million. We effectively managed our cash burn rate in the period, despite facing headwinds on the top line, maintaining healthy working capital for the period at $75.1 million. Our cash flow from operating activities for the nine months ended September 30, 2022, reflected a cash use of $19.3 million, compared to $13.1 million during the same time last year. During the third quarter of 2022, cash provided by operating activities was $200,000, compared to cash used in operating activity of $8.2 million and $11.4 million in the second and first quarters of 2022, respectively, representing sequential improvement. Turning to guidance, based on our results, outlook, and current macroeconomic trends, we are taking this opportunity to reforecast our business and as a result, are resetting expectations for the year. We are lowering our 2022 annual net sales guidance to the range of $158 million to $160 million, an increase of 14.2% to 15.7% over 2021, including net sales expectations for Q4 in the range of $30 million to $32 million. We are resetting expectations amid macroeconomic uncertainty, offset by excitement around continued strong brand growth as shown in scanned data as we realign our business strategy and launch our brand refresh for continued success in 2023. This concludes our prepared remarks. We will now open the call for your questions.

Operator, Operator

Thank you very much. Our first question comes from Bonnie Herzog from Goldman Sachs. Please proceed with your question, Bonnie.

Bonnie Herzog, Analyst

Good morning. Amy, I was hoping you could give us a sense of how many customers are managing their inventory differently, or what percentage of your business is impacted? And maybe a little more color on the channel or channels this is affecting; you mentioned e-commerce. So, what percentage of your sales does e-commerce represent? And I want to understand how confident you are that this will really be transitory, or is there something else going on with possibly the underlying demand for your brands? Is there a possibility that some of these retailers are reducing their shelf space allocation for you as we look into next year? Hello? Operator, I think we lost the management team.

Amy Taylor, CEO

Hello? This is Amy. Are you there?

Operator, Operator

Hi, Amy. Are you on the line?

Amy Taylor, CEO

Amy is on the line.

Operator, Operator

We can hear you, Amy. You may proceed.

Amy Taylor, CEO

Thanks. I hadn’t been unmuted. Apologies for that. Bonnie, thanks for your question. I will take the latter part of it first and then walk through the details. Consumer demand is clear. I just want to emphasize that the register is where the truth is told. We have really strong pull-through, and that’s true in e-commerce as well as in retail. It’s important to remember that scanned data demonstrates super healthy growth, 20% essentially through the quarter and even in the October read continues at a 20% growth clip and double-digit in volume as well, leading the category in both dollar growth and volume, where the category is either flat or declining. We see that across the board but also at each channel level and the vast majority of customer levels. From a customer and consumer pull-through perspective, we have no issues and maintain a very healthy brand and outlook. I want to clarify that we have robust sales at a same-store level in historical channels. We are just now entering mass channels, club channels, drug channels, and value, all of which are experiencing very healthy sales from a sales-to-register perspective and all of which are expanding space with us. Shipments have fallen short largely due to a few key customers managing inventory down as they leverage cash amidst economic pressure. This has had an outsized impact on our growth brand and is exacerbated by our route to market as a warehouse brand shipping directly to customer warehouses. For example, one customer with an inventory target of eight weeks has currently been reducing inventory down to two to four weeks at any given time, while scanned data shows accelerated growth and while they actually increased their Zevia assortment and space allotment moving forward. This is not something we had planned for in our fast growth environment in Q3 or even in the Q4 outlook. This dynamic is even more pronounced, specifically as mentioned in e-commerce. We saw as much as a 20 to 25 point swing in e-commerce from scans to consumer sales versus shipments to the customer during this period. E-commerce isn’t showing up with scanned data in this environment where we are the leading brand. Therefore, in the long term, the consumers lost, shipments will catch up with their purchasing behaviors. This will be reflected in our net sales in the midterm. But in the short term, we are definitely tempering our expectations based on this dynamic.

Bonnie Herzog, Analyst

Okay. That’s helpful. Sorry, did you...

Amy Taylor, CEO

More people are interested in our household data both in scans and consumer metrics. More people are buying Zevia than ever, they are buying more of it, and they are paying higher prices for it. These are indicators of a healthy brand and business. So for us, we’re managing a short-term impact of the current dynamics in our route to market and the macroeconomic environment.

Bonnie Herzog, Analyst

Okay. So you do – just to confirm, Amy, based on all of that, and what we’re seeing in the scanner data, do you have pretty good visibility then on shelf space or cooler space allocation next year when retailers reset in the spring?

Amy Taylor, CEO

We do. It’s a seasonal business, of course. With that comes seasonal resets. The biggest opportunity for resets in beverages is in the spring and then again in the fall. We look forward to the spring reset seasons where we anticipate some space gains that will coincide with a brand refresh. This gives us an opportunity to present to new shoppers in a big way. The other positive change is we are expanding into new parts of the store with our first time single-serve soda offering now penetrating open-air coolers in the deli section and in two customers' front-end merchandising, which for us as a small growth brand is a major win. These are proof points for a profitable, trial-driving package and a bright indicator for us for further expansion once our routes to market allow for single-serve and impulse business that can bolster our reach.

Bonnie Herzog, Analyst

And to be clear on that point, you have already started shipping some of these single-serve packages? We would have seen that in Q3?

Amy Taylor, CEO

Yes. The single-serve remains in single digits in terms of mix for us, and we had a dynamic in the previous business where six-pack sales were being broken down by the retailer and presented as a single business course, offsetting underlying margin as a six-pack sold at a single price. But now, it is still less than 10%, but growing rapidly. On a same-store sales basis, it is very impressive. When sold cold, it doubles. It has been a great story for us as we continue to expand that business.

Bonnie Herzog, Analyst

Right, especially in the C-store channel, which I think is still a huge priority for you.

Amy Taylor, CEO

Absolutely.

Bonnie Herzog, Analyst

Final question, and then I will pass it on. As it relates to all of this, you touched on your brand refresh. I wanted to confirm that I think it's still expected to begin in January of next year and perhaps an update on that given the context of these retailers. Are they going to be selling down their existing inventory as you roll out this brand refresh? Is it going to be a phased rollout? How should we think about that?

Amy Taylor, CEO

Yes. We are keeping an eye on the P&L and sustainability principles. We want to minimize write-offs and distractions. Hence, we plan a rolling launch that allows product to show up in the market by the summer, which is peak beverage season. We will start shipping in Q1, and we believe that by the summer, we will build consumer excitement around the new brand refresh. That allows for full distribution into our key customers alongside the new brand look and feel by summer, paving the way for expansion into new channels in the fall, with single-serve business being the key opportunity.

Bonnie Herzog, Analyst

Alright. Thank you. I will pass it on.

Amy Taylor, CEO

Thanks, Bonnie.

Operator, Operator

Thank you. The next question comes from Ben Bienvenu from Stephens Inc. Please proceed with your question, Ben.

Ben Bienvenu, Analyst

Hi. Thanks. Good morning.

Amy Taylor, CEO

Good morning Ben.

Ben Bienvenu, Analyst

I want to ask, regarding the inventory resets you highlighted. I am curious about how pervasive this is across your customer portfolio. If you think about a two-part question here: One, of those that have made these inventory decision changes, what do you think the duration will be regarding the impact on your business? And secondly, among those that haven’t made that decision but could, what’s the probability in your view of knock-on impacts like this, albeit transitory?

Amy Taylor, CEO

Sure, Ben. Thanks for the question. I want to manage the perception of the impact of this. This is just a few customers. But for us, even a few customers can be quite significant. The top-down direction company-wide, you can see in the press from a couple of retailers and key e-commerce operators, is to reduce inventory. We are then impacted by that. As a warehouse brand shipping to the retailer’s warehouse, it’s more challenging for us than a direct store delivery operator to influence order cycles and in-store decision-making. To leverage cash, these retailers are taking on less inventory for a short period of time. They can continue strong sales at the register, which is reflected in our scanned sales, but their back-end inventory has decreased, thereby leveraging cash. We are talking about an impact on weeks to months. Overall, this is transitory, correlating with a few limited number of customers. As I mentioned, the very same customers who reduced inventory have also increased their media space for Zevia in the front of the store for 2023. We plan for inventory levels to return as we move ahead.

Ben Bienvenu, Analyst

Got it. Very good. Thank you. My second question is related to margins and profitability. You spoke about management there; can you also provide some insight regarding input costs? Are you seeing pressures abate there? How optimistic are you as you move forward? Compared to a couple of years of volatility, how would you assess your visibility into costs today versus a year ago?

Denise Beckles, CFO

Hi Ben, this is Denise.

Ben Bienvenu, Analyst

I can. Loud and clear.

Denise Beckles, CFO

Good morning. I will answer the question on margins. As you have seen, we have returned to the 40s range and we expect that to continue. We have visibility into our cost structure regarding cost of goods sold, and we see improvements in some areas. We expect to see continued improvements through the end of the year. Of course, there are some unknowns due to inflation, but we expect to see our margins stay in the 40s range for the remainder of the year. Hopefully, that answers your question.

Ben Bienvenu, Analyst

It does. Okay. Thanks so much.

Denise Beckles, CFO

You’re welcome.

Operator, Operator

Thank you. The next question comes from Bryan Spillane from Bank of America. Please proceed with your questions, Bryan.

Bryan Spillane, Analyst

Thanks operator. Good morning, Amy, Denise.

Amy Taylor, CEO

Hey, Bryan.

Bryan Spillane, Analyst

Good morning. Yes. Two questions, just two follow-ups. One is that we are observing a slowdown in some other product categories that we follow, possibly related to people not being home as much and changing purchasing patterns. Can you discuss how this has affected your business? Additionally, as you think about channels moving forward, will there be less emphasis on e-commerce and more on traditional retail if that’s the trend?

Amy Taylor, CEO

Yes, Bryan, this is a strategic question. We have not seen a slowdown in consumer purchasing behavior in e-commerce for Zevia. We have not. However, we have seen some strategic changes from our customers on managing products specifically in beverage. This is probably a longer conversation, but at a high level, our largest e-commerce operator has some shifting objectives. Thus, the way they manage pricing versus competition in the market may fluctuate. We have no control over this, but we want to partner with our key e-commerce partner to set the right framework for competitive retail. We will continue to consider the right packaging for e-commerce as a unique offering to the e-commerce shopper versus retail. Our focus, however, is to grow our retail presence. Carbonated soft drinks are ubiquitous worldwide, and Zevia's upside is massive. We focus on growing retail distribution. Our same-store sales are robust, and our success rate in growing in-store presence in existing customers has been tremendous. We need to keep that momentum while filling gaps in the mass channel stores where we aren’t sold or addressing food service and convenience spots that need Zevia. E-commerce will fill the gaps in instances where retail doesn't meet the needs of the business or individual shopper. Therefore, we do not seek to grow or shrink the e-commerce mix.

Bryan Spillane, Analyst

Yes, that does. My second question is regarding signing on with a DSD partner to better service retailers as they are accustomed to, especially in carbonated soft drinks. When do you think about implementing that?

Amy Taylor, CEO

Thanks, Bryan. We are being very thoughtful about gaining new distribution. You didn’t ask when we would do it, but I will say that our approach to the relationship between the brand refresh and when we introduce ourselves to new channels is crucial. This could require an evolution of our current route to market, but we are satisfied with our current distribution model for where we are sold today. We've learned a lot. I want to remind everyone here today that this leadership team has been in place for one quarter. There has been tremendous change, and we are focused on healthy unit economics and cutting costs. We are managing these transitory issues, cycling the full pipeline still to the club, and pacing our distribution growth with a focus on quality, including the route to market. I may be vague because the plan is not finalized yet, but we are very thoughtful about growing in convenient and foodservice areas while ensuring we have the right routes to market.

Bryan Spillane, Analyst

Yes. That’s very, very helpful. Thanks, Amy.

Amy Taylor, CEO

Thanks, Bryan.

Operator, Operator

The next question comes from Andrew Strelzik from BMO. Please go ahead with your question, Andrew.

Andrew Strelzik, Analyst

Hi. Great. Good morning. Thanks for taking the questions. Firstly, I wanted to revisit your confidence in the timeline regarding weeks or months that you spoke about. Is there anything in your conversations that gives you that confidence? The macro, of course, is uncertain.

Amy Taylor, CEO

What gives me confidence that the inventory issue will subside going into next year is consumer demand, as well as retailers’ lack of stamina for sustained lost sales and market share. We have established a focused, small insights department that effectively illustrates to retailers their losses due to decreased inventories. We are close to the point where retailers will start losing money by reducing inventory for Zevia. As retailers expand Zevia’s space, meaning increasing their assortment and in-store space, we must maintain stock levels to avoid out-of-stocks that are teetering at risk right now. I can share anecdotally that we are collaborating with individual customers to review SKU-level stock levels while also building plans to navigate through this unexpected economic downturn. We are not the largest player in beverage, so we don't always have the buyer's attention as category leaders do. But I am confident as I speak with specific customers driving this dynamic, they are partnering with us to navigate this situation. I believe it will remain through the end of the year but am confident we will not persist in a trajectory that causes lost sales at the register.

Andrew Strelzik, Analyst

Got it. That’s helpful. I also wanted to ask about pricing and overall spending levels as you present this to consumers. I know that gross margins are sequentially improving. Given consumer receptivity to pricing, does it change how you think about your price points, pack sizes, or anything along those lines? Are you considering any pricing movements as you navigate these inventory issues?

Amy Taylor, CEO

Let me share some initial thoughts, and then I would love to turn it over to Denise. The data suggests we have strong consumer acceptance of our pricing. Pricing is a driver of our growth, but not the only one. We are growing in units and dollars, and we seem to have elasticity similar to category leaders. Coupled with consumers continuing to trade up in pack sizes and the brand refresh next year, I believe we have significant pricing power moving forward. So let me turn it over to Denise for further clarification.

Denise Beckles, CFO

Yes, Amy. We continue to have strong pricing power. Acceptance has been robust from both consumers and our customers regarding price increases. We expect continued acceptance at both levels due to the strength and health of the brand, providing positive upside from our pricing strategy. Generally, our elasticities demonstrate very low sensitivity, especially when compared to other larger players in the category. This indicates a positive response from consumers regarding our recent price increases. Hopefully, I have addressed your question.

Andrew Strelzik, Analyst

Yes, that was great. Thank you very much.

Amy Taylor, CEO

Thanks, Andrew.

Operator, Operator

Thank you. Your next question comes from Chris Carey from Wells Fargo Securities. Please proceed with your question, Chris.

Chris Carey, Analyst

Hi. Good morning.

Amy Taylor, CEO

Hi Chris.

Denise Beckles, CFO

Good morning Chris.

Chris Carey, Analyst

Good morning. I wanted to connect this back to Bryan's question regarding DSD. That could be a good development from a distribution perspective, but there are implications on margins. How do you think about balancing top-line growth with gross margins moving forward, particularly as you have provided revenue outlook but not profit outlook?

Amy Taylor, CEO

Thanks, Chris. This is a sharp question, and I will connect it to Andrew's question around pricing. We prioritize profitable growth and examine our unit economics. Building a strong brand allows for the opportunity to take regular price increases consistent with category behavior. Additionally, we can improve our supply chain; we haven’t discussed that much on this call, but we have a legacy supply chain that grew with an entrepreneurial mindset. Now, we have the chance for a reset to optimize the entire supply chain, beginning now, as the academic work has been completed. The outcome will be significant cost reductions going forward along with robust pricing increases. Therefore, top and bottom unit economics lead to lower costs and stronger pricing. Margins can accommodate changes in routes to market as necessary by packaging, category, channel, or geography. I acknowledge I may not provide specifics because the plan is yet to be finalized. However, we are committed to growth in key areas like convenience and foodservice, ensuring to establish the right routes to market and pricing ahead of that. 2023 will be notably important and rewarding as we integrate our brand refresh, maintain pricing power, and adjust pack architecture to align with proper pricing in respective channels.

Chris Carey, Analyst

Thanks, Amy. Good luck.

Amy Taylor, CEO

Thanks, Chris.

Operator, Operator

The next question comes from Joe Feldman from Telsey Advisory Group. Please proceed with your question, Joe.

Joe Feldman, Analyst

Great. Hi. Good morning, guys.

Amy Taylor, CEO

Hi Joe.

Joe Feldman, Analyst

I wanted to ask about the club channel. When did you start to roll that out, and when will we annualize that rollout? How much of an impact has this had on volume? And has the club customer behaved as you had hoped, with that trial becoming more sticky?

Amy Taylor, CEO

Yes. This is a crucial question; I’ll address the second part first. The club channel has proven effective; we can track the data of these club shoppers. As 70% of that business is incremental, we see that shopper is spending more on higher-margin packs in grocery once they discover their favorite flavors through a variety pack in club. It has been a very incremental and sticky channel for us and provides well-worth investing in. As for your first question, we launched this business in the fourth quarter of 2021 with a pipeline fill. Zevia is a seasonal business, and the 2021 seasonality was less pronounced with the pipeline in the fourth quarter of club. We are starting to see this with monthly comparisons in Q4. This will have a material impact on shipments in Q4 and will be part of our outlook for the fourth quarter, which is a one-time effect looking ahead.

Joe Feldman, Analyst

Thank you. I have a similar question, but I know it's early with single-serve beverages at convenience. Are you seeing repeat purchases, or can you track that customer in more detail in the club? What about single-serve at convenience?

Amy Taylor, CEO

It’s challenging to say; we don’t have singles yet in convenience. We do have them in grocery. It’s too early to say whether it's a new shopper. In Q4 and the early part of 2023, we plan to expand to front-end merchandisers, meaning we will have cold single Zevia soda, energy drinks, and tea right at the register. At that point, we will be better able to determine initial trial behavior and whether these customers return for multipacks. Please follow up with me on that after the next six months; it's an important aspect.

Joe Feldman, Analyst

Got it. Great. Thanks, and good luck with the fourth quarter. Thank you again.

Amy Taylor, CEO

Thanks, Joe.

Operator, Operator

Thank you. There are no further questions at this time. This concludes today’s teleconference. You may disconnect your lines at this time, and thank you very much for your participation.

Amy Taylor, CEO

Thank you.