Zevia PBC

NYSE:ZVIA

Earnings Call Analysis

Zevia Q4 2023 Financial Performance

In Q4 2023, Zevia's net sales rose to $37.8 million, a 6.9% increase YoY, thanks to price adjustments and a 3.7% surge in volume, signaling a rebound in growth. However, gross margin dipped to 40.7%, falling by 3.6 percentage points YoY due to supply chain shifts, including a write-off of materials, impacting margins by 4 percentage points. Nevertheless, a strong cash position endures, with $32 million in hand and no debt. Full-year earnings show modest net sales growth at 2% ($166.4 million), an improved gross margin of 44.9%, and reduced net losses of $28.3 million. First quarter 2024 guidance predicts sales between $38-40 million, but full-year forecasts are postponed until the Q1 earnings call. Despite Q1's costs dragging margins, expectations lean towards a return to robust gross margins historically in the mid-40s.

Q4 Earnings Overview

In the last quarter of 2023, the company reported net sales of $37.8 million, marking an increase of 6.9% compared to the same period in the previous year. This growth was bolstered by a successful price hike that added $1.5 million to revenues and a volume increase of 3.7% which accounted for an additional $0.9 million. Despite these positive developments, gross margin saw a dip to 40.7%, shedding 3.6 percentage points year-over-year. The gross margin contraction was largely attributable to accelerated supply chain transitions that necessitated the disposal of outdated branded materials, discontinuation of certain SKUs, and a sacrifice of some raw materials, collectively causing a 4 percentage point impact for that quarter.

Expense and Loss Analysis

The company experienced a surge in selling and marketing expenses by 38.1% to $13.8 million, driven chiefly by increased freight and warehouse costs associated with supply chain hiccups. Although these logistics challenges are now resolved, the interim costs dented profitability. General and Administrative (G&A) expenses remained stable year over year at 22.2% of net sales. Notably, stock-based compensation decreased significantly from $3.1 million to $1.7 million. The net loss widened by 48.3% to $9.2 million, with a loss per share escalating from $0.09 to $0.14 year-over-year, reflecting the consequences of the supply chain and inventory issues.

Annual Performance and Future Outlook

For the entire 2023 fiscal year, net sales reached $166.4 million, a modest 2% climb from 2022, while gross margins improved to 44.9% from 42.9%. These figures show resilience in the business model and suggest a potential for future growth. Net losses significantly contracted from $47.6 million in 2022 to $28.3 million. The company projects Q1 2024 net sales to be between $38 million to $40 million, with a delayed full-year guidance awaiting the new CFO's input, highlighting a cautious but optimistic approach to future sales trajectories.

Investment in Growth and Marketing

The company plans to continue its mid-40s gross margin trend, which will be used to fuel further investments, overcoming some anticipated cost headwinds in early 2024. The management expressed a robust intent to advance out-of-store marketing initiatives and exploit a stable supply chain as a growth lever, riding the momentum of a market shifting away from sugary sodas. Zevia's brand position as the top consumer choice in natural soda places it at an advantage as it seeks to pioneer new market segments with a broad distribution strategy.

Strategic Shift to Direct Store Delivery (DSD)

Zevia is set to embark on a Direct Store Delivery (DSD) model to reinforce its presence across sales channels, particularly within convenience stores. This strategic shift is expected to substantially aid in stock maintenance, boost product display, and enhance program participation that might otherwise be exclusive to DSD partners. Although specific financial details of the DSD arrangements were not disclosed, the company indicated it was ready for this transition, having laid a firm foundation in grocery sales. The DSD rollout will be regional and incremental, alluring DSD operators due to Zevia's robust established business.

Competitive Positioning Amidst Challenges

On the competitive front, Zevia is contending with volume and shelf space recapture following prior setbacks, alongside concurrently implementing price hikes. This dual approach, aiming for increased sales while adjusting prices, reflects strategic maneuvering in an expanding market with numerous competitors in the 'better-for-you' beverage sector. Zevia aims to uphold its leadership in natural soda, grounded in its product taste, occasion versatility, and relative affordability, which are key differentiators in keeping its edge over the competition.

Closing Remarks: A Path Forward

In summary, company executives conveyed excitement for Zevia's prospects, stating a bullish stance on revenue growth into 2024, particularly through a mix of increased volume and impending price adjustments. The company foresees gains in household penetration alongside strategic initiatives, such as stepping up marketing efforts and enhancing distribution models. With a reinforced gross margin and a new CFO at the helm, the company is poised to capitalize on its ability to invest in its upward trajectory.

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, good morning, and welcome to the Zevia PBC Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.It is now my pleasure to introduce your host, Reed Anderson, Managing Director, Investor Relations. Please go ahead.

[Reed Anderson, executive]

Thank you, and welcome to Zevia's Fourth Quarter 2023 Earnings Conference Call and Webcast. On today's call are Amy Taylor, President and Chief Executive Officer; Girish Satya, Chief Financial Officer; and Florence Neubauer, SVP Finance and Business Transformation.By now, everyone should have access to the company's fourth quarter 2023 earnings press release and investor presentation made available this morning. This information is available on the Investor Relations section of Zevia's website at investors.zevia.com.Before we begin, please note that all financial information presented on today's call is unaudited. Certain comments made on this call include forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs concerning future events and are subject to a number of risks and uncertainties which could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release and other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.During the call, we will use some non-GAAP financial measures as we describe business performance. The SEC filings as well as the earnings press release, presentation slides that accompany today's comments and reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are all available on our website at investors.zevia.com.And now I'd like to turn the call over to Amy Taylor.

[Amy Taylor, executive]

Thanks, Reed, and good morning, everyone. Welcome to the Q4 2023 earnings call for Zevia PBC.Before I walk us through fourth quarter results, I'd like to introduce our new Chief Financial Officer, Girish Satya. Girish is a 20-year veteran of high-growth consumer businesses that brings various skill set across finance, operations, technology, and strategic planning. His track record of success in driving growth and profitability will make him an excellent partner for me and for our leadership team and our Board as we chart the course to the future.I'm also thrilled that Florence Neubauer, who has served as our interim CFO, will continue in a key leadership role in Zevia, now as SVP Finance and Business Transformation. The entire Zevia organization and the Board joined me in thanking her for a remarkable contribution overall, but especially in these last several months.And now on to cover fourth quarter results and to provide an update on foundational initiatives that set us up for accelerating growth during exciting times for better-for-you beverages. I'm pleased to announce that Zevia returned to volume growth and net sales growth in the fourth quarter as the remediation of customer fulfillment issues in the midst of the supply chain transformation was implemented on time and as the brand refresh came to life on shelf.I'm grateful for the remarkable effort put forth from veteran and new Zevia team members in 2023, and I'm proud of their well-executed initiatives, not only to restore service levels, but also to ensure supply chain scalability for the future. Zevia's business has growing tailwinds as consumers across demographics continue to move away from sugar and increasingly toward clean label products. Diet and zero-calorie carbonated soft drinks continue to lead the growth in the broader soda category and natural service outpace even further.Zevia is the #1 consumer choice in the natural soda. Consumer spending on the brand is up per household and per trip. And over the past 18 months, we have increased price with strong consumer acceptance. This demonstrates brand strength and supports unit economics and a strong gross margin, which enable our ability to invest in growth going forward.Our brand refresh improves on-shelf visibility and continues to position Zevia as the beacon for this growing category within CSD. Zevia is the natural soda brand with a strong foundation at scale at center store across natural and conventional grocery with a loyal consumer base. And now we have the opportunity to expand our base through a launch into immediate consumption and cold single distribution in new and existing channels.Zevia's focus remain taking our better-for-you beverages mainstream. Our competitive advantages include great taste, limitless enjoyment across usage occasions, our zero-sugar clean label, and our affordability relative to other better-for-you beverages. Our mission focus is on global health for people on the planet. And in Q4, we removed another 2,700 metric tons of sugar from consumers' diets, never having sold a plastic bottle. Zevia is more affordable than 64% of nonalcoholic beverages in North America and more accessible than recent functional entrants in adjacent carbonated beverage categories.I'll share a few important shopper metrics. Zevia households increased their annual brand spend by 9% and their spend per trip by 7% over the past 12 months as of the fourth quarter. We are a home stocking brand and are relevant across all usage occasions and dayparts. Zevia shoppers spend 39% more on beverages versus total nonalcoholic beverage shoppers and make 32% more trips to stores to purchase beverages. Zevia shoppers continue to differentiate themselves even further from average beverage shoppers year-over-year and versus prior period as they continue to spend more on the brand and overall.I'll provide a few channel and category insights before moving on to address some of our new initiatives here at the start of the year. Our growth for the quarter was led by continued exciting progress at the world's largest retailer, who doubled video space in 2023, as mentioned last quarter, and is testing the brand in the mainstream carbonated soft drink aisle. The test continues to outperform expectations. Zevia Soda is up 94% in same-store sales. This evolution is one of a few examples of our opportunity to lead the exciting growth that mainstream better-for-you soda represent.Similarly, one of the 3 national drug chains took Zevia to the mainstream CSD aisle across 100% of its stores in Q4, posting double-digit growth. Zevia Soda delivered growth in the food channel in the quarter, outpacing the category of food here at the start of the year. Our newest flavors, Creamy Root Beer and Vanilla Cola continue as the #1 and #2 in Zevia dollar growth across the quarter, and both have ample room to expand distribution further as we expect their performance to support increased brand presence in upcoming spring resets at retail. Each new soda item we introduced into our portfolio performs better than the last.And in e-commerce, Zevia returned to growth in the quarter. Our top e-commerce customer posted 30% growth in December, indicative of supply chain recovery and continued demand in one of our strongest channels.I'll provide some insights on Q1. We are experiencing a delay in the recovery of on-shelf stock levels at retail, a lag effect of last year's customer fulfillment issues amid supply chain transition and thus some initial volume softness. We expect a recovery in Zevia's points of distribution and the return to normal promotional support at retail following spring resets and thus a return to growth through spring and summer.Zevia turns the corner into 2024 with a sharp brand refresh in market, a stable and scalable supply chain, momentum in critical new market segments and strong pricing. These factors underscore brand strength and bolster gross margins, indicating the ability to invest in accelerating growth going forward. On that foundation, we are focused on the following initiatives.Firstly, we are prepared to launch a regional approach to direct store delivery or DSD, which we believe will present an excellent case study of what DSD can do for our well-established high-potential brand in our current distribution footprint and in yet unpenetrated market segments.Secondly, we have gained distribution in a limited number of regional convenience chains in the U.S. and in Canada to test and learn the right assortment, merchandising, price points, and service levels for Zevia to be successful in this critical immediate consumption trial driving channel.Thirdly, we have stabilized and strengthened our supply chain in the following manner. We have shifted contract manufacturers' ownership over raw materials, but that we manage only finished goods, and we have outsourced freight to an excellent partner who will help reduce costs and deliver efficiency as we ready Zevia to scale.And finally, we are introducing marketing beyond retail, now that the brand refresh is fully in market, ramping up after spring reset season with a nationwide focus on the spring and summer beverage season. In short, it is critical we invest in consumer marketing outside the store and in route to market to drive growth in 2024 and beyond with a focus on the long-term opportunity.Following the broader category, we've also announced a price increase effective May 1, between 4.5% and 5% across selected packages as Zevia continues to demonstrate brand strength and as we maintain the same relative price position as premium to mainstream soda, but materially more accessible and affordable than other natural and better-for-you beverages on a unit and per ounce basis.I'll turn it over to Florence for additional color on our financial results, and I'll come back to speak about our broader opportunity, especially in light of the addition of an experienced strategic CFO to our leadership team.

[Florence Neubauer, executive]

Good morning, and thanks for joining the call today. I will now provide an overview of our fourth quarter and full year financial results, discuss guidance, and then pass it back to Amy for final remarks.In the fourth quarter of 2023, we delivered net sales of $37.8 million, up 6.9% versus same time prior year. We saw positive impact from a price increase in the year, which delivered a sizable impact of $1.5 million as well as an increase in volumes of 3.7% or $0.9 million, reflecting a return to volume growth after previous quarters were impacted by short-term supply chain fulfillment challenges. Gross margin was 40.7%, down 3.6 percentage points that is versus the same quarter a year ago. The decrease was driven by the decision to accelerate our supply chain transition, which included the write-off of some legacy branded materials, discontinuation of long-term SKUs as we focus on our highest potential products, and the write-off of some raw materials as we transition our supply chain to a new model. All of these temporary inventory losses had a 4 percentage point impact to the quarter.Selling and marketing expenses increased by 38.1% to $13.8 million, entirely due to freight and warehouse expenses. Given our supply chain logistic challenges, which are now remediated, freight to customers and freight transfer costs were temporarily elevated as expected, but translated into a lower impact compared to the previous quarter. Our increased inventory level also impacted our warehouses' cost as we continue to manage our inventory back to optimal levels.G&A expenses were $8.4 million or 22.2% of net sales, which is essentially flat compared to $8.5 million or 24.1% of net sales versus same time prior year. Stock-based compensation and noncash expense was $1.7 million as compared to $3.1 million same period in the prior year. Net loss was $9.2 million compared to a net loss of $6.2 million last year, a decline of $3 million or 48.3%, primarily driven by the supply chain logistics challenges and inventory losses.Loss per share was $0.14 per diluted share to Zevia's Class A common shareholders compared to $0.09 same time prior year. Adjusted EBITDA loss was $6.8 million compared to an adjusted EBITDA loss of $2.9 million same time prior year due to continued expenses from short-term supply chain recovery efforts through the back half of the year as expected. More than half of the losses are attributed to this recovery effort, which was better mitigated than in the previous quarter and stabilized going forward.Our balance sheet remains strong with $32 million in cash and cash equivalents and no outstanding debt as of the end of the fourth quarter of 2023 as well as an unused credit line of $20 million.Full year results. For full year 2023, Zevia achieved net sales of $166.4 million, an increase of 2% versus 2022. Our effective price increase during the year resulted in $11.5 million higher net sales, which mitigated the volume loss from short-term supply chain disruptions. We realized healthy gross margins of 44.9% versus 42.9% in 2022, indicating strength in our business model, which allows us to invest in future growth.Net losses were $28.3 million as compared to net losses of $47.6 million in 2022 and adjusted EBITDA loss was $19 million for the year compared to an adjusted EBITDA losses of $19.6 million for the full year of 2022.Turning to guidance. The company expects net sales for the first quarter of 2024 to be in the range of $38 million to $40 million, reflecting a delay in the recovery of on-shelf stock level and display activity at retail at the start of the year. Given the current transition in financial leadership and as we look ahead to spring resets, along with our overall wrap-to-market evolution, we are delaying providing full year guidance until our Q1 earnings call under Girish's leadership.Turning the call back to Amy.

[Amy Taylor, executive]

Thank you, Florence. Before we wrap, I'd like to introduce Girish and have him speak about his view on the Zevia brand and the opportunity ahead here in his first full week.

[Girish Satya, executive]

Thanks, Amy, for the kind words. I'm really excited to join the Zevia team. Zevia's strong consumer value proposition and leading brand position are incredibly well positioned to take advantage of the accelerating tailwinds in the natural soda category. I look forward to partnering with you and the rest of the executive team to help unlock the brand's true potential and accelerate this next phase of growth.Lastly, I'd like to thank Florence for her efforts over the last few months, and I look forward to partnering with her in her new role.

[Amy Taylor, executive]

Thanks, Girish, and welcome. We are excited to have you join and we look forward to the impact you will make here in Zevia.These are exciting times in better-for-you beverages. Zevia is the #1 consumer choice in natural soda and Zevia is accelerating initiatives to expand into new market segments with a category captain's mindset in a growing portion of a massive category. Our business can deliver mid-40s gross margin, which allow us to invest in growth. We launched marketing out of store this spring and summer, and we are evolving our route to market with an advantage in taste across the usage occasion with proven broad distribution and in relative affordability, we aim to step up as the beacon brand in the category that we pioneered.We continue to have strong demand, and now we have new scalability in our supply chain, pricing upside, and a step-change organizational capability, amid a rising tide of excitement around natural soda and a seismic consumer shift away from sugar. We spent a few years building a strong foundation and this business is now ready to scale. We are bullish on the years ahead.Thank you for your time this morning, and we are prepared to take your questions. Operator?

[Operator]

[Operator Instructions] Our first question is from Bonnie Herzog with Goldman Sachs.

[Ethan Huntley, analyst]

This is Ethan Huntley on for Bonnie. I guess my first one here would be sort of your thoughts on not providing full year guidance. I recognize you're going to provide it on Q1. And then also sort of the Q1 guidance being a bit softer than expected. I guess we're just trying to -- any color you can provide on sort of full year sales, recognizing things should return to growth in the spring and summer, but just maybe any sort of qualitative commentary you can provide on how we should we be thinking about net sales growth for the full year here?

[Amy Taylor, executive]

Sure. Thanks, Ethan. You're right. We expect a return to growth in the spring and summer given our healthy velocities. As an example, we're exceeding the category here at the start of the year versus CSD in the food channel, which is obviously massive for us and reflective of our potential and collectively our performance in mainstream channels. And as we return to full presence on shelf, we can also return to more competitive promotional levels, commercial investments in display.So add that to the impact of our brand refresh, our fast-growing innovation and forthcoming investments in marketing, we look to the spring resets as being a trigger to the return to growth at more expected levels. In short, our Q1 was softer in shipments than we expected as we're getting back to health on shelf at brick-and-mortar retailers, ensuring that the retailer merchandising is actually reflective of the space dedicated to Zevia through planograms. So that progression has been a little slower than expected in Q1.We've invested in incremental merchandising to top accounts to speed recovery there. And the spring reset should really be a trigger going forward.In terms of guidance, we're really excited to have Girish join us as our CFO. And we want -- we've had now 4 days on the job. We want to give them just a little more time than that to get a point of view on full year. And so we come into the year bullish on full year growth with strong gross margins, which indicates our ability to invest, be it marketing or route to market and a new CFO at the helm. So more to come and greater clarity on the full year after the Q1 earnings call.

[Ethan Huntley, analyst]

And then maybe just as a follow-up, maybe sticking with gross margins. We're under a bit of pressure here in Q4, as you mentioned. Any sort of color on how we should be thinking about gross margins for the year? Or any sort of headwinds related to the inventory losses and your supply chain transitions are those sort of all behind you at the moment? Or might that bleed into Q1? And maybe should gross margins expand this year from an improved cost environment? Any sort of guardrails you can provide on gross margins for the year would be helpful.

[Amy Taylor, executive]

Yes. So I mentioned before that we have the ability to deliver gross margins in the mid-40s. And that was reflected in the first 3 quarters of 2023. Obviously, Q4 was the exception, given the choice to invest in some of the inventory write-offs that really helped us start the year 2024 clean from the standpoint of legacy branded materials or raw materials through our supply chain transition. So let's call it Q4, the anomaly.We have an outlook with the ability to deliver mid-40s gross margin, but we will also take the opportunity to invest. As you know, we don't provide guidance on gross margins, but we expect a lagging impact of inventory into Q1 on some of our costs, but generally speaking, expect a return to the strong gross margins that we've had historically.

[Operator]

Our next question is from Andrew Strelzik with BMO Capital Markets.

[Andrew Strelzik, analyst]

My first one, I guess, is just about the visibility that you have to get to the restocking time line with the delays that you're seeing right now? And maybe just more broadly from a volume perspective and a distributions gain perspective. Can you talk about the visibility you have to return to that growth in the spring and summer and kind of some of the underpinnings of that bullishness?

[Amy Taylor, executive]

Sure. So we saw the softness coming kind of mid-quarter this first quarter here after a first round of scan data in late January and with January shipments, and we can share that, that is already improving. I mentioned one bullet point as to reasons to believe a faster recovery being the fact that we are leading CSD growth in the food channel. And while our dynamics vary channel by channel, some of the biggest ones, including food and strong e-commerce business, et cetera are reflective of demand but also a faster clip to recovery. Pre resets are obviously a moment in time, varying between February, March and April, depending on the retailer. And we know that some of the degradation of our presence on shelf is really just in-store merchandising rather than true dedication of space to Zevia.So what we've done to get there faster is invested in some incremental merchandising across top accounts, especially in the grocery or food channel to help to sort of bridge to the time of spring resets. With fast-growing innovation like Creamy Root Beer and Vanilla Cola, we have a good story going into resets to ensure that we gain back not only the space we had dedicated prior, but that we make some strategic gains and presence on shelf as well. So combine this with strong velocity and for the first time, marketing out of store now that we have the brand refresh fully in market, in stocks back on shelf, a stable supply chain. And those are some of the accelerators of velocity and therefore, net sales that we expect going forward.

[Andrew Strelzik, analyst]

And then maybe I'll take the crack on the cost side as well. And I guess you talked about a couple of different pieces, some benefits on the supply chain side that you have in place now, but then you've got the route-to-market stuff and the marketing pieces as well. Is there any way to kind of frame the various pieces in terms of pluses and minuses through the year on an annual basis? I'm just trying to get a sense for how to handicap each of the various pieces as that kind of comes into place.

[Amy Taylor, executive]

Yes. Let me ask Florence to speak to that through the lens of 2023, and then we'll do our best to give you a look forward as well.

[Florence Neubauer, executive]

Yes. So as you remember, Q3 was heavily impacted by selling costs, right? We still have some lingering selling costs in Q4. But as far as supply chain remediation, we are definitely now in a better position for 2024 on the selling costs side. As far as route-to-market, Amy, that's more of going forward?

[Amy Taylor, executive]

Sure. So with route to market, we're excited that we've talked about before, what would it require for Zevia to be ready to go DSD. And we've talked about our merchandising capabilities and different merchandising setup in store for our singles lineup. We've talked about unit economics and therefore, price. We've talked about the brand refresh being complete. And then, of course, now a stable supply chain. So with all those factors in place, we're ready to launch DSD on a regional basis and have some specific news on that forthcoming. And with that, we'll obviously be investing on the foundation of strong gross margins to accelerate that launch.So I wouldn't anticipate the noise in our selling costs in 2024 to the same degree that we saw them in 2023. Instead, we have a solid gross margin that allows us to invest in DSD and then ultimately as well in marketing to accelerate both expansion and growth. Does that answer your question, Andrew?

[Andrew Strelzik, analyst]

Yes. I mean, I guess, I'm trying to get a sense of magnitude of the various pieces, but I also understand that you probably want to hold off on some of that until the next call. But the color is helpful.

[Amy Taylor, executive]

Yes, both qualitatively and numerically as we provide a full year outlook in net sales with our new CFO in seat with 90 days under the belt, then we can also provide color on structure and margins at that time.

[Operator]

Our next question is from Sarang Vora with Telsey Advisory Group.

[Sarang Vora, analyst]

I'll continue the follow-up on the prior question. Can you help us understand the economics of the DSD model compared to your model? Just at a high level, how does it impact your gross margin versus the cost? And then -- and I know you will share details ahead, but any thought on like as you expand, do you expand with the customer nationally, do you go region by region, product by product? Just any early thoughts you can share on the expansion of DSD?

[Amy Taylor, executive]

Sure. Absolutely, absolutely. So first of all, this will be a rolling launch. So that we will be nowhere close to nationally distributed in DSD anytime soon. We have a regional rollout, which will give us great entail as to the case study for DSD support for this brand, the impact that it will make. So to answer your last question first, this will be regional based on geography, not nationally based on customer. And that allows us to gain the full benefit of DSD across channel, which brings me to my next point. How does DSD impact the business as well as the P&L?The way it impacts the business is in our existing footprint, it step changes our ability to compete in store through merchandising. That means fewer out of stocks. That means more displays. That means the ability to commit to certain programs that some retailers hold for only DSD brands, whether that be incremental cold availability then merchandised by your DSD provider rather than retail staff or whether that be incremental coolers and permanency around the store. So those are some examples of how DSD helps you in your existing footprint.Now for Zevia, we also have upside in other channels. And the most important example of that is convenience. And convenience is best serviced by a DSD model with frequency of visits and merchandising capabilities on a regular basis in a fast turn environment. This is a great place for us to drive trial. And remember that we have a really healthy strong center store business as a multi-back and home stocking brand, and this is now our upside to drive trial and significantly step change the size of our consumer base.So how does one pull off DSD? There is a gross margin investment with the DSD operator. And while I can't detail that at this time, what we needed to do as a brand was be ready, both from an awareness and pull perspective, but also from a unit economic lens, having strong enough pricing to turn around and go DSD and be able to sustain our path to profitability and make sure that, that model benefits us the DSD operator and the retailer. And my final comment on this is one advantage that we have and one of the reasons why there's a lot of interest in Zevia among DSD operators is that our healthy established grocery business is something they can pick up on and make an impact for their business and for ours immediately and then also bring new channels to bear. And that level of development is unusual at first blush for a new DSD and supplier partnership.So Sarang, hopefully, that steps you through how we expect the impact to play out by channel. We focus first on geography, and we will make investments through a gross margin lens to launch that effort, albeit quite small out of the gate, given the regional launch model.

[Sarang Vora, analyst]

And I have one big-picture question. Can you help us understand how the competitive landscape is right now for Zevia? I mean there were some losses on the volume and shelf side last year. You are trying to get back some of that shelf space. You're also raising prices in conjunction with it. So you're trying to raise volume, but you're also raising prices. I'm just trying to -- and you're competing with a lot of brands who are also expanding, whether it's tea or it's cola, natural, zero-calorie. So I'm just trying to understand like the competitive landscape as you see today? And how do you see that evolving in '24.

[Amy Taylor, executive]

Sure. It's a very dynamic environment right now in carbonated soft drinks. The driver of growth is diet and zero as has been the case over the last few years. And then what's accelerating even faster is the subset of the category we refer to as natural soda. And of course, that's a space where we are the pioneer and have the largest consumer base have sold by far the most can. So we are the #1 consumer choice as it relates to natural soda.And what's been exciting is that now there is a number of new brands in adjacent functional spaces, making significant investments to see with the consumer, the idea that soda can be better for you. And as that idea is seeded with the consumer and they come to the shelf, they find when properly merchandised, Zevia sitting next to other fast-growing competitors and Zevia is advantaged on taste, advantaged on relevance across usage occasions. We call it limitless enjoyment versus being limited to minimal consumption based on a functional promise, but also on price.And so we're more affordable for -- a better-for-you product is more affordable across households and easier choice for both impulse purchase as well as home stocking. And so with that positioning, we're excited to see a rising tide of focus on better-for-you sodas, and we continue to focus on expansion to defend our #1 position in that space from a consumer perspective.

[Operator]

Our next question is from the line of Jim Salera with Stephens.

[James Salera, analyst]

I wanted to maybe start off by -- I wanted to start off by maybe just closing the loop on the gross margin. For the fourth quarter, that impact is primarily just flushing the remainder of the old packaging out of the system. Is that the right way to think about that?

[Amy Taylor, executive]

Yes. It is that plus some raw materials write-off as we transition our supply chain, our contract manufacturers to manage raw materials from this point forward while we as suppliers manage only the finished goods. So those 2 factors together.

[James Salera, analyst]

Okay. And I think in Florence's prepared remarks, she said it was like a 4 percentage point impact. So if we back that out, that's 4Q gross margins are just under 45%. Is that kind of a fair number to think about on a go-forward basis, maybe a little bit of a headwind from the DSD? But moving forward, that's kind of in the ballpark of what we should think about?

[Florence Neubauer, executive]

Yes. Absolutely, Jim. You have it.

[James Salera, analyst]

And then if I could maybe drill down on some of the C-store opportunity. Can you just give some color around what SKUs you guys have in the C-stores? Are there any branded fridges? And if possible, if you could kind of size up maybe store count or give us a range of what you think that opportunity is right now?

[Amy Taylor, executive]

Jim, I can't size it up quite yet. More color on that in the next quarter, but I can share with you that in each instance in the limited number of regional players with whom we are launching in the coming months, we're featuring Zevia Soda. And then a few instances, also energy drink and in one instance, tea as well. We're testing different merchandising setups of the portfolio in the way that I just described. And then in one operator, we will be featuring branded barrels, so ice barrels near the register to drive impulse purchase. So each of these scenarios will give us different data sets to test everything from price point to range to merchandising strategies in that footprint.

[James Salera, analyst]

Okay. Great. And should we think about the C-store opportunity as being kind of the full complement of Zevia products? Or do you feel that there's a certain piece of the portfolio that you lead with and then start with soda and then teas come down the road? Or is it -- do you have a thought on what goes in first?

[Operator]

Ladies and gentlemen, we have lost the line of the management. Please stay connected.Ladies and gentlemen, we have the management connected with us. Jim, you can proceed with your question.

[Amy Taylor, executive]

Jim, I'm so sorry. We're having some technical difficulties. Can you repeat your question and we'll pick right back up?

[James Salera, analyst]

Yes, no problem. I was just asking, is there a particular SKU that you lead with, whether it's traditional soda offering or like citrus offering? What do you lead with into C-stores? And then what does that look like as you expand the portfolio you offer?

[Amy Taylor, executive]

Yes. So soda is by far our #1 priority. And so featuring our hero SKUs, our strongest flavors in the soda line is our top priority. But we all know that energy drink is obviously a very relevant category within energy -- within a convenience as well. So in a couple of instances, we're testing energy drinks across 4 key flavors. Does that answer your question?

[Operator]

Ladies and gentlemen, as there are no further questions, I will now hand the conference over to Amy Taylor for her closing comments. Amy?

[Amy Taylor, executive]

Yes. Thank you, and thanks for dialing in this morning, everyone. Apologies for the delay in communication given our technical difficulties. We are excited to continue to accelerate topline growth for the full year 2024 through a mix of volume and price. We talked about a price increase effective May 1. We've had strong consumer acceptance of that. We continue to drive gains in household penetration and execute the key initiatives we discussed this morning, whether that be investing in marketing or step changing our route to market. So with this throughout the market evolution and initial expansion into convenience and for the first time, out of store marketing, we head into spring and summer beverage season, very bullish. We have strong gross margins indicative of our ability to invest, and we're excited to have Girish as our new CFO.So we're excited about the future, and we appreciate your time this morning.

[Operator]

Thank you. The conference of Zevia has now concluded. Thank you for your participation. You may now disconnect your lines.