New Dispute Brewing for Snapple

Snapple Beverage Corp. claims that its popular fruit drinks and iced teas are made from “the best stuff on Earth.” Now government regulators are demanding to know just what that stuff is.

In a recent filing with the Securities and Exchange Commission, the company disclosed that regulators are questioning claims that its drinks are “all natural” and “real brewed”--the underpinnings of Snapple’s success.

However, the company said it believes the disputes will be resolved with no adverse impact on the firm.

The regulatory dispute is only the latest problem to emerge for the Valley Stream, N.Y.-based beverage maker. Last month, the company was forced to launch a costly media campaign to deny persistent rumors circulating in San Francisco that it is linked to the Ku Klux Klan and that its iced tea labels show ships bringing slaves to America. In fact, the historical drawing depicts the Boston Tea Party.

In interviews at about the same time, Snapple executives also denied rumors that the company is tied to Operation Rescue, an anti-abortion organization. Executives said they responded to the rumors because they feared the rumors might spread to other parts of the country.

Snapple has cashed in on a rising consumer demand for “all natural” beverages, helped in part by a clever marketing campaign that includes endorsements from radio shock jock Howard Stern and conservative commentator Rush Limbaugh.

According to Snapple’s SEC filing, the company’s drinks account for about 20% of the nation’s ready-to-drink iced tea sales and 10% of single-serving fruit drink sales. The company had sales of $231.9 million in 1992, up from $95 million in 1991. It went public in December.

The company, in its SEC filing, said it has enjoyed noteworthy success in Los Angeles. Last year, Snapple accounted for one-third of all ready-to-drink iced tea sales in the area, up from less than 2% in 1991.

Now at least one investment advice publication believes that the regulatory inquiries could affect Snapple’s success. The Half Moon Bay, Calif.-based Overpriced Stock Service newsletter is advising subscribers to sell Snapple’s stock short, a bet that the price will fall.

In its SEC filing, the company disclosed that the U.S. Food and Drug Administration and the California Department of Health Services are questioning Snapple’s claim that its drinks are “all natural”--but for different reasons.

The FDA’s inquiry centers on citric acid, a flavoring that can also be used as a preservative. The agency said that in general, products containing preservatives are not considered natural. It isn’t yet clear how Snapple is using citric acid in its drinks, according to the FDA.

California regulators contend that Snapple’s drinks are not “all natural” because they appear to contain artificial or highly processed ingredients.

State investigator Lester Lowe said that one ingredient, high-fructose corn syrup, isa processed sweetener, and that citric acid is often artificial.

While it is possible to use natural citric acid, Lowe said the company “hasn’t proven to us that they do that.”

California regulators said the biggest sticking point is over Snapple’s claim that its iced teas are “real brewed.”

James Waddell, a regional administrator with the department’s food and drug branch in Sacramento, said Snapple makes its tea by brewing only a small amount of potent tea, then adding water to the concentrate.

“That is not brewed tea,” Waddell said.

In a letter to Snapple officials seven months ago, the department warned that it could “embargo” shipments of the company’s drinks unless Snapple modified its claims. State regulators said in interviews that discussions with the company are continuing and no embargo is imminent.

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Case Closed: Dreyfus Corp. has agreed to modify brochures for its Growth and Income Fund to settle misleading advertising charges made by the New York City Department of Consumer Affairs.

As reported in this space in July, the department said a Dreyfus brochure stating that the fund did not invest in “junk bonds” was misleading because the fund invested in convertible debt securities considered below investment grade.

Dreyfus argued that the convertible securities, though considered risky, are not junk bonds.

In settling the charges, the department said it accepted Dreyfus’ position and that it no longer disputes the accuracy of the brochures.

However, Dreyfus said that in future brochures for the fund, it will state that it invests in below-investment-grade convertible securities “to avoid any possible confusion on the part of unsophisticated investors.”