The Coca-Cola Company (NYSE:KO) is the global leader of the liquid refreshment beverage (LRB) market, especially in the carbonated soft drinks (CSD) category, which accounts for almost 40% volume share of the overall LRB market. In 2013, Coca-Cola’s shares gained just 13%, lagging not only the S&P 500′s 29% rise, but also its chief competitor PepsiCo’s 21% advance. Both these beverage giants have suffered a continual decline in CSD demand, mostly in the developed markets. In addition to the soda slump, much criticism has been directed towards unhealthy sugary juices. These reasons are why Coca-Cola is expected to report flat to negative top line growth in 2013, given that more than three-fourths of its revenue came from CSDs and juices in 2012.
We estimate a $44 price for Coca-Cola, which is around 10% above the current market price.
As consumers shift preferences from CSDs to alternatives such as sports and energy drinks, bottled water and ready-to-drink (RTD) teas, Coca-Cola will have to strengthen its portfolio in these fast growing segments in order to maintain its share in the overall beverage market. Although Coca-Cola has established itself in the global bottled water and sports drinks markets with popular brands Dasani and Powerade respectively, the company has negligible presence in energy drinks, which is the fastest growing beverage category.
Growth Potential Of The Energy Drinks Market
The U.S. energy drinks market grew by a whopping 14% in 2012 to reach nearly $10 billion sales. Sales of energy drinks increased by ~5% year-on-year in each of the last three months as well. A surprising trend in the last few years has been the surge in sales of these caffeine fueled drinks amid looming health concerns that have contracted sales of CSDs. Energy drinks have managed to grow due to attractive packaging, product innovation and by targeting older consumers. Despite the health concerns and competition from other energy-boosting beverages such as RTD coffees and teas, energy drinks are expected to grow to ~$16 billion sales by 2017 in the U.S. One of the main reasons for this forecasted growth is the low per capita consumption of energy drinks, which is the lowest among RTD beverages. 
Red Bull and Monster dominate the energy drinks market with shares of 43% and 39% respectively. Both these companies had retail sales of over $3 billion in fiscal 2013 ending July, marking a year-on-year growth of 16% for Red Bull and 21% for Monster.  Thus, due to the stronghold of these two companies, most of the growth in the energy drinks market might be captured by them in the coming years.
Coca-Cola’s Bid In The Energy Drinks Market
Full Throttle and NOS are the two energy drink offerings by Coca-Cola, which together have a small market share of ~4%. In order to take advantage of the growth potential in this category, Coca-Cola will have to increase focus on strengthening its energy drinks portfolio. One step in this direction could be acquiring an already established player.
Coca-Cola had considered acquiring Monster in early 2012, but eventually dropped the deal in April. Monster’s market value has grown over three times since 2010 to reach ~$11.3 billion presently. According to Bloomberg, the company’s sales are expected to swell by 53% through 2017, beating every other beverage company in the U.S. valued at above $50 million.  Given that Coca-Cola already distributes Monster in the U.S., acquiring this energy drinks company might be beneficial for the beverage giant.
The widespread distribution channels and marketing muscle of Coca-Cola could boost Monster’s sales in international markets where energy drinks is a relatively nascent beverage division. On the other hand, Coca-Cola will gain from the established presence and popularity of Monster in the energy drinks segment. The possibility of losing Monster to a competitor might also prompt Coca-Cola to take over the company and protect the growth it gets from distributing Monster energy drinks.
In addition to providing huge growth opportunities, energy drinks is a high profitability business. As compared to other beverages, especially RTD coffees and teas, these drinks have much higher prices. Although energy drinks entail large investments in marketing, advertising and packaging, their margins are still broader than those of CSDs. This is because energy drinks are almost four to five times more expensive than CSDs. Given the potential growth opportunities and higher margins, we expect that Coca-Cola might look to expand in the energy drinks market in the coming future.Notes: