Energy Drinks Could Be The Growth Driver For Coca-Cola In The Domestic Market

Since early last year, shares of the beverage giant The Coca-Cola Company (NYSE:KO) have fallen around 3.5%, hurt by poor performance in the core carbonated soft drinks (CSD) category. Although global volumes for Coca-Cola rose 2% in the first quarter, this result mainly reflected the 8% growth in still beverage volumes. CSDs, which formed almost three-fourths of the net volumes in 2013, continue to suffer negative consumer perception owing to health and wellness concerns regarding high calorie content. Domestic soda volumes declined by 3.2% last year, but still form the largest category of the U.S. liquid refreshment beverage (LRB) market. While CSDs constitute around 43% of the overall market, energy drinks represent just over 2% by our estimates. However, energy drinks have outpaced the growth in carbonates in the last few years, and present a solid opportunity for beverage manufacturers to extract further growth from. CSD makers such as C0ca-Cola, PepsiCo (NYSE:PEP) and Dr Pepper Snapple (NYSE:DPS) already compete in this budding segment but face stiff competition from major energy drink companies such as Red Bull and Monster Beverage Corp., which together form over 80% of domestic energy drink volumes by our estimates. With sugary sodas and their diet variants in free fall, energy drinks could be a crucial growth driver for beverage companies in the next few years. Coca-Cola in particular might be relatively better placed in the energy drinks sector going forward, as compared to PepsiCo or Dr. Pepper.

We estimate a $40.99 price for Coca-Cola, which is roughly in line with the current market price.

See our full analysis for Coca-Cola

Energy Drinks Take Away Shelf Space From CSDs

Dollar sales for energy drinks grew almost 6% to $6.67 billion in measured channels in 2013, which propelled sales growth for convenience stores (C-stores) despite lukewarm sales for CSDs. ^[1] 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 sugary sodas. Energy drinks have managed to grow due to attractive packaging, product innovation and by targeting millennial customers. Growing popularity of energy drinks has even prompted C-stores to increase shelf space allotted to this category from around 20% presently. According to a survey conducted by Wells Fargo, retailers plan to expand shelf space for energy drinks to over 30% in the near term, taking away space from ailing diet CSDs. ^[2] Energy drinks have not only been outperforming the U.S. LRB market sales-wise, but also carry fatter margins. Compared to around 30% margins for CSDs, margins for energy drinks are around 40%, primarily due to higher pricing. This acts as an added incentive for retailers to promote energy drinks over other beverages and provide larger shelf space to this category.

Coca-Cola’s Energy Drinks Fare Well In The U.S.

As compared to PepsiCo’s 11.5% and Dr. Pepper’s 28% unit sales decline in energy drinks in the fiscal year ended April, Coca-Cola witnessed an almost 14% volume growth. ^[3] In fact, Coca-Cola’s energy drink portfolio consisting of NOS and Full Throttle grew more than every other brand in this category during this period. Retail sales for NOS rose nearly 7% in the U.S. in 2013 to $243 million, selling less than only Red Bull and Monster in the domestic market. ^[4] However, both Red Bull and Monster dwarf sales of Coca-Cola’s energy drink portfolio at present. These two companies together generated almost $4 billion in dollar sales last year. But the positive for Coca-Cola here is its distribution deal with Monster, adding to its reach and presence in the budding energy drink segment.

Monster Volumes Could Be Crucial For Coca-Cola’s Growth

Around half of Monster’s beverages, mainly Monster Energy, are distributed in certain U.S. and Canadian territories by Coca-Cola. In addition, Coca-Cola’s bottlers also distribute Monster Beverages in some international markets. According to Stifel, the Coca-Coca-Monster partnership will constitute 3% of Coca-Cola’s net operating profits and roughly 13% of the company’s North American operating profits in 2015. ^[5] 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 ~$11.1 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. ^[6] Given the already established Coca-Cola-Monster relationship, acquiring the energy drinks company could further boost Coca-Cola’s top line.

As part of its 2020 vision, Coca-Cola aims to double its revenues from 2010 levels. However, in the last couple of years, category headwinds and structural changes have allowed only a 1% growth in its sales between 2011 and 2013. Monster generated over $2.2 billion in sales in 2013, up 9% year-over-year. A possible acquisition would not only boost Coca-Cola’s top line but also give the company a strong foothold in the fast growing energy drinks segment. In the last twenty years, Coca-Cola has spent around $29 billion on acquisitions, trailing PepsiCo’s $45.4 billion spend. ^[7] The beverage giant could in fact lose its present deal with Monster if the energy drinks maker is bought out by another beverage company. A possibility could be Anheuser-Busch, which also has a distribution deal with Monster in Brazil. Coca-Cola could also look to acquire Monster due to vast international opportunities in the energy drinks segment. Around 70% of energy drink sales globally are outside the U.S., but Monster sells only 21% of its drinks in international markets. Coca-Cola’s widespread distribution channels and marketing muscle could help generate meaningful growth for Monster internationally.

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1. “Big brands boost energy drink success“, March 2014, csdecisions.com [↩]
2. “US C-stores: ditching Dr. Pepper 10, skeptical on natural sweeteners“, January 2014, beveragedaily.com [↩]
3. “Beer shines, CSDs show life, energy drinks slow“, May 2014, cspnet.com [↩]
4. “ref 1” [↩]
5. “Renewed reasoning for Coca-Cola to buy Monster Beverages“, April 2014, cspnet.com [↩]
6. “Monster’s surging sales argue for Coca-Cola bid“, January 2014, bloomberg.com [↩]
7. “ref 5” [↩]