Coca-Cola Buys Stake In Monster Beverages

The largest soft-drink manufacturer in the world, Coca-Cola announced that it will buy 16.7% stake in Monster Beverages, a leading energy drinks company, for around $2.15 billion. ^[1] This deal, which is expected to close by the end of the year or early in 2015, will further extend Coca-Cola’s reach in the fast-growing energy drinks market globally. While consumers, especially in the developed markets, continue to shift away from sugary carbonated soft drinks (CSD), smaller beverage segments such as energy drinks have seen considerable volume rises in the last couple of years. Around half of Monster’s beverages, mainly Monster Energy, were already 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. As part of this new deal, Coca-Cola will transfer its energy brands to Monster, and the latter will transfer its non-energy portfolio to Coca-Cola, in order to optimally realign product portfolios. Amid declining sales of the core CSD category, the new Monster deal locks-in Coca-Cola’s share in the fast-growing global energy drinks market, worth around $27 billion presently. ^[2]

We estimate a $41.86 price for Coca-Cola, which is roughly in line with the current market price.

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Energy Drinks Continue To Grow In The Domestic Market

CSD volumes in the U.S. declined by 3.2% last year due to negative consumer perception owing to health and wellness concerns regarding high calorie content, but still form the largest category of the country’s liquid refreshment beverage (LRB) market. While CSDs constitute around 43% of the overall market, energy drinks represent just over 2%, by our estimates. Energy drink volumes grew by 5.5% in the U.S. in 2013, and owing to the low current levels of penetration, large-scale promotions and innovative advertising initiatives, could grow by 52% through 2018. ^[3] Growing popularity of energy drinks has even prompted C-stores in the domestic market 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. ^[4] 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.

In addition to the domestic market, energy drinks are also expanding overseas. For example, the energy drinks segment in Brazil is expected to outpace the growth of the country’s overall LRB market through 2017. As compared to the CAGR of 6% for the latter, energy drinks are expected to grow by over 25% annually in terms of volume during this period. ^[5] In fact, Brazil is expected to outrun every other country in terms of volume growth in this segment through 2017. ^[6] Low penetration levels in Brazil as well as other emerging economies means that there is a large growth potential in energy drinks in the next few years.

Coca-Cola To Benefit From Monster’s Strong Positioning

Owing to the high demand for energy drinks, distribution of Monster’s beverages was expected to contribute 3% to Coca-Cola’s net operating profits and roughly 13% to the company’s North American operating profits in 2015, according to Stifel. ^[7] As part of the new agreement, both the companies will modify their current distribution agreement in the U.S. and Canada by expanding into additional territories in these countries, as well as international markets. Monster will become the exclusive energy drinks partner of Coca-Cola, which will add another cash flow stream owing to the equity investment in Monster.

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 ~$14.5 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. ^[8] Monster generated over $2.2 billion in sales in 2013, up 9% year-over-year, and the high demand for energy drinks could further bolster both Monster and Coca-Cola’s finances, going forward. Apart from strengthening domestic sales, Coca-Cola’s widespread distribution channels and marketing muscle could help generate meaningful growth for Monster internationally. Around 70% of energy drink sales globally are outside the U.S., but Monster sells only 21% of its drinks in international markets.

In addition, Monster will now take control of Coca-Cola’s energy drink portfolio, including Full Throttle, NOS, Burn, Mother, Relentless, Play and Power Play. Owing to Monster’s strong brand positioning in the energy drinks sector and dedicated investments in advertising and marketing, Coca-Cola’s energy drinks could also enhance their reach. 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. ^[9] 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 in the U.S.

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1. Coca-Cola and Monster enter into a lone-term strategic partnership, wsj.com [↩]
2. Coca-Cola buys $2.15 stake in Monster Beverages, ft.com [↩]
3. U.S. LRB market remained flat in 2013, beveragemarketing.com [↩]
4. “US C-stores: ditching Dr. Pepper 10, skeptical on natural sweeteners“, beveragedaily.com [↩]
5. “Brazil-soft drinks“, September 2013, datamonitor.com [↩]
6. “Red Bull gmbh in soft drinks (world)“, April 2013, euromonitor.com [↩]
7. “Renewed reasoning for Coca-Cola to buy Monster Beverages“, April 2014, cspnet.com [↩]
8. “Monster’s surging sales argue for Coca-Cola bid“, bloomberg.com [↩]
9. “Big brands boost energy drink success“, March 2014, csdecisions.com [↩]