Could Monster’s Takeover Be On The Cards For Coca-Cola?

by Trefis Team
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The Coca-Cola Company (NYSE:KO) closed on a 16.7% stake in Monster Beverage in June 2015, and since then there has been speculation regarding when the former would end up acquiring the remaining stake in the latter. This speculation hit a high in the beginning of this month, sending the stock price of the two companies higher. According to The Deal, Coca-Cola may be nearing a takeover of Monster Beverage. However, contrary to this opinion, Credit Suisse thinks the deal may happen, but further down the road. In light of these contradictory statements, we’ll highlight some factors that show why the deal may make sense for Coca-Cola.

See our complete analysis for The Coca-Cola Company

Lure Of The Energy Drinks Market

The retail market for sports and energy drinks in the US touched sales of $25 billion in 2016, rising at an average annual rate of 7% over the previous five years, according to Packaged Facts, Rockville, Md. As per their research, these drinks are perceived to be healthier than carbonated beverages because of their association with sports and physical activity. While meant originally for athletes, these drinks grabbed the attention of teens and young adults as “anytime drinks.” Energy drinks also appeal to consumers as a change from the regular sodas. The market is set to carry on its growth momentum, albeit at a slower rate of 3.1% a year for the next five years. Monster is the number two player in the market, after Red Bull, with a market share of 26.8% versus the 38.3% of Red Bull.

Looking forward, the market will be hurt as these companies face allegations that their products are harmful to the consumers, as they contain a high level of sugar and caffeine. Keeping this in mind, Monster is launching Hydro, a non-carbonated energy drink, which the company feels can generate $200-$400 million in sales within two or three years, and White Lightening, a zero calorie carbonated soft drink.

International Expansion Will Boost Sales

Monster has in the recent past been delivering strong financial performance and has been capitalizing on the tremendous potential of the energy drinks market. However, in the global scenario, the company still has only a small share. This could change if Coca-Cola acquires the company. Coca-Cola has a strong global distribution network, with the help of which Monster would be able to greatly expand its presence in international markets. Moreover, by using KO’s distribution network and scale, the company will be able to reduce its distribution costs significantly. Such a scenario will put Monster in a better position to compete with the likes of Red Bull. While the company already has a partnership with Coca-Cola, an acquisition could speed things up. Hence, the acquisition would result in a meaningful increase in Monster’s sales, and consequently of Coca-Cola. Furthermore, it could also provide a boost to its margins, given the reduced expenses associated with the international expansion.

Diversifying Portfolio

As the beverage industry undergoes a transformation with carbonated soft drinks losing their position and consumers preferring “healthier” beverages, it appears that Coca-Cola is now looking to focus on innovation to introduce new/modified beverages which will attract consumers. It is focusing on flavored water, bottled water, and dairy beverages to diversify its portfolio. The new management structure is aimed at the company’s strategy to drive growth via newer products in line with changing consumer preferences.

In this regard as well, the purchase of Monster will benefit them in terms of diversifying its portfolio. It will also help them compete better with Pepsi, though an acquisition of a food company might make more sense. Coca-Cola already has a sufficient number of water, juice, and soda brands in its portfolio. For KO, this acquisition would mean a better foothold in a market where the company does not have a significant presence. New CEO James Quincey has already stated that the company will be looking into expanding into other categories that they deem attractive. Globally as well, Coca-Cola trails Pepsi in this segment, and hence, by combining with Monster they can edge that company from its dominant position.

Have more questions on Coca-Cola? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Coca-Cola

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