Behind Coke’s Monster Deal

Following Coca-Cola's agreement to acquire a 16.7 percent equity stake in Monster Beverage Corp., the second-biggest producer of energy drinks in the United States, under the terms of which Monster will concentrate on energy drink production while Coke will add Monster's non-energy drink brands -- Hansen's Natural Sodas, Peace Tea, Hubert's Lemonade and Hansen's Juice Products – to its portfolio, Progressive Grocer engaged in a Q&A session with New York-based analyst Will McKitterick, of global business intelligence firm IBISWorld, to gain more insight into the beverage industry conditions that led to the deal and what's likely to occur in its aftermath.

PG: What's behind the soda category's falling sales? Is it due to health concerns, oversaturation of products, anything else, or some combination of issues?

WM: Demand for soft drinks has waned over the past five years as consumers become more aware of the negative health effects of drinking soda. The government, media and even soft drink producers themselves have voiced the consequences of consuming artificially sweetened diet soda and how drinking large volumes of regular soda can lead to obesity. Furthermore, a number of states have implemented a tax on soda to curb consumption.

PG: Why have energy drinks taken off in such a big way in recent years?

WM: Products appeal to several types of consumers, including students, athletes and young professionals looking for an alternative to traditional forms of caffeinated beverages such as coffee and tea. While coffee contains a relatively high level of caffeine in relation to major industry products, such as Red Bull or Monster, energy drinks offer a variety of ingredients not found in coffee. Furthermore, companies have been adept at marking products by linking them to athletes, movie stars and musicians, each of which appeal to younger consumers.

PG: How long can energy drinks maintain their upward growth, and what would cause them to level off in popularity? Are they still essentially a product that appeals mainly to teenagers and young adults, or are other demographics becoming more interested in them? Why or why not?

WM: We expect the energy drink production industry to continue to achieve single-digit growth over the next five years as more consumers incorporate energy drinks into their daily beverage repertoire. As the economy improves and a greater share of the population goes back to work, industry operators will attempt to capitalize on consumers' need to wake up in the morning and stay energized throughout the workday. New products and marketing are expected to drive the consumption of energy drinks among secondary demographic groups such as young moms, older consumers and females. However, any sort of regulatory change due to perceived or actual health risks associated with industry products could derail this growth.

PG: Why has Coca-Cola up until now been relatively unsuccessful with its own energy drink brands, despite, in IBISWorld's words, its "superior global distribution apparatus"?

WM: Coke’s products haven't been totally unsuccessful, but they haven't been able to meaningfully displace demand from competing products. Coke spends less time focusing on this segment of its operations, as it only generates a fraction of the company's total earnings.

PG: Will Monster and its other brands risk losing their individual character as part of Coca-Cola's vast stable of brands? Why or why not?

WM: It is unlikely that Coca-Cola will attempt to change Monster's image. First, the company only controls a 17 percent share in Monster. Furthermore, the agreement reached [last] week signals that Coke is confident that Monster understands the energy drink market better than it does. Monster's marketing and sales teams have done a good job at selling their product based on its unique brand. Why wreck a good thing?