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COKE'S MONSTER MARRIAGE: WINNERS AND LOSERS

Coke’s Monster Marriage: The 5 Key Talking Points

15-Aug-2014
Last updated on 15-Aug-2014 at 17:49 GMT - By Ben Bouckley+
Coke’s Monster Marriage: The 5 Key Talking Points
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As Coke inks a $2bn+ deal to buy a stake in Monster Energy, we explore the implications for energy drinks – and predict a harder fight for PepsiCo and Red Bull.

1. PepsiCo peril – Playing around in the energy periphery?

Pressed by CLSA analyst Caroline Levy in February on energy drink acquisitions given Pepsi’s valuable distribution system and Monster’s status as the fastest-growing CSD on the market, CEO Indra Nooyi categorically ruled out any acquisitions.

“Moutain Dew Kickstart is our version of the energy drink that’s right for the masses, and we distribute other energy drinks” she said, adding that PepsiCo had looked ‘long and hard’ at the energy category before deciding that M&A would not create value for shareholders.

CFO Hugh Johnston then jumped in to flag-up Pepsi’s distribution agreement with Rockstar, adding that Kickstart “plays around the energy space, in a similar way to Starbucks Frappucino and iced coffee and other potential innovations go down that path as well”.

Pepsi’s lack of a ready rival to newly bulked-up Monster beyond Rockstar and AMP (remember that brand? management don’t seem to) is worrying – given Kickstart’s position in a CSD/energy hinterland Monster is also starting to exploit with products like Ultra Zero. Effectively, Nooyi seems to have run up the white flag and decided that it's too costly for Pepsi to mix it in mainstream energy as we traditionally understand it.

2. Coke gives Monster wings, to rattle Red Bull…

Like PepsiCo, Red Bull is no shrinking violet (€5bn+ or $6.7bn+ global sales in 2013) and isn’t going to fold its US tent overnight – but it’s been losing share against Monster in the States over consecutive quarters now, and RBC analysts predicted last week that Monster will soon overtake its rival in terms of US sales.

Bar the Editions launch in March 2013 and this year’s Summer Edition exclusive in 7-Eleven, there’s the nagging sense that the Red Bull has lost its edge – beyond all the sporting tie-ups, there’s not much innovation (in terms of package, liquid or digital marketing) or youth buzz around what, frankly, seems like a brand in need of a refresh, suffering its first middle-aged aches and pains.

In the States you’ve got to ask whether Coke’s new distribution and marketing muscle behind Red Bull’s main rival won’t make the fight for cooler space even more of a challenge? Monster’s new ability to push vending sales – and Rodney Sacks mention thereof – is also ominous.

In international markets, Red Bull has the jump on Monster due to its earlier introduction in the 1990s, but its rival is gaining share in the majority of markets beyond the US (the smart money says this trend will only accelerate with Coke’s backing) while Red Bull is reportedly losing share.

3. Where next for Burn, NOS, Full Throttle?

Officially, at least, Monster is thrilled to fit these brands into its portfolio, and given the scale of the energy market they aren’t insignificant. But given that the likes Burn, NOS and Full Throttle have significantly underperformed Monster Energy on a per dollar basis in terms of A&M spend and compete with its SKUs for shelf space and market share, is it worth keeping them?

It will be fascinating to see what Monster does with what these effective ‘B brands’ – divest them, stop investing and let them die a slow death, withdraw them, or perhaps push them through different channels?

4. Monster faces down political firestorm

What a difference a year makes! In July last year Monster CEO Rodney Sacks had been summoned to a Senate commerce hearing, where crusading senatorial tag team Blumenthal and Markey took pot shots at the brand for alleged marketing to kids – the negative publicity seemed endless…

In 2014 the product liability lawsuits drag on, but Coke’s patronage of Monster is a vote of confidence – a shot in the arm for the company’s stock that will also buff up its image with the public and investors. And despite his immense business acumen the combative Sacks does not always wage the most diplomatic PR war on his critics: Atlanta can help smooth out the bumps.

5. Coke primed for a full takeover?

In early 2012 Coke explored a possible takeover of Monster, so the news itself is not surprising, even if the timing is, given that both parties managed to stop the deal leaking-out in the press.

What are the odds on a full takeout of Monster? Well, we can speculate. Perhaps Coke wanted this but Monster resisted – perhaps the 16.7% stake is a strategic play to prevent the energy brand falling into the hands of a rival, the key one being Pepsi.

As Stifel Nikalus analyst Mark Swartzberg said earlier this year, the Monster distribution relationship as was looked set to generate 13% of Coke’s North American operating profit in 3%. Simply put – the prize was too big to lose.

Greater involvement will no doubt be discussed further down the line, but taking the minority stake also protects Coke against possible headwinds in the energy drink space – namely lawsuit fallout leading to possible regulatory action and changing consumer trends.

Peace Tea could take on Arizona

Who benefits most from this deal? There are arguments on both sides. Monster’s share price shot up yesterday on news of the deal, which will only accelerate sales growth despite the equity giveaway.

It will also enhance any future price Coke might pay for further equity and help Monster to cut operating costs and boost margins in international markets via access to Coke’s system and control of its global energy drinks business.

As for Coke, it’s secured the Monster Energy homestead, so to speak, against PepsiCo, and its apparent wait-and-see policy on energy's prospects (before perhaps throwing up the electric fence and adding to its stake) seems wise.

Coke's also bagged Monster non-energy brands into the bargain, with Peace Tea a particularly promising brand – a potential threat to Arizona Beverages low-cost hegemony? – in a sector where Euromonitor predicts volume sales will grow 11% from 2013-18.

Coke’s $2.15bn bite of Monster Energy: Soda giant’s ‘exclusive energy play’

‘Monster Energy can crack China with Coke’s help’: CEO Rodney Sacks

Related topics: Emerging Markets, Energy Drinks & Beyond, Fizzing-Up Carbonates, Manufacturers, Markets, Regulation & Safety, Coca-Cola, PepsiCo, Monster Energy, Red Bull, Soft Drinks & Water, Energy & Sports