The Energy Drink Industry
Kurt Ondash, Hugh Stewart,
Andrew Brown, Mike DiChiara
Why the Energy Drink Industry?
• College students a major target population
• Substantial industry growth in past decade
• Similar ingredients lead to importance of pricing
strategies
• Health concerns and side effects
Functional Beverage
• Energy drinks categorized as a Functional
Beverage
▫ A non-alcoholic drink that includes in its
formulation ingredients such as herbs, minerals,
vitamins, amino acids and/or additional raw fruit
or vegetables
▫ Often claim specific health benefits
Functional Beverage Industry
Nutraceutical
Drinks
10%
Sports
Drinks
27%
US Functional Beverage Industry
Energy Drinks
63%
Energy Drinks
• Beverages that contain caffeine in combination
with other presumed “energy enhancing”
ingredients such as taurine, herbal extracts and
B Vitamins
• Energy drink segment includes options such as
shots, ready-to-drink and powder forms
• Focusing on the traditional canned energy drink
Industry Analysis
Background
• Perceived effects:
▫ Increased mental
performance
▫ Increased physical
performance
• Potential ingredients:
▫
▫
▫
▫
▫
▫
High level of caffeine
Herbs
B vitamins
Guarana
Taurine
etc.
Financing and Distribution
• Financing
▫ Use existing infrastructure
 AMP using PepsiCo
▫ Create entirely different company
 Red Bull
• Distribution
▫ Usually use large beverage companies
 Monster uses Coca Cola
Typical Customer
• Originally:
▫ Target athletes
• Currently:
▫
▫
▫
▫
Young adults (teenagers and people in their 20s)
Overworked individuals
Hip hop crowd
Extreme Sports Enthusiasts
Firms in the Industry
•
•
•
•
•
Only including energy drink cans
NOT energy shots or vitamin water
About 200 brands
Over 300 varieties of energy drinks
Top three energy drinks:
▫ Red Bull
▫ Monster
▫ Rockstar
Herfindahl-Hirshman Index (HHI)
Barriers to Entry
• Barrier to entry is not extremely high
▫ Industry very profitable
▫ Low initial investment if infrastructure in place
• Hard to compete with leading energy brands
▫ Top 2 energy drinks control 80 percent of market
Product Differentiation
• Energy drinks are different based on:
▫ Ingredients
▫ Health (low-calories, low-sugar, lowcarbohydrates)
▫ Countries drinks are sold
▫ Regulations
Top Energy Drink Sales 2010-2012
$3,500
Energy Drink Industry Sales
$3,000
Sales (millions)
$2,500
Red Bull
$2,000
Monster
Rockstar
$1,500
Amp
NOS
Full Throttle
$1,000
$500
$0
2010
2011
Year
2012
Top 3 Energy Drinks
#1
#2
#3
Red Bull
• Launched in Austria,1987
• Started by group of investors
• More than 35 billion cans
sold
• 5.2 billion cans sold in 2012
• In 165 countries
• Grew 15.9% in sales in 2012
• Invests heavily in Formula 1
Championships
• Slogan: “Red Bull gives you
wings”
Monster
• Launched by Hansen
Beverage Corporation
• Over 25 different energy
drinks sold
• Coca Cola Used as
distributor
• Advertises by supporting
“the scene, the bands,
our athletes and our
fans”
• Over 8 billion cans sold
since product launched
• Slogan: “Unleash the
Beast!”
Rockstar
• Created in 2001 as
independently owned
venture
• 20 different flavors
• In 30 countries
• Uses PepsiCo as
distributor
• Gained market share by
selling a drink that is
“twice the size of Red Bull,
but sold at the same price”
• Slogan: “Party like a
Rockstar”
Pricing Strategies
Main Pricing Strategies
• Tacit Collusion
▫ Promotional Strategies
• Price Leadership
• Second Degree Price Discrimination
▫ Drink Sizes
▫ Drink Quantities
Tacit Collusion
Tacit Collusion
• Seemingly independent, but parallel actions
among competing firms
• Not a formal agreement
• Seen in energy drink industry with price
matching
Tacit Collusion
• A lack of significant product differentiation and
production costs
• Similar ingredients found across all brands:
▫ B-Group Vitamins
▫ Taurine
▫ Ginseng
Promotional Strategies
• Similar promotional strategies
across the industry
▫ Focus on sponsoring extreme
sport athletes/events
▫ Promote brand image by
targeting events with “high
energy”
• Emphasize the overall
experience, not just the drink
Promotional Strategies
• Each of the major brands
employ on campus student
reps
• Goal is to create brand
awareness
▫ Free giveaways
▫ Providing energy drinks at
parties
▫ Promoting on-campus events
Tacit Collusion
• Industry dominated by 2 major firms:
▫ Red Bull (42% market share)
▫ Monster (37% market share)
• Consistent industry growth in sales with a small
number of competing firms
Tacit Collusion
Fastrac
Brand
Size (oz.)
Monster
Red Bull
AMP
NOS
Rockstar
Full Throttle
Quantity
16
16
16
16
16
16
Price
1
1
1
1
1
1
$2.69
$3.99
$2.49
$2.69
$2.49
$2.49
Price/Total oz.
$0.17
$0.25
$0.16
$0.17
$0.16
$0.16
Price Leadership
Price Leadership
• Occurs when a firm leader in its sector
determines the price of the product
• Competitors may choose to lower prices in hopes
of capturing market share
• Energy Drink Price Leader: Red Bull
Price Leadership
• Raw data regarding prices collected from:
▫ Wal-Mart (wholesale retailer)
▫ Fastrac (gas station)
▫ Universal Deli (corner store)
• Survey taken by 100 current college students:
▫ Energy drink consumption/preferences
Price Leadership
Price Leadership
• Wal-Mart Energy Drink Prices:
Price Leadership
• Fastrac Energy Drink Prices:
Price Leadership
• Universal Deli Drink Prices:
Price Leadership
• Survey shows 60% of students prefer to
consumer energy drinks with alcohol
• Red Bull Vodka very popular among college
students
• Red Bull is only energy drink offered at most
bars
Second Degree Price
Discrimination
Second Degree Price Discrimination
• Induce customers to select into high and low
price groups themselves.
• Key constraint: you can’t make the inexpensive
version too attractive to those willing to pay
more.
• Often firms cannot distinguish between groups
of consumers based on observable
characteristics
▫ Offer a menu of alternatives
Second Degree Price Discrimination
• Each brand offers a variety of different sizes
• The Starbucks example holds true in the energy
drink industry
• 42% of students prefer a medium sized 12oz.
option
Second Degree Price Discrimination
• Each brand offers a variety of different quantities
to purchase
• Different product packages offered depending on
store type
▫ Individually, 4 pack, 12 pack, 24 pack
• 77% of students prefer to purchase individually
Second Degree Price Discrimination
• Versioning: create different versions of virtually
the same product to appeal to different types of
buyers
• Customers choose the version that best meets
their needs
Recommendations
Industry Regulation
• FDA limits caffeine content of cola-type soft
drinks to 0.02% caffeine, or 71mg/12 fluid oz
• At least 130 energy drinks exceed this level
• EU requires energy drinks to have a “high
caffeine content” label
• Canada requires labels indicating that Red Bull
should not be mixed with alcohol
Regulation
• FDA does not require warning labels advising
proper use or amount of caffeine in product
• OTC caffeine-containing stimulants must
contain specific warnings and directions on
product label
• Striking inconsistencies between OTC stimulant
medications and energy drinks
Caffeine Comparison
Energy Drink
Ounces per can
Total Caffeine (mg)
Red Bull
8.4
80
Monster
16
160
Rockstar
16
160
NOS
16
250
SPIKE Shooter
8.4
300
Wired X505
24
505
Health Concerns
• Adverse side effects and increased health risks
have been linked to consumption
▫ Includes elevated blood pressure, cardiac
arrhythmia and seizures
• Lack of adequate labeling, aggressive
advertising, and consumer demographics all
make risks of energy drinks greater
• Caffeine intoxication, dependence and
withdrawal
FDA Actions
• Announced investigation into energy drink
related deaths
• Congress sanctioning preliminary exploration
into caffeine and stimulant levels, and marketing
tactics
• In response Red Bull and Monster hired
lobbying firms
• 2010 – under threat of further FDA restrictions,
Four Loko agreed to remove stimulants from
product
Investment Recommendation
• Increased regulatory scrutiny makes industry
future very uncertain
• Monster Beverage Company (MNST)
Recommendations
• Development of lower caffeine products
• Focus on creating a healthier alternative from
both a ingredient and marketing perspective
▫ Potential regulations could shift target market
• Regulation could create opportunities for
market/price leadership
• Consumers have shown willingness to pay
premium for healthier option