Running Head: COMPETITION IN ENERGY DRINKS
Competition in energy drinks, sports drinks and vitamin enhanced beverages
Kyle Holloway
Spring Hill College
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COMPETITION IN ENERGY DRINKS
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INTRODUCTION
Alternative beverages such as sports drinks, energy drinks, and vitamin-enhanced
beverages developed into an important competitor for the beverage industry and saw rapid
growth in the mid-2000s. Alternative beverages compete on the basis of differentiation from
each other in the market and traditional drinks, such as carbonated soft drinks and fruit juices.
The largest sellers of alternative beverages are the global food and beverage giants, such as
Coca-Cola and PepsiCo., that have already built respected brands in snack foods, carbonated soft
drinks, and fruit juices prior to joining the alternative beverage industry. Along with these global
giants, companies that utilized the blue ocean strategy, such as Red Bull GmbH and Hansen
Natural (now known as Monster Beverage), were able to develop respected brand images and a
decent share of the alternative beverage market. Success in this industry is based on companies
that exploit innovation, capitalize on consumer trends, and have brand loyalty.
IDENTIFICATION
When the U.S. saw an economic recession starting in the year 2008, the premium-priced
alternative beverage market was hit hard. While the alternative beverage segment of the beverage
industry provided opportunities for bottlers, the poor economy decreased demand for higherpriced beverages, with sales of sports drinks declining by 12.3 percent and flavored and vitaminenhanced water declining by 12.5 percent over 2008 and 2009 (Gamble, 2011, p. 264). A great
deal of the industry’s growth was stunted in these years but the industry is projected to grow at a
rate of 5.88% on average for the next five years (Appendix 1). Industry analysts believe that
“carbonated soft drinks would remain the most consumed beverage but would continue to see a
decrease in annual sales due to a consumer preference for bottled water, sports drinks, fruit
juices, vitamin enhanced drinks, ready to drink tea, coffee, and other beverages,” suggesting that
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the alternative beverages are likely to keep growing in the maturing beverage industry (Gamble,
2011, p. 264).
Global beverage companies, such as Coca-Cola and PepsiCo, have struggled to reverse
the decline in carbonated soft drinks consumption in the U.S and have relied on the alternative
beverages in order to maintain volume growth in mature markets where consumers were
reducing their intake of carbonated soft drinks due to consumer health concerns, such as diabetes
and obesity (Esterl, 2013). Coca-Cola, PepsiCo, and other companies expanded the alternative
beverage market through introducing energy drinks, sports drinks, and vitamin drinks into
international markets. In addition, companies, such as Hansen Natural Corporation and Red Bull
GmbH, have seen high profits as well through their development and sales of alternative
beverages. Sports drinks are most frequently purchased by those who engage in sports, fitness, or
other strenuous activities, where vitamin enhanced beverage are mostly purchased by the adult
consumers interested in increasing their intakes of vitamins. While the profile of the energy drink
consumer is presented as teenagers, in earlier years, teenagers were the face of carbonated soft
drinks’ traditional target market (Gamble, 2011, p. 266) Today’s youth are “often turning to
water, energy drinks and coffee instead” of carbonated soft drinks (Esterl, 2013).
Of the five competitive forces, the strongest in the alternative beverage industry is the
competitive force associated with rivalry among competing sellers to attract customers. With
many competitors fighting for market share, competition between rivals has become fierce. This
rivalry, mixed with many different substitutions – which include bottled water, carbonated soft
drinks, etc. – drive the alternative beverage industry.
The weakest of the five competitive forces is competitive pressures stemming from buyer
bargaining power. While there are numerous substitutes, strong brand loyalty keeps customers
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from switching to lower-cost substitutes. The quality can be judged via taste preferences, the
effectiveness of the drink (i.e. the amount of energy the consumer gains from the energy drink),
or what certain companies endorse (i.e. Monster and Red Bull endorse extreme sports and CocaCola endorses healthy lifestyles). These preferences help support an extremely loyal consumer
base making the market hard to enter and gain market share from other established companies.
This combined with the already higher costs of alternative beverages – energy drinks costing
nearly 400 percent higher by volume than equivalent carbonated soft-drinks – leads to weak
competitive pressures from buyer bargaining power.
ANALYSIS AND EVALUATION
One of the most important factors for success in the alternative beverage industry is
innovation. As Gamble mentions in the case, “Product innovation had been among the most
important competitive features of the alternative beverage industry since the introduction of
Gatorade in 1967.” (Gamble, 2011, p. 269) This is certainly still the case, as companies who
come up with new, innovative ideas are usually rewarded with large market share as seen with
products like Red Bull, Gatorade and Five Hour Energy shots. Each of these products holds a
commanding market share as copycat products fight for the scraps. In 2009 Red Bull held a 40%
of dollar sales market share for energy drinks in the US; the next closest competitor, Monster,
held only a 27% market share (Gamble, 2011, p. 268). Gatorade holds a staggering 75% of the
$1.57 billion US sports drink market and Five Hour Energy holds a monstrous 85.5% of the
$578.6 million energy shot market. The dominating market shares held by innovative products in
the alternative beverage industry makes the market very attractive for new entrants who can
provide an innovative product to consumers.
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Some companies in the alternative beverage industry have found success on capitalizing
on consumer trends. The different types of beverages are affected differently with certain trends.
For example, a recent consumer trend is health consciousness. With this trend, people are
veering away from sugary, high caffeinated drinks and turning to healthier substitutes, such as
vitamin-enhanced beverages and fruit juices. The beverage that was the hit the worst was
carbonated beverages. As stated above, carbonated soft drinks consumption has been declining
for the past couple of years. There was even a legal ban for companies to sell carbonated soft
drinks in containers of thirty-two ounces or larger. This ban was overruled in New York but it is
still a sign of how important this health consciousness is to the people. (Barr & Hajela, 2013)
The giant conglomerates of carbonated soft drinks are trying to turn the spotlight somewhere else
by expressing exercise and active lifestyles through marketing campaigns to combat obesity in
the U.S. rather than banning soft drinks from the people. Energy drinks have a different problem
only because of the nature of the product. The stimulant drinks have established the reputation as
being too sugary and having too much caffeine. The amount of caffeine in energy drinks is
causing consumers are expressing concern with energy ingredients, which is forcing companies
like Monster Energy to put warnings on its products, and Red Bull to come out with a zero
calorie, zero sugar energy drink.
Although the alternative beverage industry is a relatively new industry, competition is
very fierce. There are many companies trying to gain an early foothold on large market shares in
this new industry and some companies, like PepsiCo, Coca-Cola and Red Bull, are doing just
that. Companies like PepsiCo and Coca-Cola gained these market shares from already
established brand images from the snack and carbonated soft drinks industry, while Red Bull was
the first energy drink and implemented the blue ocean strategy capturing and maintaining large
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portions of the market. These three companies alone account for 45% of the worldwide market
share of alternative beverages. (Gamble, 2011, p. 268) While growth has declined for the overall
U.S. Beverage industry by 3.1% in 2009 compared to the previous year, energy drinks saw a
0.2% growth. Energy drinks, along with ready-made ice tea were the only beverages to see a
growth in consumption during 2009.
The three industry titans – PepsiCo, the Coca-Cola Company and Monster Beverage
Corporation (formerly known as Hansen Natural Corporation) are each doing fairly well from a
financial standpoint. In the last three years, 2010-2012, each company has posted profit margins
ranging from 14% by PepsiCo as the low and 39% by the Coca-Cola Company in 2010 as the
high. Some interesting numbers surfaced after collecting the select financial ratios for each
company (see appendix #2-4 for full tables). PepsiCo has posted a consistent 14% profit margin
in the last three years, which is by far the lowest of the companies; however, they also have
posted the highest Earnings Per Share out of any of the companies at around $4.00/share each
year. Monster Beverage Corporation had a surprising debt-to-equity ratio of 0.00 as they have no
total debt and are financed exclusively by equity. This leads to higher than industry average
liquidity, as they posted Current Ratios in 2010 and 2011 of 4.97 and 4.44 respectively. Despite
having the lowest profit margin of the three companies, PepsiCo has the strongest financials out
of any of the other companies, including strong Net-Asset Value, high Earnings Per Share, and
an industry leading Inventory Turnover ratio.
RECOMMENDATIONS and CONCLUSION
The rising alternative beverage industry has a couple of concerns that hurt the industry as
a whole and need to be answered by each company in their own unique way. Besides the major
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concerns like health issues, changing consumer demand, and low priced substitutes; distribution,
innovation, and discretionary income remain the most potent concerns for the industry.
The products of the alternative beverage industry are purchased in supermarkets,
convenience stores, wholesale clubs, etc. making distribution a key factor for any company
planning on entering this rising market. The most viable option for companies to take to
minimize distribution costs is to merge with companies with established distribution activities.
Energy drink companies like Monster, NOS, and Full Throttle all use Coca-Cola as a distributor
and Rockstar, Amp, and DoubleShot use PepsiCo. The only energy drink company that is
independent is Red Bull. This method creates a platform for a more efficient and effective supply
chain management activities.
A key factor to stay above the competition in the alternative beverage industry is
innovation. Consumers of alternative beverages require everything from product innovation to
marketing campaigns to be new and exciting. Products like Gatorade, Red Bull, and 5 Hour
Energy are prime leaders of innovation and are rewarded with high market shares. The concern
of any new entrant is to be able to be innovative enough to capture market share from the
industry giants and to maintain that innovation as to not lose the previously gained market share.
The recommendation to this concern is to implement a high percentage of income to product
research and development and marketing campaigns. A key figure to watch for on Research &
Development and marketing campaigns is return on investment.
The last major concern with this rising industry is the fact that most products are subject
to discretionary income. Because many firms use the differentiated strategy and charge premium
prices, total sales will move up and down with the average discretionary income. A solution for
this concern will be for companies to enter into a fiercer price competition causing the average
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price for alternative beverages to fall. As firms become more efficient and reduce cost either
through distribution, suppliers, or production, firms should translate those reductions to the
consumers. The lower the prices for these premium goods the less subject the alternative
beverage industry will be to the ups and downs of the economy.
The overall state of the alternative beverage industry is growing. With economic
environment improving coming out of the recession and consumer preferences changing away
from carbonated soft drinks to alternative beverages, the projected outlay for this industry is
extremely high. The blue ocean products like Red Bull, 5 Hour Energy, and Gatorade are seeing
increased competition in the industry forcing more product and marketing innovation in the
industry. The only main concern for the alternative beverage industry is the health issues
involved with energy and relaxation drink. However, these issues are being addressed by the
FDA and other concerned parties persuading industry leaders such as Red Bull and Monster to
put cautions and warnings on the products as well as monitor the amount of inputs producing
caffeine.
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Appendix
1. Projected Percent Growth for Alternative Beverage Industry
Year
Dollar Value ($billions)
Percent Change
2009
40.2
2010*
42.8
6.47%
2011*
45.5
6.31%
2012*
48
5.5%
2013*
50.8
5.83%
2014*
53.5
5.3%
Average Percent Change = 5.89%
2. Select Financial Ratios for PepsiCo 2010-2012
Ratios
2012
2011
2010
Profit Margin –((Sales Revenues –
COGS)/sales revenue)
14%
14%
14%
Return On Equity – (After Tax Income/equity)
28%
31%
30%
Liquidity - (Current assets/current liability)
1.10
0.96
1.11
Debt to equity – (total debt/total equity)
1.27
1.30
1.18
Inventory Turnover – (COGS/Inventory)
8.74
8.26
7.88
Net-Asset Value – ((Assets-Liabilities)/Shares
Outstanding)
37.27
34.97
33.06
Earnings Per Share – ((After Tax
Income)/Shares Outstanding)
4.00
4.13
4.01
3. Select Financial Ratios for The Coca-Cola Company 2010-2012
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Ratios
2012
2011
2010
Profit Margin –((Sales Revenues –
COGS)/sales revenue)
22.45%
21.86%
39.13%
Return On Equity – (After Tax Income/equity)
27.15%
27.13%
38.09%
Liquidity - (Current assets/current liability)
1.09
1.05
1.17
Debt to equity – (total debt/total equity)
.995
.903
.755
Inventory Turnover – (COGS/Inventory)
5.84
5.89
4.79
Net-Asset Value – ((Assets-Liabilities)/Shares
Outstanding)
18.08
6.99
6.76
Earnings Per Share – ((After Tax
Income)/Shares Outstanding)
2.02
1.90
2.58
4. Select Financial Ratios for Monster Beverage Corporation 2010-2012
Ratios
2012
2011
2010
Profit Margin –((Sales Revenues –
COGS)/sales revenue)
27%
26%
25%
Return On Equity – (After Tax Income/equity)
53%
29%
26%
Liquidity - (Current assets/current liability)
2.89
4.44
4.97
Debt to equity – (total debt/total equity)
0.00
0.00
0.00
Inventory Turnover – (COGS/Inventory)
4.90
5.20
4.07
Net-Asset Value – ((Assets-Liabilities)/Shares
Outstanding)
3.89
5.62
4.65
Earnings Per Share – ((After Tax
Income)/Shares Outstanding)
2.05
1.64
1.19
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5. Market Share Data and Tables (2009-2012)
A. Beverage Industry Market Share
Carbonated Soft Drinks
48.2%
Bottled Water
29.2%
Fruit Beverages
12.4%
Sports Drinks
4.0%
Ready-to-Drink Tea
3.1%
Flavored or Enhanced Water
1.6%
Energy Drinks
1.2%
Ready-to-Drink Coffee
.30%
B. Sports Drink Industry Market Share
Gatorade Perform
50%
Powerade Ion4
16.2%
Gatorade
10.6%
Gatorade G2
10.3%
Powerade Zero
4.5%
Gatorade Cool Blue
1.4%
Gatorade Frost
1.4%
G2
1.2%
Powerade
1.0%
Powerade Zero Ion4
.80%
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C. Energy Drink Industry Market Share
Red Bull GmbH
39.8%
Monster, Monster Energy, and Java Monster
29.9%
Rockstar and Rockstar Recovery
9.2%
Nos
3.5%
Amp
2.1%
Full Throttle
1.4%
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References
Barr , M., & Hajela, D. (2013). Judge strikes down NYC ban on supersized carbonated soft
drinks. Wall Street Journal. Retrieved from
http://online.wsj.com/article/AP2994ae4cfc42475d93e82c5e0b45319a.html
Beverage industry. (2012, July 18). Retrieved from http://www.bevindustry.com/articles/856562012-state-of-the-industry--sports-drinks
Esterl, M. (2013, January 18). Retrieved from
http://online.wsj.com/article/SB10001424127887323783704578245973076636056.html
Gamble, J., Thompson, A., & Peteraf, M. (2013). Essentials of strategic management. (3rd ed.,
p. 265). New York, NY: McGraw-Hill/Irwin.
2012 state of the industry: Energy drinks. (2012, July 15). Retrieved from
http://www.bevindustry.com/articles/85655-consumers-seek-out-energy-boosts