Taking a significant minority stake in Monster Beverage Corp rather than launching a full-scale takeover is a smart move on Coca-Cola’s part, boosting its participation in one of the beverage sector’s fastest-growing categories but providing a ‘hedge’ should the energy drinks market turn sour, says one market-watcher.
Under their proposed "strategic partnership" , Coca-Cola will pay $2.15bn for a 16.7% stake in Monster, which will assume control of Coke's energy brands including NOS, Burn and Full Throttle and gain access to Coke's international distribution network; while Monster will transfer its non-energy brands such as Peace Tea and Hubert's Lemonade to Coca-Cola.
Euromonitor International beverages analyst Jonas Feliciano told FoodNavigator-USA: “I think this is a brilliant move from Coca-Cola.
“It’s like the Keurig deal [Coke recently took an equity stake in Keurig Green Mountain, with whom it is developing the Keurig ‘Cold’ platform ]. Maybe they limit their revenue [vs what could be achieved by a straight takeover], but getting a 17% share while divesting its own energy brands hedges Coke against any future energy backlash, so it’s a smart move.”
Monster’s success rate for new products is well above the industry norm
What stood out about Monster was its success at generating brand extensions and new product concepts in a market where the vast majority of new products fail, said Feliciano, noting that Coke had had real success in the energy market (its brands generated net sales of $330m in 2013 from 20 countries) but had not gained the traction of Monster or Red Bull.
“Monster has kept that core functionality [ie.energy], but has been experimenting in so many ways with new flavors and concepts [Rehab, Java Monster, Ultra etc]. It has a new product development team that any CPG company would covet.”
Wells Fargo: Deal a huge win for both companies
Wells Fargo analyst Bonnie Herzog said the deal was a “huge win for both companies”.
As around 80% of Monster’s sales are currently generated in the US, access to Coke’s global distribution network will significantly accelerate Monster’s international market share, she predicted.
“We believe Monster could generate four to five times its current international unit case sales by 2017, earlier than our original estimate of 2020... We believe that the Monster brand has vast white space opportunities, including most of Asia, Africa, and South America."
Coca-Cola, meanwhile, will now be able to “quickly gain access to one of the most attractive beverage categories in a capital efficient way”, she added.
Finally, Monster’s non-energy brands such as Peace Tea “could generate more upside potential” with the might of Coca-Cola behind them, she said.
Nielsen xAOC data: Monster energy drink sales +14% in 12 weeks to Aug 2
According to Nielsen data cited by Wells Fargo, dollar sales of carbonated soft drinks (excluding energy) fell 0.8% in the 12 weeks to August 2, 2014 in the US retail market, while dollar sales of energy drinks rose 10% over the same period.
Monster’s energy drink sales were up 14%, while Red Bull's rose a more modest 4.4%.
Speaking on Monster's second quarter earnings call on August 7 (net sales +8.9% to $687.2m), Monster CEO Rodney Sacks said: "Our Original Green energy drink continued to perform well and grew in excess of the growth of the category as a whole. Particularly noteworthy is that sales of our Ultra line continued to improve during the second quarter."
Asked why growth in energy drinks had slowed in the US in recent months, he said: "There are certainly some changing consumer trends and preferences. We will deal with some of them, I think, by adapting our products to be more drinkable, to be lighter, lighter in calories and lighter in taste. And that's the sort of profile that we have for the Ultra line, and that's what we're now doing in reformulating the juice line.
"On the other hand, a majority of consumers still like full-flavored, heavy-bodied drinks... So we're trying to obviously cater for the full gamut of consumers, and that is the reason we introduced Muscle Monster."
Speaking on a call with analysts this morning, he said that China represented a particular opportunity, while the deal would hopefully turn Monster into the world's leading energy brand. "In 5-10 years' time we believe that China will be a big market for energy drinks."
Highlights of the deal:
Under the proposed partnership with Coca-Cola - which is expected to close in late 2014 or early 2015 - Coca-Cola will pay Monster $2.15bn in cash and transfer its worldwide energy business to Monster, while Monster will issue shares of Monster common stock to Coca-Cola (giving Coke a 16.7% share in Monster), transfer its non-energy business to Coca-Cola, and enter into expanded distribution arrangements.
- Coca-Cola will acquire an approximately 16.7% ownership interest in Monster (post issuance) and will have two directors on Monster's board of directors.
- Coca-Cola will transfer ownership of its worldwide energy brands (NOS, Full Throttle, Burn, Mother, Play and Power Play, & Relentless) to Monster.
- Monster will transfer its non-energy brands (Hansen's Natural Sodas, Peace Tea, Hubert's Lemonade and Hansen's Juice Products) to Coca-Cola.
- Coca-Cola and Monster will amend distribution agreements in the U.S. and Canada by expanding into additional territories and entering into long-term agreements.
Click HERE for more details.