The Energy Drink Industry

1. The Energy Drink Industry Kurt Ondash, Hugh Stewart, Andrew Brown, Mike DiChiara

2. 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

3. 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

4. Functional Beverage Industry Nutraceutical Drinks 10% Energy Drinks 63% US Functional Beverage Industry

5. 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

6. Industry Analysis

7. Background • Perceived effects: • Increased mental performance • Increased physical performance • Potential ingredients: • High level of caffeine • Herbs • B vitamins • Guarana • Taurine • etc.

8. 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

9. Typical Customer • Originally: • Target athletes • Currently: • Young adults (teenagers and people in their 20s) • Overworked individuals • Hip hop crowd • Extreme Sports Enthusiasts

10. 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

11. Herfindahl-Hirshman Index (HHI)

12. 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

13. Product Differentiation • Energy drinks are different based on: • Ingredients • Health (low-calories, low-sugar, low-carbohydrates) • Countries drinks are sold • Regulations

14. Top Energy Drink Sales 2010-2012

15. Top 3 Energy Drinks #1 #2 #3

16. 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”

17. 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!”

18. 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”

19. Pricing Strategies

20. Main Pricing Strategies • Tacit Collusion • Promotional Strategies • Price Leadership • Second Degree Price Discrimination • Drink Sizes • Drink Quantities

21. Tacit Collusion

22. Tacit Collusion • Seemingly independent, but parallel actions among competing firms • Not a formal agreement • Seen in energy drink industry with price matching

23. Tacit Collusion • A lack of significant product differentiation and production costs • Similar ingredients found across all brands: • B-Group Vitamins • Taurine • Ginseng

24. 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

25. 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

26. 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

27. Tacit Collusion

28. Price Leadership

29. 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

30. 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

31. Price Leadership

32. Price Leadership • Wal-Mart Energy Drink Prices:

33. Price Leadership • Fastrac Energy Drink Prices:

34. Price Leadership • Universal Deli Drink Prices:

35. 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

36. Second Degree Price Discrimination

37. 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

38. 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

39. 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

40. 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

41. Recommendations

42. 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

43. 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 VS

44. Caffeine Comparison

45. 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

46. 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

47. Investment Recommendation • Increased regulatory scrutiny makes industry future very uncertain • Monster Beverage Company (MNST)

48. 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