The Energy Drink IndustryKurt 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

Sports Drinks27%

US Functional Beverage Industry

Energy Drinks63%

Nutraceutical Drinks10%

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

•Perceived effects:▫Increased mental

performance▫Increased physical

performance•Potential ingredients:

▫High level of caffeine▫Herbs▫B vitamins▫Guarana▫Taurine▫etc.

Background

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, low-

carbohydrates)▫Countries drinks are sold▫Regulations

2010 2011 2012$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

Energy Drink Industry Sales

Red BullMonsterRockstarAmpNOSFull Throttle

Year

Sale

s (m

illi

ons)

Top Energy Drink Sales 2010-2012

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

Brand Size (oz.) Quantity Price Price/Total oz.Monster 16 1 $2.69 $0.17Red Bull 16 1 $3.99 $0.25AMP 16 1 $2.49 $0.16NOS 16 1 $2.69 $0.17Rockstar 16 1 $2.49 $0.16Full Throttle 16 1 $2.49 $0.16

Fastrac

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

VS

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