- After months of arbitration and concerns about Coca-Cola violating its agreement with Monster Beverage Corp, courts ruled the beverage giant could sell its brand-name line of energy drinks globally, according to Reuters.
- The ruling determined contract language in the agreement penned when Coca-Cola took a 16.7% stake in the energy drink company in 2014 allows Coca-Cola to sell own-brand energy drinks while maintaining its stake in Monster.
- In opening trading Monday, Monster shares fell 3%, while Coke’s climbed marginally. Later afternoon trading showed both of the companies’ share value in the positive.
As part of the contract to purchase the stake in Monster, the energy drink company banned Coca-Cola from distributing other energy drinks. However, there was an exception for products marketed under the Coke brand.
Coca-Cola leaped at this loophole and last fall announced the release of a line of energy drinks called "Coca-Cola Energy" and "Coca-Cola Energy No Sugar," which placed the two companies in head-to-head competition. Although Coke voluntarily filed the arbitration and announced that in either outcome it planned to abide by contractual obligations, it was clear that the Atlanta-based company was confident in its case. In April, Coke began selling its energy drinks in Spain and Hungary, an early signal of what it saw the outcome would be.
It’s no surprise that Coke chose to push the boundaries of contractual obligations and launch its own line of energy drinks, despite its stake in Monster. Energy drinks are expected to bring in about $16.9 billion in U.S. sales by 2022, according to Market Research Hub. As consumers turn away from soft drinks, Coca-Cola has been looking for products with which it can diversify its portfolio.
Unlike Monster, Coca-Cola Energy focuses on ingredients from naturally derived sources, including guarana extracts and B vitamins. The beverage will not contain taurine like Monster, as the energy additive has recently come under scrutiny as studies have shown conflicting evidence about its effects on human health. Ingredient choice is what Coca-Cola argued in arbitration as the differentiator between the two brands, saying that the different types of ingredients would appeal to two different demographics of consumers.
But since the energy drink space is crowded, there is no doubt Coca-Cola Energy will be directly in competition with Monster.
“Overall, we view this development as a negative for MNST since we believe it’s realistic to expect some cannibalization from a Coca-Cola-branded energy drink," Bonnie Herzog, an analyst for Wells Fargo Securities, said in a note to clients. "Also, we do think it increases the risk/concern that KO may sell some/all of its stake in MNST (although we’re not convinced this will actually happen).”
Now that Coca-Cola has the green light to launch its brand globally, things could become a little hairy in the two companies’ relationship. Although both sides professed an amicable settlement and said they would continue working together, if the new energy beverage begins taking market share from Monster, their symbiotic relationship could look a little different.
It is in the best interest of both Coca-Cola and Monster to remain on good terms. Monster products were the second most popular energy drinks in the United States last year, according to Statista. Having access to Coca-Cola’s distribution system is an invaluable asset as the company continues to expand its reach.
Likewise, Coke benefits from having a bold innovator like Monster in its portfolio, which can offer insight into leveraging a startup-like mentality. That insight could pay off particularly well for its new energy drink product. Looking at the sleek, slim packaging, it appears that Coca-Cola could be aiming for the stars and looking to take on global market leader Red Bull.