What does the launch of Coca-Cola Energy mean for its deal with Monster?
- Coca-Cola announced it is introducing its first branded energy drink next month in Spain and Hungary. Coca-Cola Energy contains naturally sourced caffeine — 80 milligrams per can — plus guarana extracts and B vitamins.
- The new product will also be offered in a no-sugar, no-calorie variety. Both versions will have the "great Coca-Cola taste and feeling that people know and love," the company said. The product will come in 250-milliliter cans, or about 8.5 ounces, and is designed primarily for young adults aged 18-35.
- Javier Meza, Coca-Cola's global chief marketing officer for its sparkling business, said other markets will be added in the future. "We plan to introduce Coca-Cola Energy in additional countries through 2019 and 2020," he said in the release. "We will confirm plans and timings if a decision is made to launch this new brand in a certain market."
While some will be pleased by this product launch, Monster and Red Bull are probably not among them. Although Coke hasn't launched any of its own branded energy drinks until now, the company acquired a 16.7% stake in Monster for $2.15 billion in 2015. Now, the Monster energy drink company is in arbitration over Coke's decision to launch its own drink, claiming that Coca-Cola is violating a deal the two had made.
That deal prohibits Coca-Cola from distributing other energy drinks, but not if they are marketed under the Coke brand. Monster CEO Rodney Sacks said during a conference call in November the exception doesn't apply to these latest energy products — and that could hurt the launch of this product.
Coca-Cola had previously been involved in the energy drink sector through its Relentless beverage products and has bought others such as NOS, FoodBev reported. But those energy drink brands were shifted to Monster as part of the 2015 agreement. Coca-Cola may be dipping back into energy drinks in order to continue transforming itself into a "total beverage company," as CEO James Quincey puts it.
The company has been testing new products intentionally before bringing them to the U.S. This strategy has manifested itself through Lemon-Do, its first product containing alcohol, which launched last year in Japan. The company also has relied on foreign market success before purchasing Mexican sparkling water brand Topo Chico — which grew 30% in its a single quarter after its acquisition. It may be looking to do the same with U.K.-based Costa Coffee, which is not yet for sale in the United States, and new versions of its signature soft drink.
Energy drinks could be a smart move for Coke since they continue to grow in popularity, but have declined in recent years because of a lack of transparency around their ingredients and health and safety concerns. U.S. sales were projected to reach $15.3 billion in 2018, but the annual growth rate has slowed to 1.5%, according to Euromonitor International — in stark contrast to the 60% growth rate between 2008 and 2012, Fortune reported.
The move doesn't bode well for Coca-Cola's partnership with Monster. The energy drink brand has reportedly had trouble maintaining its gross margin, and its gross profits dropped last year.
Bonnie Herzog, an analyst for Wells Fargo Securities, wrote in a note to analysts that the competitive threat from Coca-Cola's new energy drink is a negative for Monster and signals Coca-Cola "is increasingly confident that it will prevail in the arbitration process." Other negative factors are ongoing pressure from VPX Sports' Bang energy drink and increasing pressure from Red Bull, she said, adding up to a "cautious view" on Monster stock.
Should Coca-Cola expand distribution of its new energy drinks throughout Europe and subsequently bring them to the U.S., its fight with Monster might escalate. And depending on how the arbitration goes, the relationship may sour entirely and Coca-Cola could decide to divest its stake. It remains to be seen how the whole situation will shake out, and given the potential profits and competitive positioning at play, it could take quite a while to resolve.
- FoodBev Coca-Cola Energy: first energy drink released under Coke brand
- The Coca-Cola Company Coca-Cola Energy to Launch in 2019, Starting in Europe