Once a fringe player, the energy drink segment today is a billion-dollar business and according to analysts, there’s still room for growth.
By David Bennett, Senior Editor
As consumer tastes have shifted, carbonated soft drinks (CSD) top perch within the pantheon of packaged beverages has eroded considerably over the last few years. During that period, the energy drink segment has climbed higher in the ready-to-drink (RTD) beverage category—not bad for a product that began as a market novelty some 25 years ago.
In the U.S., energy drinks were first promoted as a lifestyle beverage reflective of youth culture and today they continue to uphold that position in the market.
The packaged beverage juggernaut also plays a lead role in current convenience store sales, with the potential to grab even more share of the RTD category going forward.
The energy drinks segment saw dollar sales in c-stores of $6.67 billion for the 52 weeks ended Dec. 1, 2013, according to IRI Convenience All Scan data. Dollar sales in the category jumped 5.94% from 2012. Broken down, Red Bull continued as the top selling energy drink with $2.58 billion in sales, followed by Monster Energy with $843.40 million in sales, according to IRI. Monster’s Rehab line of tea-infused energy drinks ranked third with total dollar sales of $282.52 million.
As energy drinks grow in popularity, they continue to chip away at behemoths Coca-Cola and Pepsi, which aggressively compete for shelf space in both grocery and convenience stores at a time when CSD sales are fizzing out.
Not to be outdone, both beverage makers are firmly entrenched in the energy drink segment. Coca-Cola—including its NOS and Full Throttle brands—enjoyed nearly 14% volume growth in its energy drink segment.
Energy drinks haven’t only been outperforming CSDs in sales, but also carry healthier margins, according to industry statistics. Compared to approximately 30% margins for CSDs, energy drinks account for estimated margins of about 40%, primarily due to higher pricing.
“It’s really been the bright spot within the broad beverage industry in terms of really providing growth and actual margins for retailers,” said Bonnie Herzog, managing director and senior beverage and tobacco analyst for Wells Fargo. “If you look broadly at the liquid refreshment category, CSDs have been declining for about eight years, and so what has helped to drive their revenue and volume, really, has been the growth they have seen and captured within this energy category.”
Within the Lines
Despite being around for more than 20 years, energy drinks are still viewed as relatively new, mainly because of the developing products and line extensions that continue to emerge.
For example, Monster Energy has been at the forefront of flavor offerings, moving beyond the taste associated with guarana—a popular energy supplement—with products like Cuba Lima and Java Monster, which has gained popularity with its variety of coffee flavors.
Such product innovation seems to be paying off in terms of industry performance. Energy drinks in 2013 enjoyed the largest growth in incremental dollar sales in the non-CSD category, earning the number two spot in retail sales with $10.3 billion—just behind bottled water, which generated $13.9 billion, according to Wells Fargo.
Moreover, the growing popularity of energy drinks has even prompted c-stores to increase shelf space allotted to the segment, which is about 20% presently, according to a survey conducted by Wells Fargo. The survey showed that on average, retailers plan to expand shelf space for energy drinks to more than 30% this year—further encroaching on CSD territory.
The evolution of the energy drink segment can be linked to several factors, including attractive packaging, novel marketing and the successful targeting of a new generation of consumers. It’s the formula that has positively influenced energy drink sales at Tedeschi Food Shops Inc., which operates more than 200 stores in Massachusetts, New Hampshire and Rhode Island.
Last year, energy drinks comprised 20% of Tedeschi’s total packaged beverage business. Steve Monaco, beverage category manager for Tedeschi, predicts that as consumers continue to seek out energy drink products, the evolving segment will help drive future profits at Tedeschi as well.
“Momentum is continuing based on innovation and acceptance with Millennials,” Monaco said.
All the Rage
Historians can track the Big Bang moment in the energy drink industry to the launch of Jolt Cola in 1985. Its slogan, “All the sugar and twice the caffeine,” kicked the door open to other products hyping wakefulness, health or both. The segment took off when Red Bull arrived on the scene in 1997. By the time the Rockstar brand appeared in 2001, many category managers were incrementally adding space in their coolers for additional energy drink lines. Monster followed with its signature product in April 2002.
According to industry figures, more than 500 new energy drinks were launched worldwide in 2006. In the following years, the energy drink market would grow more in light of a recovering economy and increased scrutiny from regulators.The incidence of energy drink usage among adults rose to 17% in 2012 from nearly 13% in 2006, according to Simmons Research.
Today, the Rockstar Energy Drink Uproar Festival is an annual tour that caters to metal fans. Red Bull is a noted NASCAR sponsor. In terms of popularity, the volume of consumers who purchase Monster, based in Corona, Calif., rival the volume of consumers of Corona—the top U.S. imported beer.
Red Bull and Monster Beverage currently dominate the market, commanding more than 80% of the sales in this country. Monster recently reported a more than 10% increase in gross sales to nearly $614 million in the first quarter of 2014, which ended March 31.
As energy drinks continue to move at breakneck speed, is there an end in sight?
“Energy could represent a third of all c-store beverage sales in the next several years,” Herzog said.
Delivering Down Range
Not only have energy drinks dominated in c-stores in the U.S., they are top performers in c-stores located on military bases here and abroad.
“Yes, the market share of energy drinks has increased during the past few years at the expense of the carbonated soft drink segment, which continues to decline,” said Vicki Venables, a senior buyer for Army & Air Force Exchange Service (Exchange). “We are experiencing a shift to beverages that promote healthier attributes. We expect this trend to remain a focus in 2014 as more suppliers add healthier options to their portfolio.”
Energy drinks and shots became popular among U.S. troops assigned to forward operating bases in theater because they are easily carried and consumed and provide a much-needed pick-me-up during long patrols or long work shifts back in camp.
“I was working in the RTD beverage category in 2010 and energy drinks were in high demand in deployed areas,” Venables said. “Since the drawdown in Iraq and Afghanistan, energy drinks continue to be very popular among service members with sales of more than 35 million units in 2013.”
In 2013, energy drinks produced more than $90 million in military sales, at home and abroad.
Similar to any c-store operation, the Exchange funds 98% of its operating budget, including civilian employee salaries, inventory investments, utilities and capital investments for equipment, vehicles and facilities, from the sale of merchandise, food and services to customers. Venables currently manages non-alcoholic beverage category purchases for 899 Exchange locations. In the U.S., the majority of RTD beverages are purchased locally from distributors.
“The strongest brands of energy drinks for the Exchange are Monster and Red Bull,” Venables said. “Combined they represent more than 85% of the energy drink sales and more than 30% of the total non-alcoholic beverage sales.
Part of the allure of energy drinks is their promise to deliver refreshing ways for consumers to gain mental focus, stamina and added herbal supplements. Some regulators, on the other hand, charge that excessive caffeine and sugar—widely used ingredients—is too much of a good thing. In July 2013, members of Congress reprimanded the energy drink industry for marketing efforts geared toward children and teens.
Complicating the situation is the controversy tied to beverage makers who sell energy drinks containing caffeine and alcohol. Some regulators question whether such product lines run afoul of consumer protection statutes because many promotions seem geared to underage youth.
Chicago-based Phusion Projects, owner of the once-popular caffeinated alcoholic beverage Four Loko, announced earlier this year that it had reached an agreement with 19 attorneys general to halt the production and sale of caffeinated alcoholic beverages nationwide.
Despite recent negative headlines, people can’t seem to get enough of energy drinks—consumers and retailers alike.
“Two or three past quarters ago, some of the concerns over the ingredients did cause some near-term pressure on the category, but that has been dissipating, so you have seen the category return to stronger growth,” Herzog said.
Energy Shots Maturing
Gary Hemphill, managing director of research for Beverage Marketing Corp., based in New York City, noted that the energy shots category has experienced somewhat slower growth in recent years. “It may be that the category is maturing a bit,” he said, noting that 5-hour Energy continues to dominate.
While IRI numbers indicate sales have slipped, convenience store retailers remain bullish on the category.
“We expect to see continued growth in energy shots in 2014,” said Matt Clement, director of marketing for Savannah, Ga.-based Enmark. “Category growth was explosive from 2008-2013, but there is still a relatively low incidence of consumer penetration, meaning there’s a lot of opportunity for growth. There is also an opportunity to convert consumers exiting the cola category that are still looking for an energy boost without all the calories.”
Enmark, which operates 59 stores in Georgia and the Carolinas, offers a few types of energy shots, but 5-hour Energy makes up the majority of the chain’s SKUs.
Clement noted that innovation can certainly help the category. “Some of the new flavors that have been added in the last year or two have performed very well, but it will take more than that for energy shots to continue to sustain growth over time,” he said. “Each year there are more and more types of non-beverage products available that have an energy-delivering component, creating competition for energy shots outside of the beverage category.”