The Breeze With Beverage Digest
The Breeze With Beverage Digest
Episode 15: Twenty-year 'Startup' Monster Faces Energy Drink Turbulence
Is the energy drink market truly slowing down? In Episode 15 of The Breeze, industry expert John Sicher joins Beverage Digest Editor and Publisher Duane Stanford to analyze recent performance data showing rocky performance this year for the energy drink category at retail, as well as Monster Beverage's recent leadership transition announcement.
Hello and welcome to the Breeze. I'm your host, dwayne Stanford, the editor and publisher of Beverage Digest. The Breeze is where we bring you into the kinds of industry conversations we have every day at Beverage Digest. We dissect what's happening, connect the dots and ask the most important question what does this mean? I'd like to welcome our regular Breeze contributor, john Sitcher, who's coming to you from New York City. John, I'm in Atlanta. We are just now handing off our heat dome to you up there in New York City. Are you keeping cool up there?
Speaker 2:Dwayne, you're generous as always. It's pretty hot up here in New York. It's 90 degrees right now. It's supposed to get up into the high 90s in the next day or two. The only saving grace is, it's sure, good for the beverage industry.
Speaker 1:That's right. Yeah, those heat domes are brutal, but I tell you, beverage executives are perfectly happy to sweat that out in the summer. So, for those of you who are new to the podcast, john has spent years following the beverage industry, including as the former publisher of Beverage Digest. Since then, john has consulted for Coca-Cola and Body Armor prior to the Coke acquisition. He's also served as an expert witness in beverage-related court cases.
Speaker 1:So John and I this week have been texting about the slow down in the US energy drinks market, which is causing a fair amount of consternation among investors who invest in companies like Monster Beverage, which is distributed by Coca-Cola, celsius, which is distributed by PepsiCoCola, celsius, which is distributed by PepsiCo, and independent wholesalers like Big Geyser and John's Backyard. They want to know what's going on here, and one thing that's clear is that there is a slowdown that's been happening for the last few months, but there is not a ton of agreement as to why this has happened. So we thought we'd jump on the podcast, hash it out for you and kind of see where we're netting out and where the questions are. So, john, you agree Slow down.
Speaker 2:Slow down. For sure, I have my thoughts. Do you want me to go ahead?
Speaker 1:or do you want to start off, Dwayne? Yeah, let's hear your diagnosis.
Speaker 2:You know, I think it's a consumer issue, not a category issue. I think energy drinks, the appeal of energy drinks, continues. I think that a lot of consumers in the US are financially pinched. I looked up some data recently. The New York Fed keeps track of things like credit card and auto loan delinquencies, and credit card and auto loan delinquencies continue to increase. The Fed recently said that an increasing number of borrowers have missed credit card payments recently and this reflects financial distress among a lot of consumers in the US. Why is that impacting energy drinks specifically?
Speaker 2:Energy drinks are very reliant on the C-Store channel. Almost 60% of energy drink volume goes to the C-Stores and C-Stores are the premium price channel. Stores and c stores are the premium price channel, so you've got energy drinks basically selling at a per case price, based upon syndicated data duane, about 30 percent higher in c stores than in grocery. So it's a it's it's it's. It's a really tough time for a premium price category like energy drinks. Consumers are hurting. Prices are high. They have grown a lot in the past. They're moderating. Now they're going to grow faster. They're going to grow again if Monster takes this price increase that you can maybe give us some details on, but I think it's a consumer economic issue, not a category issue.
Speaker 1:Yeah, I think that's a really good rundown. You know, especially when you talk about low-income and middle-income consumers, that seems to be where the pressure is right now. I was listening to a call with John Fieldley that he did with Deutsche Bank at one of their conferences earlier this month, that he did with Deutsche Bank at one of their conferences earlier this month, and he talked about the sort of compounding effect that's happening with consumers that over time, you know they've been. You know certain COVID relief has gone away.
Speaker 1:Some of the things you've cited pricing, of course, inflation has continued. Even though inflation has decelerated, there's still inflation happening and it's on top of inflation that happened over the last two years. So you're just seeing consumers at some point deciding they need to cut back on some things, and it looks like within beverages I mean, they're cutting back on other categories as well. It's not just energy drinks, but energy drinks is a premium product, so that's kind of one of those things that consumers can, you know, skip at the gas station when they're trying to afford gas and just trying to make ends meet, and so that's a lot of what you see happening here.
Speaker 2:You know, going back to the syndicated data, CSDs are performing a bit better in the grocery channel this year If you look at Q1 of this year compared to Q1 last year. But energy drinks are not. Energy drinks have decelerated. It's a consumer problem, it's an economic problem, it's a channel issue which hurts energy drinks because of their dependency on the C-Store channel. But again, I don't think it's a category problem.
Speaker 1:Yeah, Rodney Sachs on their annual meeting call recently, said that the C-Store channel was part of what's to blame here for the slowdown, which was a little confusing, Because when you look at some of the C-Store trends, they're not bad, as you pointed out.
Speaker 1:I think one of the things that's kind of become clear and he probably just wasn't maybe digging in or the analysts on the car weren't digging in enough to sort of understand the dynamic here. But you know, Carmel Garguala at Jefferies had a report out, you know, this morning, I believe it was, where he talked about the fact that C-store trends, traffic in C-stores, is still pretty healthy, and so he looked at that as a sign, you know, similar to what you're saying, that you know this is just sort of a bubble that's happening, kind of an air pocket, as he called it right now, and the thinking being that C-store traffic is good. So that means people are still going to the convenience store and once they feel better they're in the position of buying energy drinks. But potentially, if you wade through that, what we're really saying is when they're going to the C-Store they're just picking up fewer energy drinks right now, probably because of this economic strain that they're feeling. That seems to be what's going on.
Speaker 2:Right. Look back in 2007 and 2008, when I was still covering the industry at Beverage Digest. When the economic crisis hit, the American consumers felt pinched, worried and scared, and it had a pretty dramatic impact on energy drinks. As the economic crisis began to lift, energy drinks returned to growth. My question is I'd call it a question more of a concern is if we're seeing consumers pinch now, not able to basically meet all their expenses. Their debt is going to delinquency auto loans and credit card loans. You know what's going to turn that around. Again. I think that the consumer likes energy drinks. I think the category has good core strength, but we probably have to figure out some way to imagine a stronger US consumer to see this category return to pretty healthy growth.
Speaker 1:Well, and I think one of the things that we've been hearing from executives at companies like Monster and Coca-Cola and PepsiCo and Dr Pepper is that they believe the second half of the year the consumer is going to feel better. Now we'll see if that happens, but they seem optimistic and I think a lot of what they cite is the fact that wages are still up, unemployment is low, you've also got this easing of inflation. You'll see a return to some of the promotional environment from before as they try to figure out new ways and packages to help consumers at the lower and middle end of the income scale. So they seem to think that you know the consumer is going to end up feeling better through the course of the year. We'll see if that happens.
Speaker 2:I hope so. I mean, I hope so, not just for energy drinks. You know, I hope that the middle-class US consumers feel better about their economic situation at the end of this year or next year, because I think it's going to have a bad impact on a lot of things if they don't. You know, one question I wanted to ask you. I was thinking about this when we were talking about energy drinks in this podcast. Assuming that energy drinks are getting too expensive for some consumers, which is why they're cutting back, could you imagine energy drink producers sort of adopting the strategy that the soft drink producers did, which is start differentiating packaging to offer consumers more lower price choices so they keep drinking the product but maybe they buy less of it at a lower price point? Would you imagine seeing energy drink producers do that kind of thing? A package strategy?
Speaker 1:You know it's interesting because, as you know, energy drinks sort of started at that 8.4 ounce level with Red Bull and you generally had kind of smaller packages and they added larger packages because some consumers just want more liquid, they want more of that value proposition. So you've kind of seen, you know, for instance, celsius has added they've gone from just their 12 ounce slim cans to the essentials line, that's more of a 16 ounce product because of that very reason. So you almost see the opposite happening. But then I guess that begs the question of you know, if you get it, if this economic strain persists, do you start reemphasizing or using your smaller there's 12 ounce cans in different ways?
Speaker 1:I don't see them necessarily going to smaller packs like a mini can. Could you see a mini can energy drink? It just feels like the use occasion is very different and what people are looking for as a caffeine replacement is very different. I certainly wouldn't rule it out. I think we're going to have to wait and see whether this indeed is an air pocket, as one of the analysts called it, or whether this is something longer term. So yeah, we'll have to see how that bears out.
Speaker 2:You have more expertise in this area than I do, but I've wondered about this. You know a fair amount of mixer volume in the past couple of decades maybe especially Red Bull, but I'm guessing other energy drinks too I meant energy drinks have been used as mixers with alcohol. So, anecdotally, and reading some of the analyst reports, let me throw out two thoughts for you to sort of enlighten us on Dwayne. One is if distilled spirit consumption is down, does that mean the demand for energy drinks as mixers is down and with that with the increase of canned cocktails which we're seeing? I mean, if you look at the C-Store in our corner in New York, there are a lot of canned cocktails for sale right now Does the decrease in spirits consumption and the increase in canned cocktails in your view, have an impact on energy drinks? Meaning less of them are being consumed as mixers, mainly with vodka, less of them are being consumed as mixers, mainly with vodka.
Speaker 1:I talked to a 20-something this weekend during a tennis match and I started asking him what he drinks. And he drinks Red Bull, but pretty much only as a mixer with vodka. He drinks coffee. He'll drink hot coffee in the morning and then drink cold coffee for the rest of the day. That's his caffeine and that's a whole nother thing we can talk about. But in terms of energy drinks, he likes the Celsius that has the non-carbonation Interesting new area. That's something else we could talk about. But when it comes to his just core energy drink, red Bull, it's usually with alcohol. So I do think you do wonder, with this growth in ready-to-drink cocktails and that's kind of the hot thing right now that would surely mean that people are potentially buying less energy drinks as their mixer. I don't have any data that shows that for sure, but I think it's definitely an interesting avenue to explore if this continues. But either way, you would have to think. If it's true, it could be a contributing factor and something definitely worth thinking about.
Speaker 2:Again, going back to what we talked about earlier, I think it's a consumer issue. It's an economic issue. I happen to believe that the functional benefits of energy drinks, I think, consumers like those. I read an analyst report recently that suggested that energy drinks need to source more volume from coffee. I'm not sure that's realistic but again, I think as the consumer's economic health recovers, energy drink growth will recover.
Speaker 1:What's definitely true is that the success of energy drinks and their ability to grow is in large part about them accessing consumers that did not consider energy drinks before or were energy drink deniers.
Speaker 1:That's been a lot of the strategy of Celsius, for instance.
Speaker 1:I mean they have a, as they would call it, a non-aggressive marketing style.
Speaker 1:Like you might see with a Monster or a Bang Energy, they're going for more of a fitness lifestyle sort of tone in consumer because they wanted to attract more female consumers and consumers who aren't going to drink energy drinks because it's some aggressive, adrenaline, sport type activity that they're involved in, but because they want a caffeine, they want the caffeine and they don't want to drink coffee and maybe they want some of the other potential functional benefits.
Speaker 1:And Celsius has been successful in turning that into a lifestyle brand, a badge ID brand, turning it into a product that you'll even see men and women alike buying a can of Celsius with their lunch sandwich or their salad at the lunch counter. I mean that's a new thing that you're seeing a new expansion of the market. So a lot of what's happened with energy drinks is figuring out how to add occasions and then, with that, hopefully increase household penetration by getting people to stock up at home as well and, as we know, if you stock it at home, you're going to drink it. So you know, in terms of what happens with this category going forward, that's going to be pretty critical to them, continuing the kind of growth rates we've seen.
Speaker 2:Do you think the softness and energy drinks creates an opportunity for any other category? I mean, do you think that it basically to the extent that people want beverages that give them a caffeine lift, will that increase consumption of coffee? Will there be some reversion back to CSDs which sell at a lower price point than energy drinks?
Speaker 1:Yeah, I really don't see it. I mean, I guess at most they might just go back to hot coffee, which is much less expensive, you know, brewing their own coffee, but if you look at the options out there for canned coffees, I mean, the pricing isn't tremendously different. So I really, I mean going back to a point you brought up earlier which I agree with, and that's that this looks a lot like it did during the recession after the housing crisis, where you had, you know, you still had higher income consumers who were just pretty much spending like they normally did, and then you had lower and middle income consumers. It was that sort of tale of two worlds. They were still, they were cutting back on, you know, affordable luxuries even, and this feels very similar to me. So I expect us to see a rebound similar to what we had before, a rebound similar to what we had before.
Speaker 1:But, yeah, so meaning I don't see people necessarily jumping ship to coffee for the reasons I said. I think they just need to cut back right now. I mean, you know, as the analysts point out, this is still a pretty affordable luxury in terms of things that you could spend on right now, but it's also just very easy to to to forego buying. Instead of buying three a week, maybe you buy one or you wait until you really need that caffeine boost to make it through work or in the afternoon, but you're maybe not, as you know, just drinking it as you know as many times as a week and as many types of occasions as you might have before.
Speaker 2:I mean on the subject of energy drinks. I would strongly urge all listeners of this podcast to take a look at your very, very interesting and insightful story about Monster and Monster's management and management changes at Monster. I mean for people who have not read that, dwayne, what do you think is going on there?
Speaker 1:Yeah, I think it's going to be a historic diamond monster because they are setting up a management succession. The leaders, rodney Sachs and Hilton Schlossberg, have been running that company for 20 years and have really built quite an incredible growth story. And for years people, you know, at various times thought, oh, this will just be a fad. You know, boom, bust, those kinds of stories that people have been used to, with these kind of categories that would emerge out of nowhere. But it's really been sustainable.
Speaker 1:And so those two leaders Rodney Sachs has said he is looking to, you know, move out of the CEO, co-ceo role next year and just remain chairman. They've hired Rob Gehring from Swire Coca-Cola to be the chief growth officer. They've got another really good executive, emily Thierry, who is the chief commercial officer. So they've got two real strong leaders there that are, you know, potential COO slash CEO candidates. So you're now seeing the beginning of a changing of the guard that's going to happen over the next two years, from what I can see through my reporting. So you know that's going to be. What's really interesting and very important right now is that if this is just an air pocket, then that's sort of one set of factors we might see in terms of a management succession. If, for, somehow, this persists and it turns into something that becomes clear that it's some kind of category problem, that could throw all that into a tailspin.
Speaker 2:We don't know, we'll see, but it's really, it's going to be a very interesting time to watch how this company evolves to that next stage and that next level of growth and that next level of management. You know, someone said to me recently that Monster is today a very large, successful company that's still run like a startup, and he meant that as praise. It reminds me of Apple a little bit. You know, Steve Jobs basically ran that company. It got bigger and bigger and more and more successful as a startup. He was the driver, he was the innovator, much like Rodney has been Rodney and Hilton has been. And then when Steve Jobs died, Tim Cook became CEO of the company.
Speaker 2:And Tim Cook is not an innovator like Steve Jobs was, he is an operations expert. Well, what's happened to Apple? You know their market cap passed $3 billion. They're the first or second, first, second or third. I guess NVIDIA, Microsoft and Apple are now in a race, but Apple has been hugely successful under Tim Cook. Could you see I mean you know I don't know Rob Gearing very well. He was a Coke North America for a while. He was head of sales. He ran a very large Coke bottler. I don't know Emily Terry very well. Could you see a scenario at Monster, like is what happened to Apple, which is, within the next couple of years, the torch passes from Rodney to some combination of Emily and Rob Goering, and though they're not innovators, they continue the operational excellence of this company, and it continues to be successful. Or would you be worried?
Speaker 1:I'm not worried at this point. I think you know, if you look at what Rob Gearing did at Swire and a lot of the innovation he brought to that company when it comes to the digital side and technology, I think that's very critical. You know, if he runs a similar playbook at Monster, you know that's going to be important going forward. You know, in terms of within Monster, where the innovation is coming from. I mean, if the innovation is coming out of the heads of Rodney Sachs and Hilton Schlossberg, then you know that could be. That could, you know, create some friction if you've got someone who comes in and doesn't have the same creativity.
Speaker 1:But you know, frankly, there's other people behind the scenes there that are hugely responsible for a lot of that innovation and I think what you have in Hilton and Rodney is a couple of leaders who aren't afraid to take on, you know, bang when bang emerges. They're not afraid to create products like Rainstorm that will go head to head with an up and coming star brand like Celsius. They aren't afraid to create rain, to take on bang when bang suddenly took share over a couple of years. So I think you know some of that swashbuckling cowboy mentality is the kind of thing at a company like Monster that you probably have to preserve, but at the same time, that always tends to mean that there's some, you know, there's elements like how do you become more efficient in your marketing, how do you become more efficient in your supply chain? I mean, bringing that kind of high level and expertise could be really beneficial, especially if you start facing a more challenging environment. So, you know, I think that's kind of how it's shaping up now.
Speaker 2:I agree with you and I think that you could probably continue some real growth at Monster using the operational expertise of someone like Rob. I mean Apple really today is an operationally excellent, excellent company. I mean I can sit in my apartment in New York City and order a product from Apple and it arrives in two to three hours. I mean they've got supply chain, they've got execution down really well and I could see a period of time at Monster where there's a little less innovation and invention but really operational excellence and I could see growth coming out of that. You know the question. The other question is you know what happens to Monster in the next couple of years? Is Monster going to get sold? Does it stay as a standalone company? I don't think any of us know. I mean, coke owns what Dwayne 17,. 19%, 19%.
Speaker 1:Yeah, I think anytime you have this sort of changing of the guard, I think you have to ask what that might mean in terms of, you know, different personalities, different potential for acquisition activity. I mean I don't see any real reason to believe that Coke's going to has changed its tune or will in terms of, you know, buying Monster. I feel like I think of course you know Rodney Hilton. I mean I'm sure they'd love to entertain an offer from Coca-Cola. It'd be quite expensive. I mean, you know there's. You know you'd have to look at Coke's balance sheet and free cash flow and various elements to determine how much that would make sense. Now. Then, of course, you've got the board.
Speaker 1:You know, you know historically the board was pretty hesitant to take on own a brand like Monster because of you know Coke's such a big target that as soon as they take on something like that do they become a bigger target, especially back in the days when obesity was an issue and you know sugar and beverages, and before Coke was extremely aggressive around that front. You know, have they? Is this a new board? Uh, you know, with a different outlook, is the risk lower on that? I mean, those are all questions I don't think I'd be betting on that, but I certainly would not rule that out whatsoever that there could be some over the next two or three years, some kind of changing dynamic that would cause Coke to want to own that company outright. But what are your thoughts? What do you think?
Speaker 2:Do you? Would that be a good idea for?
Speaker 1:Coke at some point.
Speaker 2:Look, you know, coke is the biggest beverage company in the world. Arguably, energy drinks are the. Notwithstanding the little challenge they're facing now, energy drinks are arguably the most successful beverage category right now. It's interesting to me that the Coca-Cola company is the biggest beverage company in the world does not own an energy drink brand. So if you look at this, if you step back and you say to yourself there are two former Coke people on the monster board. There is now a former Coke executive who ran a very large Coke bottler going in as a senior executive at Monster and perhaps the next COO or CEO. You have a situation where there's this close linkage between Coke and Monster, where Monster is distributed globally by the Coke bottlers. You'd say to yourself aren't we getting the whiff of a possible acquisition or a possible deal down the road? You know you can suggest all these hypotheses and you could be equally wrong, or you could be wrong or right.
Speaker 1:It could make sense, but it could also not be what's going to happen. I mean, of course, the board seats are, you know, a function for the most part of the the stake that Coke holds. But but you know it's such a great point Swire, the fact that you know you've got this. You know a guy, and Rob Gehring has been around the Coke system 20 plus years. He knows the system. I mean, if you're Coke and there's any inkling at all that you might want to try to engineer some kind of transaction, that would be a really enticing thing to have in order to make all of that work smoothly and also set the company up for something like that. So you know that's interesting.
Speaker 2:Do we see any evidence?
Speaker 1:that that's not necessarily. But you know we're noodling, we're having some fun. It's definitely worth putting some thought into, I think.
Speaker 2:I mean, I think that Coke let's put it this way I think either you're going to see the status quo continue or Coke buying it, Because I would imagine Coke would not want to see Monster owned by somebody else. So if I had to bet over the next five years, will Coke buy Monster? I would say maybe. I'd say maybe slightly more on the yes side than the no side, but you could also make the argument why it wouldn't happen. But you know, maybe slightly more on the yes side, dwayne.
Speaker 1:Yeah, you know also you have to think about the international piece here which you know is becoming more and more formidable as a matter of fact during the slowdown. You know it's also recognized that international helps make up for some of that because of the growth that they're seeing in markets overseas. So you know for a company like Coca-Cola now that that business is expanding beyond just, you know, the US in meaningful ways. You've got companies like Celsius who are expanding to new countries, which adds more kind of fuel to the fire there in terms of just marketing attention and you know all boats rising with the tide of investment. You know those are reasons why you think also it could make.
Speaker 1:You know Celsius has talked now for a couple of quarters about PepsiCo and the fact that they've reduced their inventory levels, which has kind of had an effect as well in terms of their you know their, you know volume performance and also some of the slowdown volume performance and also some of the slowdown.
Speaker 1:You know we're in year two of a distribution agreement, pepsico and Celsius. Pepsico, of course in the early days, as you know the executives have talked about, some analysts have talked about it's kind of messy and you inventory load more than you might otherwise, because you're trying to make sure you get that out into the market. And then you know, after you get through that period, then you start really optimizing the distribution and so you're carrying less inventory as a result to make sure you're keeping that pipeline full during the buildup phase. Celsius seems to be saying now that that's pretty much past them and they're saying second half is going to look way better in that regard. So there's just another data point that says second half. You know, we might pull out of whatever's happening here and there might be some bluer skies, so that'll be something to watch as well.
Speaker 2:Yeah, it will be Again. What I'll be watching is the consumer these auto loan and credit card delinquencies. Are they going to stop increasing? I've heard too many people say things like America's got a great stock market. Corporations are making a lot of profits, wealthy people are doing well, but the great American economy has left behind a lot of people in the middle income and lower income levels and I think that somehow, some way that has to get turned around, both for the health of our country and for the health of the beverage industry and the energy drink category. And I don't know how it happens, dwayne, but I think it's going to happen somehow. I don't think the situation we can have now, where we have middle income American consumers feeling squeezed financially, I simply don't think that's sustainable in our country.
Speaker 1:Well, john, that seems like a great note to end on. It's been fun, as always. Maybe we'll jump back on here in a month or two and kind of see where this is going. I think it's going to continue to be a story for a little bit, and one that will be really interesting to see play out.
Speaker 2:Dwayne, good to be with you.
Speaker 1:The Breeze is produced by Beverage Digest. Visit our website to learn more about our products and subscribe to our newsletter. You.