Coca-Cola and Monster Tie Up, Creating New Dynamics for Soda, Energy Drinks

Via BrandChannel 

Coca-Cola and Monster Beverage seems to be a match made in beverage heaven—or is it? Taking a 17-percent stake in America's fastest-growing energy drink brand for $2.1 billon may prove far from a panacea for troubled Coke in part because energy drink sales are decelerating too.

For now, everyone from Coke CEO Muhtar Kent and Monster CEO Rodney Sacks to industry analysts seem giddy about the tie-up. Coca-Cola will give Monster its tired energy brands in the deal, including NOS, Full Throttle, Burn, Mother, Play and Power Play and Relentless, while Monster will turn over its non-energy brand products—Hansen’s Natural Sodas, Peace Tea, Hubert’s Lemonade and Hansen’s Juice Products—to Coke, which will help accelerate distribution of Monster brands in the US and abroad, especially China. Coke has carried Monster in North America for six years already.

Monster's sales increased by 9 percent last year, and 80 percent of its volume is in the US. Overall energy-drink sales increased by more than 4 percent for the industry last year, Beverage Digest said. Meanwhile, Coke's overall soft-drink sales fell 3 percent last year, and Diet Coke especially has gone into an unexpected swoon on the heels of growing consumer concern over health factors like the use of aspartame.

The deal "aligns us with a leading energy player globally, brings financial benefit to our company and our bottling partners, and supports broader commercial strategies," Kent said in a statement. On a conference call, he added, "We're impressed with Monster's performance today and are confident in Monster's ability to perform over the long term."

Meanwhile, Sacks told analysts he's excited about the possibilities for Monster finally to challenge Red Bull outside the United states. "China is a very long-term strategic goal for us—we want to be there, we want to get there as quickly as we can," Sacks said. With Coca-Cola, "We'll get something like China going pretty quickly, though it will take time because of regulatory issues there. These are the kinds of things we were struggling with on our own."

The agreement includes a clause stopping Coke from acquiring any more than 25 percent of Monster for four years unless both boards approve such a move. The CEOs declined to address possibilities such as Coca-Cola swallowing Monster whole.

At this point, Beverage Digest Editor in Chief John Sicher believes both CEOs have reason to be pleased with the deal. "It's a positive and smart move by both companies," he told the New York Times. "It will strengthen Coke and the Coke system, and the Coke system will strengthen Monster."

There might be one bee in the soda can, however: a deceleration of growth in energy-drink sales. While they're still actually growing, compared with carbonated soft-drink sales that are declining, they've been slowing. Global energy-drink sales grew by just 6.8 percent last year in dollar terms, down from 11 percent in 2012 and 20 percent in 2011, according to Euromonitor.

To an extent, this is not a surprising development—it may even be overdue. Much as Coca-Cola and PepsiCo had the marketing resources and wherewithal to keep soda sales going even in the United States long after their role in weight gain became suspect, the savvy of Red Bull and Monster in attracting the core market for energy drinks—male teenagers and twenty-somethings—has retained momentum for the segment despite growing warning signs.

Simply put, while energy drinks are the emblematic "functional" beverage because they're an effective delivery system for caffeine, they're hardly what could be called "better-for-you" beverages in the vein of bottled water, enhanced water, juices and other healthful segments that have attracted Coca-Cola lately. But they've maintained their mojo until very recently.

It may be that energy drinks finally are suffering a sales drag from the growing concerns of regulators and nutritionists about their possible role in caffeine poisoning and even the deaths of young energy-drink over-indulgers. Monster and Red Bull have been fighting back by pointing out the warning labels on their products and with other measures. Some analysts speculated that Coca-Cola's experiences with being vilified might help Monster's management handle the recent critiques of energy drinks in a more effective way.

Besides battling back, Monster is introducing a non-caffeinated energy drink called Monster Unleaded to appeal to caffeine-sensitive consumers. The company last year introduced Muscle Monster protein drinks to broaden into the recovery-beverage segment.

No telling whether their new parternship will fully solve the problems and challenges of both Coca-Cola or Monster Beverage, but it'll be interesting to watch them try.