the energy drink industry
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The Energy Drink Industry. Kurt Ondash , Hugh Stewart, Andrew Brown, Mike DiChiara. Why the Energy Drink Industry?. College students a major target population Substantial industry growth in past decade Similar ingredients lead to importance of pricing strategies - PowerPoint PPT PresentationTRANSCRIPT
The Energy Drink IndustryKurt Ondash, Hugh Stewart, Andrew Brown, Mike DiChiara
Why the Energy Drink Industry?•College students a major target
population•Substantial industry growth in past
decade•Similar ingredients lead to importance of
pricing strategies•Health concerns and side effects
Functional Beverage•Energy drinks categorized as a Functional
Beverage▫A non-alcoholic drink that includes in its
formulation ingredients such as herbs, minerals, vitamins, amino acids and/or additional raw fruit or vegetables
▫Often claim specific health benefits
Functional Beverage Industry
Sports Drinks27%
US Functional Beverage Industry
Energy Drinks63%
Nutraceutical Drinks10%
Energy Drinks•Beverages that contain caffeine in
combination with other presumed “energy enhancing” ingredients such as taurine, herbal extracts and B Vitamins
•Energy drink segment includes options such as shots, ready-to-drink and powder forms
•Focusing on the traditional canned energy drink
Industry Analysis
•Perceived effects:▫Increased mental
performance▫Increased physical
performance•Potential ingredients:
▫High level of caffeine▫Herbs▫B vitamins▫Guarana▫Taurine▫etc.
Background
Financing and Distribution•Financing
▫Use existing infrastructure AMP using PepsiCo
▫Create entirely different company Red Bull
•Distribution▫Usually use large beverage companies
Monster uses Coca Cola
Typical Customer•Originally:
▫Target athletes•Currently:
▫Young adults (teenagers and people in their 20s)
▫Overworked individuals▫Hip hop crowd▫Extreme Sports Enthusiasts
Firms in the Industry•Only including energy drink cans•NOT energy shots or vitamin water•About 200 brands•Over 300 varieties of energy drinks•Top three energy drinks:
▫Red Bull▫Monster▫Rockstar
Herfindahl-Hirshman Index (HHI)
Barriers to Entry•Barrier to entry is not extremely high
▫Industry very profitable▫Low initial investment if infrastructure in
place•Hard to compete with leading energy
brands▫Top 2 energy drinks control 80 percent of
market
Product Differentiation•Energy drinks are different based on:
▫Ingredients▫Health (low-calories, low-sugar, low-
carbohydrates)▫Countries drinks are sold▫Regulations
2010 2011 2012$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
Energy Drink Industry Sales
Red BullMonsterRockstarAmpNOSFull Throttle
Year
Sale
s (m
illio
ns)
Top Energy Drink Sales 2010-2012
Top 3 Energy Drinks
#1 #2
#3
Red Bull•Launched in Austria,1987•Started by group of investors•More than 35 billion cans
sold•5.2 billion cans sold in 2012•In 165 countries•Grew 15.9% in sales in 2012•Invests heavily in Formula 1
Championships•Slogan: “Red Bull gives you
wings”
Monster• Launched by Hansen
Beverage Corporation• Over 25 different energy
drinks sold• Coca Cola Used as
distributor• Advertises by supporting
“the scene, the bands, our athletes and our fans”
• Over 8 billion cans sold since product launched
• Slogan: “Unleash the Beast!”
Rockstar• Created in 2001 as
independently owned venture
• 20 different flavors• In 30 countries• Uses PepsiCo as distributor• Gained market share by
selling a drink that is “twice the size of Red Bull, but sold at the same price”
• Slogan: “Party like a Rockstar”
Pricing Strategies
Main Pricing Strategies•Tacit Collusion
▫Promotional Strategies
•Price Leadership
•Second Degree Price Discrimination▫Drink Sizes▫Drink Quantities
Tacit Collusion
Tacit Collusion•Seemingly independent, but parallel
actions among competing firms
•Not a formal agreement
•Seen in energy drink industry with price matching
Tacit Collusion•A lack of significant product
differentiation and production costs •Similar ingredients found across all
brands:▫B-Group Vitamins▫Taurine▫Ginseng
Promotional Strategies• Similar promotional
strategies across the industry▫ Focus on sponsoring
extreme sport athletes/events
▫ Promote brand image by targeting events with “high energy”
• Emphasize the overall experience, not just the drink
Promotional Strategies• Each of the major brands
employ on campus student reps
• Goal is to create brand awareness▫ Free giveaways▫ Providing energy drinks
at parties▫ Promoting on-campus
events
Tacit Collusion•Industry dominated by 2 major firms:
▫Red Bull (42% market share)▫Monster (37% market share)
•Consistent industry growth in sales with a small number of competing firms
Tacit Collusion
Brand Size (oz.) Quantity Price Price/Total oz.Monster 16 1 $2.69 $0.17Red Bull 16 1 $3.99 $0.25AMP 16 1 $2.49 $0.16NOS 16 1 $2.69 $0.17Rockstar 16 1 $2.49 $0.16Full Throttle 16 1 $2.49 $0.16
Fastrac
Price Leadership
Price Leadership•Occurs when a firm leader in its sector
determines the price of the product
•Competitors may choose to lower prices in hopes of capturing market share
•Energy Drink Price Leader: Red Bull
Price Leadership•Raw data regarding prices collected from:
▫Wal-Mart (wholesale retailer)▫Fastrac (gas station)▫Universal Deli (corner store)
•Survey taken by 100 current college students:▫Energy drink consumption/preferences
Price Leadership
Price Leadership•Wal-Mart Energy Drink Prices:
Price Leadership•Fastrac Energy Drink Prices:
Price Leadership•Universal Deli Drink Prices:
Price Leadership•Survey shows 60% of students prefer to
consumer energy drinks with alcohol
•Red Bull Vodka very popular among college students
•Red Bull is only energy drink offered at most bars
Second Degree Price Discrimination
Second Degree Price Discrimination•Induce customers to select into high and
low price groups themselves.•Key constraint: you can’t make the
inexpensive version too attractive to those willing to pay more.
•Often firms cannot distinguish between groups of consumers based on observable characteristics▫Offer a menu of alternatives
Second Degree Price Discrimination•Each brand offers a variety of different
sizes•The Starbucks example holds true in the
energy drink industry•42% of students prefer a medium sized
12oz. option
Second Degree Price Discrimination•Each brand offers a variety of different
quantities to purchase•Different product packages offered
depending on store type▫Individually, 4 pack, 12 pack, 24 pack
•77% of students prefer to purchase individually
Second Degree Price Discrimination•Versioning: create different versions of
virtually the same product to appeal to different types of buyers
•Customers choose the version that best meets their needs
Recommendations
Industry Regulation•FDA limits caffeine content of cola-type
soft drinks to 0.02% caffeine, or 71mg/12 fluid oz
•At least 130 energy drinks exceed this level
•EU requires energy drinks to have a “high caffeine content” label
•Canada requires labels indicating that Red Bull should not be mixed with alcohol
Regulation•FDA does not require warning labels
advising proper use or amount of caffeine in product
•OTC caffeine-containing stimulants must contain specific warnings and directions on product label
•Striking inconsistencies between OTC stimulant medications and energy drinks
VS
Caffeine Comparison Energy Drink Ounces per can Total Caffeine (mg)Red Bull 8.4 80Monster 16 160Rockstar 16 160NOS 16 250SPIKE Shooter 8.4 300Wired X505 24 505
Health Concerns•Adverse side effects and increased health
risks have been linked to consumption ▫Includes elevated blood pressure, cardiac
arrhythmia and seizures•Lack of adequate labeling, aggressive
advertising, and consumer demographics all make risks of energy drinks greater
•Caffeine intoxication, dependence and withdrawal
FDA Actions •Announced investigation into energy
drink related deaths •Congress sanctioning preliminary
exploration into caffeine and stimulant levels, and marketing tactics
• In response Red Bull and Monster hired lobbying firms
•2010 – under threat of further FDA restrictions, Four Loko agreed to remove stimulants from product
Investment Recommendation•Increased regulatory scrutiny makes
industry future very uncertain •Monster Beverage Company (MNST)
Recommendations•Development of lower caffeine products•Focus on creating a healthier alternative
from both a ingredient and marketing perspective▫Potential regulations could shift target
market •Regulation could create opportunities for
market/price leadership•Consumers have shown willingness to pay
premium for healthier option