the energy drink industry
DESCRIPTION
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
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The Energy Drink IndustryKurt Ondash, Hugh Stewart, Andrew Brown, Mike DiChiara
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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
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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
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Functional Beverage Industry
Sports Drinks27%
US Functional Beverage Industry
Energy Drinks63%
Nutraceutical Drinks10%
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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
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Industry Analysis
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•Perceived effects:▫Increased mental
performance▫Increased physical
performance•Potential ingredients:
▫High level of caffeine▫Herbs▫B vitamins▫Guarana▫Taurine▫etc.
Background
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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
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Typical Customer•Originally:
▫Target athletes•Currently:
▫Young adults (teenagers and people in their 20s)
▫Overworked individuals▫Hip hop crowd▫Extreme Sports Enthusiasts
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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
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Herfindahl-Hirshman Index (HHI)
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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
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Product Differentiation•Energy drinks are different based on:
▫Ingredients▫Health (low-calories, low-sugar, low-
carbohydrates)▫Countries drinks are sold▫Regulations
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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
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Top 3 Energy Drinks
#1 #2
#3
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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”
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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!”
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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”
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Pricing Strategies
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Main Pricing Strategies•Tacit Collusion
▫Promotional Strategies
•Price Leadership
•Second Degree Price Discrimination▫Drink Sizes▫Drink Quantities
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Tacit Collusion
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Tacit Collusion•Seemingly independent, but parallel
actions among competing firms
•Not a formal agreement
•Seen in energy drink industry with price matching
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Tacit Collusion•A lack of significant product
differentiation and production costs •Similar ingredients found across all
brands:▫B-Group Vitamins▫Taurine▫Ginseng
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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
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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
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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
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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
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Price Leadership
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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
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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
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Price Leadership
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Price Leadership•Wal-Mart Energy Drink Prices:
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Price Leadership•Fastrac Energy Drink Prices:
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Price Leadership•Universal Deli Drink Prices:
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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
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Second Degree Price Discrimination
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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
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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
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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
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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
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Recommendations
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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
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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
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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
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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
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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
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Investment Recommendation•Increased regulatory scrutiny makes
industry future very uncertain •Monster Beverage Company (MNST)
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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