The whole of America is watching the drama unfold on the energy drinks front. With the controversies over deaths allegedly caused by drinking energy drinks and the reports received by the FDA the tension is quite palpable. And I wonder whether this in some strange manner is daring the youngsters to try these energy drinks more and more.
It doesn’t take statistics to show that energy drinks are getting popular by the day – you just need to walk into any 7-Eleven anywhere in the world. If you do want to look at the stats well here’s some for you. Rodney Sacks, CEO of leading energy drink maker Monster Beverage Corp (NASDAQ:MNST) in the fourth quarter and full year 2012 earnings call said that Red Bull has sold over 5 billion cans of energy drinks in 165 countries in 2012 while Monster itself sold over 2 billion cans in around 90 countries. Quite overwhelming numbers! The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) are also desperately trying to get a piece of this pie. However the question that emerges is whether this sector is a safe bet for investors. It is to be kept in mind that with Red Bull and most of the smaller players being privately held Monster is possibly the only means to get exposed to this sector. Let’s take a closer look.
Energy vs. fizz
There is no mistake in the fact that soda sales are falling in the US. Nutritionists and experts have been fighting a war against fizzy drinks for a very long time warning the masses about health hazards like obesity, diabetes, heart problems, etc. And finally the message seems to be reaching ears. In 2012, the consumption of soda was its lowest since 1996. According to the industry newsletter, Monster Beverage Corp (NASDAQ:MNST) Digest, volume of sales of carbonated beverages excluding energy drinks was lower by 1.7% year over year. The point to note is that despite being under regulatory scanner and receiving negative press, the volume of energy drinks was up significantly. Even more noteworthy is the fact that the fastest growing brands within the carbonated soft drinks category are none other than Monster and Red Bull with their volumes up by 19.1% and 17%, respectively.
Big boys want to play
The ruling kings of the soft drink market The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) are not blind to the fact that the tilt is very slowly but steadily moving towards the soda alternatives in the US. Both of them are trying hard to get into these markets. However in the energy drinks market, Monster and Red Bull are giving these biggies a run for their money. Coca-Cola through its Full Throttle has so far been able to garner only a 1.28% market share while PepsiCo’s Amp drinks account for around for 3%. PepsiCo, Inc. (NYSE:PEP)’s latest move is the launch of Kickstart its new breakfast drink with juices, vitamins, and caffeine. So while The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) maintain their dominance in the overall beverage market with their 34% and 26.3% market shares they have a long road ahead if they want to make it in the energy drinks market.
The other side of the story
By now you must be thinking that energy drinks are ‘the’ sector to bank on but wait a minute. Let me bring you up-to-date with what’s happening at Monster (remember I told you it is your only way to get into this sector!). Monster’s image took a beating over the unfortunate death of the teenager from Maryland in December whose parent brought over a lawsuit over the company. In October 2012 the FDA reported that it is investigating as many as five deaths that may have linkages with Monster’s energy drink. While it has not been proved that any of the deaths are a directly due to Monster drinks it has brought the company under the regulatory scanner. There have been quite a lot of developments since then. Currently in news is the monthly the newsletter published by Dr Deborah Kennedy warning kids to stay away from energy drinks and Monster’s hugely criticized sharp retaliation to that. To improve its image Monster has made a big decision. It has announced that henceforth it will label its products as beverages and not dietary supplements and disclose nutritional facts of all its ingredients.
The bottom line
I believe the energy drinks sector (read Monster) should be approached with a hint of caution. It is true that this is a growing sector and carries tremendous potential. As more and more of the American public get conscious over drinking their soda alternate beverages like energy drinks, teas, etc. will gain grounds. However given the volatility that is emerging from the constant health campaigns and lawsuits against the energy drink makers, investors might wait a little before making their decision. If any of the lawsuits go against Monster or any other energy drink maker for that matter it can have a Hey huge negative impact. And things will be much worse if any legal restriction is imposed. So while having a Monster drink once in a while will surely not hurt it is better to be a little cautious with investing in this sector.
The article Will Regulations Stall Growth of Energy Drinks? originally appeared on Fool.com and is written by Eshna De.
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