Monster Sales Increase Highlights Problems at Coca-Cola and PepsiCo

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It is no secret that Monster Beverage (NASDAQ: MNST  ) is one of the best-performing beverage companies in the U.S., while Coca-Cola (NYSE: KO  ) and PepsiCo (NYSE: PEP  ) struggle to grow beverage volume. Not only is Monster in the high-growth energy-drink market, it also brings innovative new products and flavors to market. And it is the hottest energy-drink company as of late.

Meanwhile, soft-drink stalwarts Coca-Cola and PepsiCo are under pressure to boost performance after an historically weak 2013. Something needs to change at these blue chips, and that something is staring them in the eye.

Monster crushing the market
A rising tide lifts all boats, but Monster is rising even higher. According to Symphony IRI, U.S. energy-drink sales increased 7% in 2013 despite widespread media coverage of safety concerns. However, Monster performed even better than the overall market; sales increased 9% in fiscal 2013.

Still, Monster is far behind competitor Red Bull in the convenience-store channel. Red Bull has a 43% overall market share versus Monster's 39% share. But Red Bull's $2.6 billion in convenience-store sales far outpaces Monster's $843 million in convenience-store sales, which accounts for about one-third of Monster's annual revenue.

However, Monster is increasing its convenience-store penetration through innovations. The company has had recent success launching Muscle Monster protein and energy drinks, a zero-calorie energy-drink line, and other new products that have enabled it to grow market share. Wells Fargo (NYSE: WFC  ) estimates that Monster's convenience-store volume grew 9% in the second quarter of 2013, 12% in the third quarter, and 13% in the fourth quarter.

Monster's accelerating sales growth in the channel is a tribute to its innovation and popularity. It is also a result of high retail profit margins earned on energy drinks. Wells Fargo estimates that energy drinks average a 40% margin at retail, compared to just 30% for soft drinks. This gives retailers an incentive to increase shelf space for energy drinks, making it easier for Monster to grow volume.

Monster and big soda: a natural fit
Consumers crave new and bold flavors -- and Monster delivers this. The company has a long runway for growth, but that growth could come even faster.

Two things are almost always true of fast-growing products: 1.) it is popular with consumers; and 2.) it is widely marketed and distributed. The greater extent that either of these factors is true, the faster a product will grow.

There is not much more Monster can do to increase its popularity with consumers than it is already doing, but Coca-Cola and PepsiCo can help it grow distribution much faster than Monster can on its own. Coca-Cola already distributes close to 30% of Monster's dollar volume, but Monster would benefit from utilizing Coca-Cola's entire global network of bottlers and distributors. A close partnership with Coca-Cola could get Monster into more convenience stores and other retailers in the U.S. and abroad.

Even PepsiCo, which, like Coca-Cola, has its own line of energy drinks, would benefit by distributing Monster's energy drinks worldwide. PepsiCo owns AMP Energy -- a distant fifth in energy-drink market share. Although PepsiCo's Mountain Dew Kickstart energy drink/breakfast shake hybrid is gaining traction, it still represents less than $100 million in sales -- a tiny fraction of PepsiCo's $66 billion in overall revenue. Monster's $2.2 billion in sales is also small compared to PepsiCo's overall sales, but its enormous growth potential given a worldwide distribution network makes Monster an attractive partner.

Perhaps the best justification for either Coca-Cola or PepsiCo to become an exclusive partner with -- or the parent company of -- Monster is that the soft-drink business is in such bad shape. According to Nielsen data, soft-drink volume increased only 0.5% in the convenience-store channel during 2013. A significant part of soft drinks' struggle derives from the proliferation of alternative beverages led by energy drinks. As a result, it would be mutually beneficial for Coca-Cola or PepsiCo to initiate a deeper relationship with Monster in the coming years.

Foolish takeaway
Monster is thriving while Coca-Cola and PepsiCo's volumes are diving. Something at the soft-drink giants needs to change. Energy drinks are stealing soft-drink market share as the younger generation embraces the new breed of caffeine-laden drinks. It will be difficult for any company to make a more popular energy drink than Monster, which is why partnering with the company makes sense for Coca-Cola and PepsiCo. If either follows through, investors can rejoice that management is finally facing reality.

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Ted Cooper

Ted Cooper is a value investor based in Texas. He does not ride a horse to work.

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8/27/2015 4:00 PM
KO $39.27 Up +0.54 +1.39%
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WFC $54.03 Up +1.73 +3.31%
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