This Company Is an Outlier in a Weak Beverage Market

Source: Monster Beverage

According to research by Beverage-Digest, the U.S. carbonated soft-drinks (CSDs) market saw volumes fall by 3% in 2013. Performance follows similar declines of 1.2% and 1% in 2012 and 2011, respectively. Energy drinks were the outlier within the CSD category, posting volume growth of 5% in 2013.

In particular, Monster Beverage (NASDAQ: MNST  ) delivered superior 2013 volume growth at 7.7%. This compares with growth rates of 6.4% and -1% for its privately-held peers Red Bull and Rockstar, respectively. Monster Beverage increased its 2013 revenue and operating income by 9% and 4% year over year, respectively. Recent trends were even more promising. Operating income in the fourth quarter of 2013 increased by 18% compared with the corresponding quarter a year ago.

Limited private-label competition and tangible benefits
There are two key reasons for Monster Beverage's strong growth.

Firstly, Monster Beverage is relatively unaffected by private-label competition unlike other food and beverage categories. As a comparison, the mainstream lunch-meat category has a private-label penetration rate of approximately 17%. Although the CSD industry in general (excluding energy drinks) has suffered as a result of the health and wellness trend, private-label soft drinks have had limited success in taking market share from the branded soft-drinks company, with U.S. CSD market share capped at about 5%.

For example, Coca-Cola (NYSE: KO  ) has an unparalleled track record of market share stability that will put its competitors to shame. For a period close to three decades between 1986 and 2013, Coca-Cola's market share has stayed at approximately 40% and above.

In the case of Monster Beverage, its U.S. CSD market share has increased steadily from 1.2% in 2011 to 1.4% in 2012 and then 1.6% in 2013. Private-label beverages haven't posed serious threats to either CSDs as a whole or the energy-drinks market.

Most beverages help consumers quench their thirst and provide some form of intangible benefits such as refreshment and enjoyment. This is in stark contrast to functional drinks, which provide their customers tangible benefits in areas such as energy, health and wellness, and weight management.

Energy drinks offered by Monster Beverage offer the extra caffeine and energy boost that some people badly need. For example, if a person is thirsty, he has a range of options available such as water, soft drinks, and fruit juices. But if he were to stay up to either study for examinations or work overtime, there are far fewer substitutes for energy drinks.

Source: Monster Beverage

Pricing power
Monster Beverage has tremendous pricing power, as evidenced by the price premium that its products command and its consistent profitability.

Based on the results of a 2011 survey by New Nutrition Business, energy drinks like those offered by Monster Beverage are about four times more expensive than regular Coca-Cola-branded soft drinks on a price-per-liter basis. The fact that energy drinks have grown significantly faster than the CSD industry at large suggests that premium pricing hasn't deterred consumers or promoted them to trade-down to lower-priced alternatives.

With respect to its financial track record, Monster Beverage has achieved a stable and consistent gross margin in a narrow 51%-53% range over the past nine years.

Another food and beverages company with such strong pricing power is Hershey (NYSE: HSY  ) , the maker of the top U.S. chocolate brand -- Hershey's Kisses chocolate candy, as per a 2012 Harris Interactive poll. Since 2007, Hershey's gross margin has been on an upward trajectory, rising from 33% in 2007 to 46% in 2013. This was helped by price increases in 2008 and 2011.

More importantly, Hershey's top line has increased in every year over this period, suggesting that its customers are loyal to its brand and won't switch to other brands because of price increases.

Foolish final thoughts
While the U.S. CSD industry as a whole has been disappointing, Monster Beverage has been a standout success in comparison to its soft-drinks peers. Monster Beverage's product positioning as functional drinks offering tangible benefits and its strong pricing power are key factors in its financial outperformance. Monster Beverage has 35% market share of the convenience-store channel. But its market share of the entire CSD segment is small at 1.6%, suggesting room for further growth.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 11, 2014, at 3:02 PM, BradReeseCom wrote:

    Hi Mark,

    You state:

    "Another food and beverages company with such strong pricing power is Hershey (NYSE: HSY), the maker of the top U.S. chocolate brand -- Hershey's Kisses chocolate candy, as per a 2012 Harris Interactive poll."

    Mark, here's what you omitted:

    The 2012 Harris Poll EquiTrend Study is an annual online study of overall brand strength. This year, 38.5K American consumers, age 15+, ranked 1,529 brands across 127 categories from Jan 31-Feb 20, 2012.

    Reese’s Peanut Butter Cups has consistently appeared in the top ten list over the past eight years, and for the first time has rated higher than M&M’s Plain Chocolate Candy or its sister brand, M&M’s Peanut Chocolate Candy.

    Finally, HSY shareholders should keep in mind that the Harris Poll has ABSOLUTELY NOTHING TO DO with the financial success of a candy brand (i.e. net sales and/or net profit of a candy brand).

    For many years Reese's has been and continues to be HSY's most financially successful candy brand.


    Brad Reese

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Mark Lin

Mark is a private value investor and is the author of website which uses a systematic quantitative screening approach to filter the global stock markets for cheap cigar-butts and wide-moat compounders.

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