Should Starbucks and Keurig Green Mountain Be Concerned About Growth at Monster Beverage?

Caffeine has long been the fuel that keeps Americans alert. Traditionally, coffee was the preferred delivery vehicle. The advent of pod-brewing, led by Keurig Green Mountain (NASDAQ: GMCR  ) , and the convenience of stopping by Starbucks (NASDAQ: SBUX  ) on the way to work led to significant growth in coffee sales over the last 10 years.

However, coffee's growth was outpaced by energy drinks, thanks in large part to Monster Beverage's (NASDAQ: MNST  ) success in the market. Energy drinks are becoming the preferred caffeine delivery vehicle for an increasing number of Americans. Here's what it could mean for Monster, Starbucks, and Keurig.

Source: Monster Beverage

Implications for coffee companies
Although the U.S. energy-drink market is still much smaller than the U.S. coffee market, it is gaining ground every year. According to research firm Euromonitor International, the U.S. energy drink market grew at 34% per year before the 2008 financial crisis and subsequent recession. Although its growth has slowed considerably since the recession, Euromonitor predicts that U.S. energy-drink volumes could grow at a high-single-digit annual rate after the economy fully recoversIbid. "After the US recovers from the recession, perhaps we could see volume growth rates in the high single digits.". This is at least as fast as the U.S. coffee market, which grew 5.6% per year over the last five years. It appears that Americans' caffeine cravings are increasingly being fulfilled by energy drinks as well as coffee.

However, the growth of energy drinks is no reason for Keurig or Starbucks to fret. There are many reasons the coffee market will not succumb to the energy-drink market, the biggest of which is consumption patterns.

In fact, consumption patterns indicate that energy drinks may be a gateway to coffee. According to a survey conducted by New Zealand magazine Your Weekend, kids in their early teens are introduced to caffeine via energy drinks and then pick up the coffee habit when they start college. They consume energy drinks as teenagers and young adults but eventually switch to coffee. They then consume coffee for the rest of their lives. As a result, the growth of energy drinks -- and thus the growth in teenagers addicted to caffeine -- may actually boost coffee growth.

Courtesy: Keurig Green Mountain

Starbucks should not be concerned about energy drinks. If anything, it should be worried about coffee pod sales. While the overall coffee market grew at a mid-single-digit pace from 2008 to 2013, pod sales grew at an astounding 88% per year, from $132 million in 2008 to $3.1 billion in 2013. Keurig's 35% market share makes it the undisputed leader in the pod category.

Although Starbucks is a significant player in the pod space -- it captures a 14% share of pod sales -- pods are less profitable than coffee sold through retail locations. Pricing is also less robust; Starbucks recently lowered its pod prices, something that would never happen to Starbucks coffee in stores. As at-home brewing approaches the convenience of stopping by a Starbucks, the world's largest coffee chain will face tougher competition.

What's really driving energy-drink growth
Coffee may not be threatened by energy-drink growth but another beverage is: soft drinks. It is no coincidence that the rise of energy drinks comes as soft-drink volumes fall to the lowest level since 1996. According to Beverage Digest, Monster, Red Bull, and Rockstar have a 3.6% share of the carbonated-soft-drink market -- up from essentially 0% a decade ago. Meanwhile, the top two soft- drink companies have lost a combined 5.7 percentage points in market share since 2003. Clearly, soft drinks -- not coffee -- are being edged out by energy drinks.

Foolish takeaway
Far from being a substitute for coffee, energy drinks are a gateway beverage for a lifelong caffeine addiction. This benefits Starbucks, Keurig, and Monster all at the same time. As a result, investors in these companies should not worry if energy drinks soon overtake coffee as America's preferred fuel source. Instead, investors should focus on how much energy-drink share Monster can acquire and how much of a threat Keurig's pods are to Starbucks' in-store sales. The answer will determine just how much these companies can take advantage of the tailwinds pushing the industry forward.

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