It’s the most amped up category in non-alcohol beverages, in both the literal and figurative sense. From humble beginnings less than a decade ago with Red Bull’s fledgling entry into the U.S., caffeine-spiked energy drinks have stampeded into the consciousness of consumers, retailers and distributors.
Red Bull continues to dominate the energy drink market, though smaller players are nipping at the Bull’s heels.
In an overall non-alcohol market that recorded moderate growth in 2004, energy drinks scored a whopping 71% volume gain in the all-important convenience store channel that built the segment, to 19.7 million cases, according to Nielsen Convenience Track data. While that’s less than 2% of beverage volume, the segment’s unmatched pricing power has made it impossible to ignore in a category where soft drink prices have been flat for decades and bottled waters have been mired in a crippling price war. By dollars, volume rose 58% to $737 million — more than 7% of total c-store beverage sales. The average case of energy drinks garnered $37 last year, compared to $7 a case for carbonated soft drinks (CSDs) and $8 a case for bottled water.
As new entries and package sizes proliferate to the point where there are nearly 1,000 brands out there, beverage executives are asking — as they have in each of the past several years — how much higher can it go? Looking to the functional roots of CSDs more than a century ago, the ardent proponents of energy drinks argue that there is no reason energy drinks can’t follow the same trajectory into eventual dominance of the beverage aisle.
“That’s everybody’s question,” said Mark Hall, vice president at Hansen Natural in Corona, CA. “We could be witnessing the ultimate upside: becoming the soft drinks of the 21st century, particularly if you think of the birth of soft drinks, as snake oil with cocaine in them. Big companies ask, ‘Why can’t I sell soft drinks any more?’ Our answer is: ‘Because they’re 100 years old and not cool any more.'”
RETAILERS SAY NO SLOWDOWN
Retailers, too, are optimistic that energy drinks still have a long way to go. “There’s been no slowing down,” said Debbie Wildrick, product director for the 7-Eleven convenience store chain. “The more intelligent energy drink companies like Red Bull will tell you that household penetration is still low, in contrast to CSDs, which for years have been at maximum levels. As that improves, you’ll only get more customers. And you can get your existing customers to consume more with the 16-oz. and 24-oz. sizes.”
Indeed, Dan Ginsberg, ceo of Red Bull North America, has encouraged his U.S. distributors to take the brand from its current 2 cans per cap (700 million cans annually) to 10 cans over the next few years. In the brand’s most developed markets in Europe, he noted, per caps have risen as high as 14. That suggests there’s ample room for Red Bull or its rivals to more than quintuple the business.
And so far, category pioneer Red Bull does indeed remain the juggernaut, with $234 million in c-store sales last year, up 45% from the prior year and outdistancing its biggest rival, Hansen’s Monster, by nearly 5 to 1.
Although Red Bull’s media budget will rise to the $50 million range this year, the brand still isn’t doing things all that much differently than when it started out, sending youthful teams to work bars and nightclubs, cultivating students on campus, backing up-and-coming alternative-sports athletes. Most of the TV dollars still will go to targeted cable networks, like MTV and VH1. The only significant shift this year is that the brand is doing more to target a younger demographic, kids aged 13 to 17, than in the past. Mostly, though, the emphasis remains on execution. Its legions of distributors, whom the marketer wowed at a sales extravaganza in Hawaii last fall, say the company’s ingenuity and execution are in a league by themselves. “The way they do things, everything is attention to detail,” said Steve Sourapas, president of Crest Beverage in San Diego. “They leave no stone unturned.” Many beer wholesalers, leaving the Hawaii meeting, exclaimed that their primary suppliers, the brewers, could learn a lot about on-premise promotion from Red Bull.
CHALLENGERS TO RED BULL
In a market that enticing, where are Coca-Cola, Pepsi-Cola and the other major beverage players? So far, playing a relatively modest role. For big companies, energy drinks pose several distinct problems beyond the usual one of devoting enough focus to what is still a relative niche. One is their reluctance to match the formulations of some of the more successful entries, which fall into the category of dietary supplements under Food & Drug Administration guidelines. The result can be what smaller rivals deride as “lawyers’ drinks,” with relatively modest caffeine content or high-fructose corn syrup substituted for the glucose that hard-core adherents prefer as their sweetener. “They don’t get you high,” as one smaller player put it bluntly. Another problem for the big companies is the intimate association of energy drinks, starting with Red Bull, with alcohol. It’s an arena that the larger soft drink players are uncomfortable playing in. Given their grapples with anti-obesity forces, they don’t need another potentially controversial issue on their plate.
Berween the two CSD giants, Pepsi-Cola has enjoyed the greater success so far, in part because with its acquired SoBe line and with Mountain Dew, it has had two brands with stronger street cred among the young males who have been the core consumers of energy drinks. SoBe’s Adrenaline Rush and No Fear together with Mountain Dew Amp generated nearly $80 million in c-store sales last year, greater than Number 2 player Monster, and Pepsi is piling in marketing resources to the SoBe brands this year to build on that success.
Coca-Cola has struggled more to find the right formula. After failing with the 8-oz. KMX, they have put an aggressive push behind the 16-oz. Full Throttle, named for a biker hang in Sturgiss, SD, the mecca for Harley-Davidson riders. The brand, in a black can bedecked with aggressive biker imagery, rolled out earlier this year with heavy radio and billboard support. Executives at both Coca-Cola and its largest U.S. bottler, Coca-Cola Enterprises, have said they are guardedly optimistic, judging from early results, that this entry will prove to be more in synch with consumer tastes than KMX.
But so far, the strongest challengers to Red Bull have been smaller, nimbler companies more willing to take chances with their formulations, marketing and distribution strategies. Among those, there is no question that Hansen Natural has plowed the most aggressive — and so far, successful — path. Although its early 8-oz. entry, Hansen Energy, garnered only limited success, it has had a monster on its hands with 16-oz. Monster. The line, backed by a broad array of alternative-sports sponsorships and guerrilla marketing, more than doubled to $50 million in c-store sales last year; in all channels, it was approaching $100 million in sales. Nor has the company allowed complacency to set in: rather than riding just the one brand, it has tied in with California surf gear maker Lost to launch a drink under that brand for younger consumers, while extending Monster with a sub-brand called Assault that goes more directly after cola drinkers. Hansen is also using the Monster brand as a platform from which to attack the fledgling 24-oz. segment, starting with a promotional can devised with surfwear maker Billabong.
Other notable entries have come from Rockstar, which more than doubled in 2004 to nearly $40 million in c-store sales, and Boo Koo, which pioneered the 24-oz. can segment that is now attracting the attention of Hansen and others.
LARGER SIZE SEGMENT
Indeed, the category’s segmentation has followed a very unusual path. Rather than fragmenting along demographic lines, so far the main differentiator has been package size. With nobody able to dent the dominance of Red Bull in the 8-oz. can segment, much of the action from challengers has shifted to the 16-oz. size, where Monster and Rockstar have both developed major businesses. It’s been hard for Red Bull to react to those because it has for so long emphasized the scientific research that it says determined 8 ounces to be the optimal dosage of its energy drinks. While the 16-oz. players haven’t been an undue hindrance in markets where Red Bull got established early, the company has acknowledged to its distributors that they have made life tougher in its more recent markets. Though it would prefer not to, it has told its distributors that it will launch a 16-oz. entry under a different brand name, if that proves necessary.
Defcon, from Russell Simmons, targeted the hiphop demographic, but was not very successful. The company is now re-staging the brand via a new formula.
How broad the market will prove to be, and how it will get there, remain very much in question. Though brands like Monster and Rockstar have marketed large sizes without spending much on conventional media, Red Bull has spent heavily on its quirky animated ads, and Pepsi is sharply upping the ante this year on Adrenaline Rush. Coke also has committed significant media resources to Full Throttle. That will broaden awareness beyond the intial coterie of energy drink aficionados.
Moving it out beyond the young-male demographic that has dominated sales so far is another question. As producers focus more on sugar-free versions, multipacks and grocery distribution, the segment will be available to more consumers. But so far efforts to specifically target new demos have met with mixed success at best. There have been oodles of hiphop-oriented brands, from Russell Simmons’ Defcon to Lil John’s Crunk!!!, but none has really broken out. Even 7-Eleven’s product director Wildrick, who got an exclusive on the Defcon launch, said its failure has made her more skeptical of the category. “I may be hesitant because of Defcon. I’m concerned that it’s a narrow niche.” Ironically, Defcon, under a new marketing team at Simmons Communications, is similarly restaging via a new formula that purports to make it a healthier energy drink. The only brand Wildrick has lately taken on in the hiphop arena is one called Raw Dog. And at press time, we learned that 7-Eleven has launched the new energy drink Vamp N.K.G. in its stores nationwide. The producer, Transylvania Imports, markets Vampire wine, originating in the Transylvania region of Romania.
Coca-Cola’s Full Throttle rolled out earlier this year with heavy radio and billboard support.
Other brands are targeting blue-collar males who are slightly older than the teens and early 20-somethings targeted by the biggest brands. Coke’s Full Throttle, with its Harley-inspired imagery, falls into this group. So does Bacchus, a decades-old Korean brand that was among the inspirations for Red Bull. In recent months, Bacchus has made a more aggressive push into the U.S., starting mainly on the West Coast. In contrast to the radical imagery of brands aimed at teen guys, Bacchus runs images like that of two cans of Bacchus inserted into a construction worker’s tool belt, under the slogan, “Real Power for Real People.” “While others go in for extreme sports and the like, we’re going the opposite way for the average, everyday young working male,” said Pat Graney, ceo of Bacchus Energy of America in Bell, CA.
Efforts to roam further afield demographically, as Campbell Soup has done with Invigor8, targeted at women alienated by the aggressive imagery of male-targeted energy drinks, so far have not garnered much traction. But there is no lack of companies willing to try. Take Happy Bunny Spaz Juice, a raspberry-flavored drink from novelty purveyor Boston America. For teen girls and 20-something women who shop at specialty stores like Hot Topic, Claire’s and Spenser’s Gifts, it is offering the promise: “All the energy you need to annoy everyone else.” Though some may find the whimsy of that to be terminally annoying, it does grapple with a key question expressed by Hansen’s Hall: “How does an edgy category marketed more like beer than soda become mainstream?”
That will be a challenge, because it will inevitably detract from the excitement conjured up by many of the early winners in the category. Some energy drink marketers also admit to concern that the government at some point will feel compelled to step in to more closely regulate what’s getting into the market, particularly as a new breed of alcohol energy drinks begins to proliferate, too. Already in Europe, where Red Bull got its birth, several countries including Ireland and France have banned energy drinks after their high caffeine levels were blamed for some accidents and antisocial behavior. That bears some vigilance among marketers, distributors and retailers. For the balance of this year, though, it seems like smooth sailing for a segment that has done a lot to punch up a staid beverage category.
In clubs and bars people mix energy drinks with alcohol, so mating the two in a single-serve bottle would seem to be a no-brainer. But so far there have not been any outright successes in the fledgling segment, thanks in part to the powerful job Red Bull already has done on-premise as well as government restrictions on positioning the drinks. The latest flock of entries, some with solid marketing resources and powerful distribution networks behind them, aim to change all that.
The big kahuna is B to the E, the malt-based alcohol energy drink launched by megabrewer Anheuser-Busch. The brand, which contains energy drink staples caffeine, guarana and ginseng along with blackberry, raspberry and cherry flavors, clocks in at 6.6% alcohol by volume (ABV) and is packed in an upscale-looking 10-oz. can priced at a premium to A-B’s flagship brand, Budweiser. Although A-B didn’t fare so well with a non-alcoholic energy entry, 180, it has put large promotional resources behind B to the E.
Although energy drinks are best known for their mixability with vodka and other distilled spirits, industry execs said A-B and McKenzie River had shown agility in jumping on the more recent trend among consumers of pouring energy drinks into their brews to make “sweet” or “hot” beer. Besides giving them a jolt of energy, the mixtures offset the bitterness of the beers and make them taste more like the fruity malternatives that some consumers prefer. In launching B to the E, A-B was following in the footsteps of McKenzie River, which offered Sparks, a malt-based drink, 6% ABV, with caffeine and taurine packed in a can sporting a battery motif. Even before success has been assured for either of those brands, the enhanced-beer segment is showing signs of getting crowded. Canadian brewers Labatt and Molson were getting ready to face off in their domestic market with Shok and Kick, respectively. Labatt Shok will come in a slim can at a hefty 6.9% ABV, while Molson Kick will sport a high-end aluminum bottle. No word yet on whether those brands would gravitate to the U.S. Other companies, including Monster-producer Hansen, are believed to be readying their versions.
Also entering the fray have been spirits sporting energy-drink ingredients. The trend was kicked off in 2003 by Icon Partners, with its Zygo Vodka, a peach-flavored, five-column-distilled vodka made from American potatoes, natural flavors and ingredients such as taurine, d-ribose, guarana and yerba mate. It is 70 proof and positioned as a “morning” vodka for partygoers not close to packing it in as midnight rolls around.
One obstacle to seeding the brands has been the need for their marketers to speak gingerly about what precisely they are. That’s because the Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau (TTB) has taken a tough stance on alcohol energy drinks. The precedent was set several years back, when Hansen sought to launch a bottled alcohol energy drink called Hard Energy, but could not obtain label approval from the TTB on grounds that to use the word “energy” was to make a functional claim, which is not permitted for beverage alcohol products. Hansen then changed the brand name to Hard E, but consumers never “got” the concept and the brand was withdrawn.
By now, though, the efficacy of the key ingredients is better understood by consumers, so it may not be as necessary for marketers to be explicit. Thus, in introducing B to the E, Anheuser-Busch executives were careful not to style it as an energy drink, stressing instead that the new brand is in synch with contemporary adults’ “lifestyles and range of drinking occasions,” in the words of Pat McCauley, A-B’s senior director of new products and high-end brands.
Consumers probably get the message anyway. Whether they’ll opt in serious numbers for this ready-made option remains to be seen.