Energy Drinks: Five Big Questions

As the energy drink explosion rolls into its second decade, the game is changing and the stakes are higher. It’s true that the products are only about a generation old in the U.S., but what a generation it has been: for many consumers, the products have moved from edgy curiosity to lifestyle necessity. Nevertheless, there are still plenty of people wondering what Red Bull or Monster taste like, or trying to determine the difference between Gatorade and Rockstar.

So in many respects, energy drinks are at a crossroads: do they become as ubiquitous, the CSD’s of their day, as some expect, or do they remain an item that fills the functional niche – albeit a large one – that lies between coffee and Diet Coke?

With the category’s estimated $4.8 billion in sales at stake, it’s a big question, and the answer isn’t likely to arrive right away. But there are some ongoing issues whose resolution will likely affect the way retailers and distributors treat energy drinks by the end of the next generation, ten years hence.

How many hybrid products will the category accept??

Perhaps the largest limiting factor for energy drinks has been their taste, and while that particular aspect has come a long way, an ongoing solution for many brands has been to try to dissolve the flavor into a variety of more common beverage types, including juice, coffee, cola, tea, even beer. But with that expansion – and increased focus on injecting energy into beverages that cover more parts of the day – comes dilution. As a retailer, can you depend on the increase in variety to continue to expand your sales, particularly as the new varieties put pressure on your limited space?

The dependability issue is becoming a big one, at least with regard to coffee blends. Recently, Hansen’s made it clear that JavaMonster, while a fast-growing brand – almost 14 percent of its energy drink sales, according to the company – doesn’t have the high profit margin of its other offerings. And that’s where Monster’s/Hansen’s dual identity as successful energy drink company and stock market darling start to battle it out, because much of the charm that has elevated its share price has come from the category’s high profit margins. So while your JavaMonster allocation might be rising for now, that might be a short-term event – particularly with other companies pushing more strongly into the coffee market, and Starbucks hopping into the energy space, both with its own RTD products and with a guarana booster for its on-premise drinks.

Meanwhile, Rockstar Roasted has been a successful introduction for the other major independent brand, but with Coke developing a strong brand internally – note the skyrocketing success of NOS – there is always the possibility that it might opt out of its deal with the California-based enfant terrible, or at least try to shift shelf space to maximize growing its own products, costing Rockstar space for brand extensions.

In addition to core brands, the “juiced” energy category has been growing for the past few years – both Monster and Rockstar’s blends have become top sellers. But a question retailers should ask themselves is whether they want to rely on their most successful brands and their line extensions or continue to shuffle through other offshoots to see if something catches fire. With so much variety out there, it might be worthwhile to see if your customers are looking for something nontraditional, and perhaps by another manufacturer.

Some retailers are starting to address the issue by dividing their drinks up by functionality; this will be especially important as more functions start to cross over into the energy drink sector. It’s already happening with sports drinks.

Poor taste and poor judgment: Will crassness and caffeine? get them banned? And will there be backlash in your store?

Recently, South Bend, Ind. convenience store owner Candy Gioupis put up a hand-lettered sign telling kids under 18 that her Quik-Mart would only sell two energy drinks at a time. Last year, the American Beverage Association began looking into caffeine labeling ?issues. Just this spring, the owner of Redline donated $25,000 to a Florida school district after four eighth-graders became sick after consuming his product.

That kind of self-policing comes at a time when energy drinks are receiving increased media and government scrutiny. Several states are looking at banning or restricting sales of energy drinks to minors. The FDA is considering taking a hard look at caffeine. And stories about caffeine and energy drink concerns are now a regular part of any TV reporter’s playbook come sweeps week.

Meanwhile, the crass are getting crasser, as Cocaine begets Blow begets Bump and Hooters begets Deep Throat. And the alcohol tie-ins don’t help in that respect – too many potentially scary questions are being thrown at the energy malternatives as well as at the use of energy drinks as mixers. On-premise, energy drinks have grown almost exclusively in bars; that does not translate readily to the family fridge.

As of this writing, NBC’s Today Show had aired a segment called ‘The Truth about Energy Drinks,’ while the Sacramento Bee had published a report on convenience store owners limiting sales to minors. Arguments that energy drinks are the equivalent of Starbucks coffee only seem to take the industry so far in the eyes of the public. Marketing tactics may change in the future, but the wild side presented by many energy drink companies, while continuing to bring on consumers in the short term, in the long term could collapse under the weight of one negative event too many.

For retailers, the issue becomes the image of the drinks they sell, their willingness to work with local communities with regard to merchandising and sales to minors, and knowledge of their customers.

Here comes the competition – What effect will energy shots,? hyped-up diet colas, yerba mate, and even energy cookies and chips have on the category?

Energy isn’t just for energy drinks anymore. As the veil lifts on the main source of energy drinks’ energy – pure, unadulterated, caffeine – what was an aura of mystery is now counted in milligrams. And those milligrams are appearing in all kinds of new iterations.

Beverage Spectrum has been out front on the growth of energy shots as a high-profit phenomenon – one that energy drink companies themselves have started to invest in – but the stubby capsules aren’t the only product class making a grab for a piece of the energy pie. At a recent natural products convention, booth workers for vitamin maker Yummi Bears were passing out adult versions of their products that were loaded with caffeine and guarana. There are energy beans, energy lollipops and other candies – some are made by energy drink companies themselves, like Bawls – and now even energy potato chips. Caffeinated vodka is creeping onto the market, negating the need for Red Bull as a mixer (and a good thing for bartenders, too, given that company’s willingness to go for the wallet if you happen to pour an off-brand).

“The consumer continues to look for quick additives,” said George Pontiakos, CEO of BI Nutraceuticals. “We saw a guy put it into gum! And we’re seeing a lot more movement into the beverage alcohol segment.”

Additionally, the soda makers have figured out that their consumers know what caffeine is all about, as well, adding pumped-up variants like Diet Pepsi Max. Rather than bill new offerings as energy drinks, new products like Energy Green from Honest Tea and the Naked Juice Energy Smoothie are simply appropriating the energy aura and applying it to their own categories. If energy is isolated as a routine functionality across a broad variety of food and beverage products, doesn’t that expose the CSD-like flank of the energy drink category?

Whither the Third Brand?

For years, energy drinks were like the hydra – one company went out of business and two more grew to replace them. But that made for a pretty crowded collection of critters. Now, with a couple of dominant independie brands running the show, the big CSD companies still haven’t been able to figure out how to win the game – or even stay in it for a long period of time. Witness the up-and-down stories of Amp, SoBe, Full Throttle, KMX. Each time, the big soda companies have used their distribution network to build up a head of steam, but ?they have continued to see consumer sentiment return to the indie brand.

In fact, NOS, Coke’s latest, bestest new hope for a homegrown energy brand, started as an indie all its own. And while that brand has taken off in a big way, its core gearhead user is still too small a subculture for the product to become a genre spanner. NOS has been brilliantly executed to capture as much of its niche as possible, but it will be hard for it to move too far out of its core competency.

So where does that leave retailers who need leverage on their side in the face of an increasingly stultified set of distributors for Monster (i.e. Anheuser-Busch) and Red Bull (still catching hell from its own sales force after raising its case prices) Growing regional brands like BooKoo and Xyience have run into major trouble as they try to reach national status. Rip It remains bargain sized, while other major niche marketing efforts like TaB and SoBe Essential Energy have flopped. Here’s where, for retailers, knowledge of the growing field of natural and organic brands makes sense, where a Steaz or a Sambazon might be an appealing alternative, as they all have a solid but small base. Still, even those little guys can disappear in a second – has anyone seen Syzmo on shelves lately?

The category remains young enough that the cacophony of different labels is probably still fun for consumers, but with share settling into a pair of camps, there is still money to be made for retailers through the discovery of a Mountain Dew to provide an alternative to the Coke and Pepsi of Red Bull and Monster. By having that extra outlet, they can keep their costs in check.

Speaking of keeping costs in check, what about the economy?

The high margin bonanza that drove the energy category is shrinking for distributors and for retailers as raw materials and fuel costs go up. Similarly, it’s hitting consumers right in the wallet, as prices at the pump have long been the enemy of trips inside the convenience mart. Sooner or later, the high cost of the energy drink is going to have to go down, particularly as consumers start to notice they can now hit both Starbucks and McDonald’s for a $.99 high-end coffee.

But at the same time competition for consumers starts to force the price down, supply costs are going up: gas, sugar, corn syrup, fuel, aluminum for cans are all getting more costly, and so is one other important ingredient, energy drinks’ miracle caffeine source, the guarana seed. Demand for the product has increased – aided by the increase in other energy based products. International trade is ?also playing a role: the Brazilian Real is performing exceedingly well against the U.S. Dollar.

“Demand is stripping away supply,” notes Pontiakos. “I’m killing myself to get it in here before the dollar drops again.”

Energy drinks have come so far, so fast, that it’s hard to believe they were ever consigned to a small part of the evening and a small group of athletes. What’s truly amazing is that they’ve had as significant a cultural impact as they have a financial one. Still, while ten years is a short time in the development of a major brand, it’s a long, long time to forecast. In ten years, the questions we’re looking at now will have a brand new spin: either they’ll be small squalls preceding a decade-long storm of profits, or the last few clouds that arrive before a whole new weather system moves in.