Little competition: energy shots aim for big profits

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, BevNET.com Staff Writer

At a time when most energy drink brands are publicizing new, bigger cans, it turns out that the biggest profits are actually coming from the smallest packages.

Energy “shots,” concentrated two-ounce versions featuring the same basic energy mix of caffeine and b-vitamins as their larger brethren, are riding a wave of runaway sales multiples that echo the frenzied growth of first-generation energy drinks like Red Bull and Monster.

Last year, just three years after the introduction of 5-Hour Energy, Nitro2Go, ZipFizz and their ilk, the category grew to nearly $100 million. With new brands and new distribution avenues coming on-line, however, the category is expected to reach a new level by the end of the year. According to at least one beverage executive, by the end of the next year, energy shots could be a $500 million business.

“We feel like this is the next big category to explode,” says Mike Fine, who oversees the fast-growing NOS energy brand for the Coca-Cola Co.’s Fuze subsidiary. Using its newfound ability to get into the Coke distribution, NOS is planning to jump into the category in a big way in May, leveraging Coke’s advertising and marketing resources in an attempt to emulate the rapid growth of 5-Hour, which increased its sales by more than 400 percent last year.

The reasons for Fine’s optimism are twofold: like espresso to coffee drinkers, energy shots appeal to a slightly different group of consumers than core energy drink users, but they also have significant overlap in that group. In their ability to satisfy consumers’ need for energy, the shots offer retailers a product that complements the energy category, but they don’t fight for cooler space with the traditional 16 oz. and 8 oz. drinks. For some consumers, they are an add-on product to go with their energy drink in a kind of shot-and-chaser strategy. But for others, the shots are their own target.

Retailers say energy shots are selling to truck drivers and yuppies alike, but that the sales demographics seem to include customers who need energy but might not have drunk energy drinks in the past. With little or no sugar in the product, energy shots are advertised as helping consumers avoid the “crash” associated with sugar-laden energy drinks. Small enough to make it through a TSA airport security check, consumable in one gulp, and low in calories while still high in stimulants, the reduced size of the energy shot also has one main advantage that the previous generation does not:  the reduced bladder impact of the significantly smaller volume of liquid in the package — as some call it, the “pee factor.”

“The bathroom factor is huge,” says Danny Lim, who oversees energy purchases for D&J Market & Deli, in Poulsbo, Wash. “You just don’t have to go. Truck drivers, they don’t like to pull over.”

To date, the growth of the energy shot has largely centered around 5-Hour Energy, which in one year grew from $13 million to $59 million in convenience stores and from $6 million to $26 million in grocery, drug and mass channels, according to Nielsen and IRI numbers. While several other big players and a gaggle of independents are moving to compete with 5-Hour, it appears that Living Essentials’ product is the one to beat.

“I probably order about 10 boxes a week,” said Bruce Cullen, who owns a 7-Eleven in Springfield, Ore. “5-Hour seems to be like the Red Bull of the category. It just keeps plugging away. A lot of items, if they’re fads, they’re just boom-then-splat. This has been very consistent.”

For the retailer, the energy shot advantage is threefold: their small size – about about the size of a white out bottle — allows them to be placed just about anywhere in the store, although they sell best next to the register. Additionally, they can be consumed warm, saving valuable cooler space, and their standard price, about $2.99, gives them a significant ring.

Living Essentials, whose first product was the Chaser brand of hangover remedies, launched 5-Hour Energy in late 2004. After bombarding the television cablesphere with advertisements telling consumers to “avoid the crash” in the past year, Living Essentials has managed to carve out sales numbers that would easily put it in top 10 energy drinks nationwide.

“The kids are buying energy drinks,” says Carl Sperber, the marketing director for Living Essentials, which makes Five-Hour energy. “We’ve found an audience among working adults. If you’re a 35-year-old man, do you really identify with a product called Monster or Freek? It’s found appeal with those who just want energy. They want to slam something down in a couple of seconds and feel great for the rest of the day.”

What’s more, the product still is only sold in about 40 percent of the convenience channel. With only modest increases in distribution and pull-through, by the end of the year, 5-Hour Energy could be close to $250 million in sales. Not bad for a product that won’t yet be four years old.

“The big obstacle is continued distribution,” says Sperber. Despite ubiquity in Walgreen’s, 7-Eleven, and other major chains, he says, “We’re still knocking on doors. The big box stores are starting to beckon, and we still don’t have Coke, Pepsi or Red Bull ubiquity yet.”

Living Essentials is planning for increased demand, buying a warehouse in Indiana and taking its staff up from four employees to 30.

“I think if bigger and more legitimate companies get in, things will really grow,” Sperber says. “Having more legitimate players in it always helps the category. But we have a pretty big start, and I don’t know if there’s anything that Coke, Pepsi or Monster will bring to the table that will work better than ours.”

SUBHED/Firing a Power Shot

As Sperber describes, that lack of competition from big-name energy drinks has helped the Michigan-based brand take early ownership of the category. But some well-known players, particularly NOS, are about to jump into the market.

“We’re the hot brand at the hot time,” said Fine. “We’re putting it on everybody’s radar.”

NOS, best known for a set of bottles shaped like a popular brand of automotive nitrous oxide booster tanks, has taken off in the past year through a combination of innovative package design and clever channel marketing, climbing to nearly $160 million in sales.

In early May, Fine plans to introduce the NOS Power Shot throughout the Coke system. Fine says that with Coke’s distribution power, the growing popularity of the energy shot, and the momentum of the NOS brand will quickly turn the Power Shot into a top SKU.  

“Think about how excited we were when we first saw this nugget of a category nine months ago,” Fine says. “Based on what the NOS brand is all about, we thought we could take the same brand platform and extend it into this new category.”

Still, there are some skeptics who believe that the strong energy drink players won’t be able to make the transition into shots.

“If it was about taste, rather than the benefit the consumer gets from the product, that might let energy drink makers in,” said one convenience store executive. “It’s going to take some innovative products or a value-added proposition to take the share away.”

SUBHED/No Attention

So, aside from 5-Hour’s television ads – it spent nearly $10 million in 2006, according to A.C. Nielsen Monitor Plus — why haven’t energy shots picked up much media attention yet? Part of the reason is that the shots are tracked as vitamin supplements, rather than selling in the heavily-advertised beverage space. But the introduction of energy shots has turned vitamin, health and beauty into a major growth sector for C-Stores and other retail channels – according to one C-Store executive, in fact, it’s a boom that hasn’t been seen since the pre-regulatory Ephedrine tablet sales bonanza of the 1990s.  

7-Eleven has increased its space allocation for liquid vitamin supplements – the category energy shots dominate – for 12 straight quarters. Energy shots now represent 25 percent of the sales in the health and beauty category at Circle-K – even though the category includes everything from marital aids to Advil.

“I would classify it as outstanding growth,” Sandra Colvin, the 7-Eleven category manager for vitamins and supplements, says of energy shots. Starting with the single 5-Hour Energy product, she says, “we went from a bottle, to a shelf, to a shelf and a half, and our individual stores are going further depending on what their customers want.”

Marketers are betting they’re going to want quite a bit more. Last November, at the National Association of Convenience Stores Show, the rising tide of energy shots was easily evident, as brands from established players like Jolt Cola and distributor-produced rollouts like Blutonium alike jostled for attention. There is the sense that, just as with energy drinks before them, there are going to be a lot of similar products on the market in the near future. Already, in fact, 5-Hour executives are complaining about me-too products making claims of six hours of energy and beyond, filing suit against Nitro2Go in Michigan.  One of the first sports tie-ins is in place, as well – Baseball Hall-of-Famer Johnny Bench is on board with Turbo Power Energy.  

With a NOS launch that will include a major advertising push of its own and 5-Hour going strong, there is the possibility that one or two products may be enough to crowd all other comers out of the category. But with energy having become the top function in the beverage arena, energy shots are giving off the scent of cash, and there are a lot of beverage and supplement manufacturers who believe there’s a spot in the lineup for them, too.

“We’re on a pace that if we had no growth, we’d have $1.5 million in sales this year – and we’re predicting $2.5 million,” says Jim Folsom, whose company started making Blutonium less than a year ago. “I think Red Bull and Monster built a category across the whole country and contributed to a shift in consumption habits. This is maybe the next generation down from what they’ve done.”

According to marketers, energy drinks and the country’s massive coffee culture have pushed the notion of energy into the mainstream. But energy shots represent a new evolution, they say, one that distills the energy boost of caffeine into one of its most direct forms yet.

“At the end of the day, you’re selling energy, but you’re selling against energy drinks,” says Wet Planet’s C.J. Rapp. Without the crash, “You’re selling energy, but they’re the antithesis of drinks because there’s this notion that [energy drinks] don’t sustain energy, while the shots do. They’re low calorie, so it attracts a female audience, and the less liquid the better, for some.”