Wells Fargo Survey: Coca-Cola Deal, Innovation Boost Monster

monster logoIn a summer crammed with transactions, the Coca-Cola Co.’s acquisition of a 16.7 percent stake in Monster Beverage Corp. stands as one of the most influential moves in the beverage industry. The deal is expected to help Coke compensate for years of declining carbonated soft drink (CSD) sales by grabbing a chunk of a category leader with, as many would argue, plenty of room to grow. The effects of the deal are already being felt not just by Monster, but by the energy category as a whole.

In a recent Wells Fargo Securities survey, which represented tens of thousands of convenience store locations across the U.S. and was summarized by senior analyst Bonnie Herzog, respondents expressed their optimism in energy drinks. Considering the feedback, Wells Fargo believes that the category has re-accelerated in the third quarter and projects sales to be up by approximately 11 percent.

“Our retailers are generally very encouraged by [Monster’s] innovation pipeline through its Ultra line extensions, as they are ‘targeting new day parts’ and ‘increasing household penetration’ which should drive incrementality,” Herzog wrote.

One survey respondent said that the Coke-Monster partnership will lead to a greater focus on the promotion of Ultra Sunrise, a soon-to-be launched Monster product that Herzog believes will likely compete with the caffeinated Mountain Dew Kickstart as well as the original Mountain Dew, a longstanding CSD juggernaut in the convenience channel.

The respondents also state that the partnership will offer broad benefits to both companies and partnering convenience stores through SKU rationalization and increased market share/penetration.

The following responses, culled from the survey, shed light on varying retailer sentiments following the deal:

  • “Should help with distribution and staying in stock as it will mean more frequent deliveries.”

  • “Sales will grow. Prices will increase. Funding dollars will be reduced.”

  • “Total energy sales should go up. I think it’s a win for the retailers with Monster running the energy category, Full Throttle & NOS hopefully will go away and not take up unnecessary space in our coolers.”

  • “On the distribution side this is a big negative in our area. The [Anheuser-Busch] distributors were doing an awesome job (as they tend to do) however, when distribute moves to Coke Consolidated in ½ of our stores we are extremely concerned due to current delivery and performance issues.”

  • “I think it will help Coke more than Monster brand itself. Coke will begin to leverage Monster in their CMA agreements for their other categories that they weren’t as strong in. Force companies to get Monster higher $ rebates, will require more of their ancillary brands that are not as strong in their respective categories. Monster might lose some of their ‘edginess’ because may play a little more conservative with how Monster is promoted. I also think this may open the door to the ever rumored, but never confirmed, ‘Mountain Dew-like’ product.”

  • “Still a lot to be determined. Think brand swaps will help both companies, but ultimately more of a win for Monster given the international upside of the Coke network.”

Another key factor of the deal, briefly touched upon in the previous list of quotes, is Monster’s transition from Anheuser-Busch (AB) distribution to the Coke system. One respondent believes that distribution through Coke will help core volume, but could lose traction on innovation because of the company’s likely SKU rationalization. Another survey respondent said that Coke has a tough act to follow:

“AB did a very good job as such Coca Cola got its work cut out for it!!! I think they are up to it though.”

One convenience store operator had a blunt response that takes a more literal interpretation of the shift: “Coke will do much better. Beer distributors focus on beer.”

Solid Labor Day, CSDs Hanging in There

Convenience store beverage sales accelerated slightly from approximately 3.5 percent growth for Labor Day 2013 to the approximately 4 percent growth for Labor Day 2014. Herzog attributes most of the acceleration to successful product and package innovation from Coke and Pepsi, continued development of the energy drink category, and greater traffic and basket sizes for convenience store purchases.

Considering the positive Labor Day and the recent 4th of July, up approximately 5 percent, Herzog believes that positive third quarter results are on the way, especially for Coke, Pepsi and Monster.

A few interesting side notes from the survey:

  • What kind of influence does Walmart, the nation’s largest retailer, hold on convenience stores? The big three from the CSD category, Coke, Pepsi and Dr Pepper Snapple (DPS), decreased promotional activity in convenience stores over the holiday. One respondent said: “[Coke], [Pepsi] and DPS have had to invest lower on holidays due to pricing they gave to Walmart on 12-pack cans.”

  • Nearly 50 percent of the survey respondents suggested that Coke raised prices in the third quarter. More than a third said the same for Pepsi. Also, the “vast majority” of respondents believe that Coke and Pepsi will further raise prices in the fourth quarter. “We are encouraged by these price increases,” Herzog writes, “as we believe they have been driven by accelerated innovation based on consumers’ willingness to pay for new products/improved packaging — better pricing power.” That said, Herzog believes that the progressions of Coke and Pepsi could hamper DPS, which has “limited product innovation and price realization.”