The New Power Source: Cheap Energy

Like every growing boy, energy drinks got bigger as they reached maturity, moving from a puny 8 oz. can to a spiffed-up tallboy, and then even into the land of the 32-ouncer. But if they’ve gotten bigger, something else has started to fall – prices and margins.

Yes, the value brands have finally arrived. After a decade of consumers shelling out $2-4 for cans that delivered as little as eight ounces of sugar, water and caffeine, top brands have let their prices slip. They’ve held “every day” prices as high as ever – even raised them, in some cases – but Red Bull, Monster and Rockstar have indulged in promotions that move product for as little as $1.50 per can. Meanwhile, value energy brands may be gaining ground – a strange development for a space that once routinely killed entrepreneurs who boasted that their product was “like Red Bull, but cheaper.”

Budget brand Rip It, for example, sells at 16 oz. for a buck and has seen rapidly rising sales in Michigan, according to Randy Shanker, owner of Canada Dry Bottling in Lansing. Shanker said he’s carried the National Beverages brand since 2006, and it has recently enjoyed a run of double-digit growth fueled by strong execution of its value positioning. Jolt, in its latest iteration, has decided to splash into the value end of the energy category with 99-cent pre-priced 12 oz. cans and 16 oz. cans crafted to hit a similar price point in other channels. So far, said Val Stalowir, Jolt’s acting chief marketing officer, the brand has seen rapid adoption in targeted markets.

The success of these brands cuts against a premium-only perception that has defined the energy category since its inception. Red Bull built a mystique around expensive energy elixirs that encouraged suspicion of products that promised the same bang for fewer bucks. Monster and Rockstar maintained this perception but those three brands have recently faltered on pricing. Red Bull crafted an every-day deal that offers consumers two 8 oz. cans for $4 – a discount from its single-can price of $2.19; Monster and Rockstar authorized deals selling two 16 oz. cans for as little as $3. It’s gotten to the point where at least one Budweiser distributor who had wanted to keep the Hansen’s brand in his house has become so angry about his declining margins that he’s decided to kick Monster out, complaining it’s just not worth the trouble to keep if from cutting over to Coke.

The problem? Too much success. As the category has matured into a big three – Red Bull, Monster, and Rockstar – these products have gradually moved into vast, highly competitive distribution networks that tend to regard them as commodities more than status symbols. In other words, if you’re going to hook up with Coke and Pepsi, sooner or later you’re going to have to go the way of Gatorade or glaceau and pay the pricing game.

“As soon as Coke and Pepsi got the Rockstar [and] Monster agreements, they got very aggressive on pricing,” Stalowir said. “The big guys… trained the consumer to believe that great, high-quality, effective energy brands can retail for less.”

In Stalowir’s view, the category was overdue for value players. Bargain brands make up, on average, eight to ten percent of most consumer packaged goods markets, he said. By contrast, they currently account for just one percent of the energy drink category. He said that disparity, combined with consumers discovering that they don’t need to pay 30 cents per ounce for a quality energy drink, opened a window for Jolt to restage itself as the AriZona Iced Tea of the energy category – a strong, recognizable brand with an easy-to-handle price.

Of course, the fact that Stalowir is running Jolt at fire sale prices following the ouster of founder C. J. Rapp isn’t lost on observers who have voiced concerns about inconsistent quality and declining brand equity. Still, tough times mean little disposable income, and the discount nook of the category, which includes private label brands at grocery stores and big-box retailers, owes some of its recent rise to the economy.

Shanker said it’s no coincidence that Rip It has surged in Michigan, a state suffering 15 percent unemployment, but value’s rise likely also springs from energy’s maturity. Energy drinks hit $5.6 billion in U.S. sales in 2009 at food, drug, convenience and mass market stores (excluding Wal-Mart), according to Symphony IRI, with an overall growth rate of 4.6 percent. But maturity means competitive pricing and a group of consumers who, just like with CSDs, understand there are cheaper ways to get the energy buzz.

That consumer differs from those that buy Red Bull and Monster, Shanker said. In his territory, he said, Rip It captures consumers who would have normally bought traditional carbonated soft drinks, and have been reluctant to join the energy category due to high prices and the “energy drink taste.” Rip It, he said, overcame both of those hurdles with its $1 price tag and wide array of flavors. His distributorship alone carries nine.

The brand’s growth – particularly at the expense of sodas – may also indicate a generational shift. Ruben Rios, vice president of sales for XYIENCE, said he’s noticed that teenage and young adult consumers don’t drink soda like they used to. Where once they ordered soda in restaurants and kept 2 liter bottles at home, now they order water and buy teas and energy drinks.

Even though those same consumers tend to lack pocket change, Rios said he’s not sure that discount energy drinks can thrive nationwide. While XYIENCE has adjusted its prices to match promotions from the category’s leaders, Rios said he recently visited a convenience franchise in Louisiana that eschewed discounts completely. Their coolers, he said, included exactly zero energy products on special, and he expects that trend to grow among smart store managers. Individual locations are judged by their overall store margin, he said, and discount energy drinks squeeze the category’s profitability.

But Shanker and Stalowir said discount energy drinks could actually improve penny profits. Stalowir said that Jolt increased margins for both itself and its retailers by jettisoning its expensive cap can. The brand also hasn’t focused exclusively on convenience and grocery stores, he said, extending its reach to dollar stores and other large direct accounts. And, even with their $1 price tags, Shanker said Rip It offers traditional convenience stores higher margins than traditional carbonated soft drinks, if not the outstanding margins prized by Red Bull’s best wholesalers.

Shanker noted that the shift hasn’t been kind to his margins, though.

“I miss the Monster days without question,” he said. “They were a special, once-in-a-great-while run for an independent beverage distributor,” he said.