The Xyience of Energy Drinks

By Jeffrey Klineman

At this point, with sales surging and brand awareness through the roof, it’s hard to believe that Xenergy, the Ultimate Fighting Championship-focused energy drink made by Xyience, was ever fighting for its survival.

NOTE: Due to reporting and editing errors, earlier versions of this story incorrectly stated that Russell Pike was sent to prison after being indicted on charges of tax evasion. Mr. Pike is currently awaiting trial. Charges were filed in 2009. A corrected version is posted below.

But that was the case just four years ago, when the company’s creditors forced it into bankruptcy and its founder and former CEO, Russell Pike was being investigated by the U.S. Attorney for the District of Nevada on charges that would eventually lead to his indictment.

Xenergy was a brand in limbo, but one with one small advantage – complete and total identification with the fastest-growing sport in America, Ultimate Fighting. Even as its former owners had sloppily poured dollar after marketing dollar into various promotions, promoting the product alongside UFC (albeit while using a sexy dancer instead of the fighters themselves) meant it overlapped a key demographic – those precious 14-34 year-olds who are at the very core of the energy drink movement.

And as of now that small advantage is prying open doors around the country. In recent months, the brand has become the go-to independent player for distributors who have lost access to Rockstar, Monster, or Red Bull, and it has begun to consolidate share as a well-financed brand that speaks to a desirable audience. Four-channel sales (Drug, Gas and Convenience, Supermarkets and Mass) hit $31 million in June, according to Symphony/IRI Group, and those numbers don’t include the 4,000-plus GNC stores, gyms, even the live event sales that put the brand into the hands of a growing group of brand ambassadors.

“UFC is blowing things up. Gyms are huge opportunities for us,” said Reuben Rios, the brand’s dogged VP of sales, who has survived the bankruptcy to watch it come back stronger. “Our online recognition is stronger, you go to these events and everyone has the gear.”

Here’s what gives it a chance to break into new accounts: there are 30 million Americans age 12 and older who are rabid supporters of UFC and its fighters, according to a recent story in Sports Business Journal. That’s a number and a demographic that an “official beverage” would kill for. To give the number perspective, the UFC’s percentage of avid fans in the general population trails only pro and college football, basketball, and pro baseball.

Still, Rios makes it clear that he knows the brand has not arrived on the scene fully formed (“I’m not a fan,” said one key New England distributor).  Helping keep things under the radar is still-inconsistent national distribution and a heterogeneous fan base for both the product and its key marketing asset. Just as with the sport to which it has linked its fortune, most people just don’t know how big it is becoming.

“Look, in some of our bigger distributors, our biggest accounts, we’re probably at about an 8 to 11 share,” Rios said. “But that drops way down if you gather in the whole U.S.”

That inconsistency means that Xyience seems to remain part of the chase pack of brands that have long tried to go after Monster, Red Bull, Rockstar, and the shifting lineup of Pepsi and Coke products. But as it gathers shelf after shelf, Rios said, “these guys, they don’t see us coming.”

But some folks do: other drink companies are aware of the potential for marketing via top UFC fighters. While Xyience has 205 lb. Champion Jon Jones in its camp, no less a beverage power than Gatorade has signed up popular welterweight champ Georges St. Pierre.

Here’s what Xyience has going for it:  it’s a brand with zero calories and a flavor profile that has improved by leaps and bounds since a switch to Allen Flavors last year, along with a packaging overhaul that has unified the line inside an au courant black 16 oz. can. As an advantage, Xyience has a brand that straddles the line between athlete and spectator effectively—many MMA fans are workout freaks. The strategy for Xyience is to ride one of the most enthusiastic fan bases in the country into sales momentum that lets Xyience consolidate space occupied by any number of the category’s also-rans into significant share. They see other potential competitors like DPSG’s Venom failing to catch fire and know they have better mainstream appeal than other, less mainstream products like Redline or Cocaine.

“In the last few years, the energy drink category is consolidating down,” Rios said. “Sets are clean – they’ve only got Red Bulls, Monsters, Pepsi products, Coke products. But there’s that 20 percent, the miscellaneous area, and we’re finding that opportunity, and we’re exploiting that opportunity.”

But there are downsides to having the strength of a brand rely almost solely on its affiliation with UFC. For starters, leagues have their ascents, and their declines. Red Bull, for example, has long been rumored to want to pull out of its deal with NASCAR sponsorship – particularly as that sport’s popularity has begun to wane with the same group that is currently enamored of UFC.

And there are other sports on the rise, as well. Look at FMF, a new energy drink modeled to exploit the world of motocross – itself a fast-growing, exciting sport aimed at the UFC demographic.

“Xyience is a good brand, but it’s kind of stuck in that cage-fighting niche,” said Frank Kerker, the “Chief Power Officer” at FMF, which launched last month. “Ask people if they’d rather watch cage-fighting or motocross.”

While that might be a question to ponder, it’s not one that seems to be a concern for either UFC or for Xyience. Maybe that’s because of the troubles the brand has already overcome. In fact, for a long time, it wasn’t clear that Xyience would have the opportunity it has now.

Started by Pike in 2004, the brand quickly attracted investors – many in Las Vegas – who understood the potential of a brand that was focused on UFC.

At the time, that league was cleaning up its own image, consolidating a myriad of organizations, each focused on hyping the no-holds-barred gore of their products – once derided by Sen. John McCain as “human cockfighting” – into a more technical (albeit still gory) streamlined set of pay-per-view spectaculars and a reality tv series, The Ultimate Fighter.

Pike spent heavily on The Ultimate Fighter – $50 million in marketing in one year, according to one former executive – and the brand grew from $109,000 in sales to $20 million by 2006. The next year, the company took in more loans to continue to finance its growth – including $12 million from Zyen, a marketing company owned by the Fertittas, the owners of UFC and the Station Casino franchises. But with spending so far out of whack and hot competition in the energy drink category, Xyience couldn’t maintain its momentum. In January, 2008, it filed for bankruptcy, listing liabilities of more than $42 million.

Later that year, Manchester Consolidated bought the company out of bankruptcy for what was essentially a promise to repay $15 million in debt, and Manzen was established as the corporate entity to oversee it. With much of that $15 million in debt belonging to the Fertittas via Zyen, the company appears to have largely fallen under their control.

As the bankruptcy case progressed, so too did the government’s case against Pike, who was indicted in April, 2009, on tax evasion charges relating to the sale of Xyience stock to an investor in 2006. He is awaiting trial.

And that control by the Fertittas – official or unofficial — isn’t necessarily a bad thing, when you look at what the Fertitta brothers, along with their friend Dana White, managed to do in turning around UFC. After buying it for a reported $2 million in 2001, the company is now valued at more than $1 billion, with its TV rights coming up for bid later this year.

Fastest-growing sport in America, meet one of your fastest-growing energy brands: as of June, Xyience sales revenues were up more than 61 percent over the previous 12 months, according to Symphony/IRI; overall, in 2010, it grew 58 percent. That barely takes into account the new, national accounts that the brand has added since February, including a much-anticipated agreement with Circle-K that will put it into nearly 5,000 new stores nationwide. As the brand continues to add stores – new president John Lennon, the former CEO of Pabst, among other beer companies – has a mandate to expand it to more national chains and “complete the picture” for the brand, particularly on the East Coast.

“I feel fortunate for joining the brand at the right time,” Lennon said. “Hopefully there’s something I can add in terms of getting the distribution completed in time. I feel fortunate in that, here’s this brand, it kind of feels like a startup, but it’s out of the garage, it’s in the fast lane.”