Gerry’s Insights: The Rockstar Domino Falls

I’ve written before about what a glory the energy drink category has been for those who appreciate premium-priced brands that bring both margin and growth to distributors and retailers. While most emerging RTD categories from bottled water to iced tea started off that way, it’s been hard not to notice over the years that as soon as the strategic players get involved, a familiar pattern unfolds: innovation starts to wane, pricing gets aggressive and excitement at the shelf sputters out. Before long that category is just another commodity. So it’s been hard to resist the conclusion that, more than 20 years in, it has been precisely the continued independence of the key energy brands that has allowed the category to continue to thrive. True, two of the biggest, Monster and Rockstar, have traversed the Coke and Pepsi systems, respectively, to get to retail, but they have remained independent, generally in control of their innovation, marketing and pricing. (Fair credit to Coke and Pepsi for recognizing the merits of this setup.) With category pioneer Red Bull seemingly maintaining as a key strategic imperative the continued amusement of its founder, Dietrich Mateschitz, rather than a desperate quest for volume at any cost, the segment has maintained its premium nature and pizzazz long into its more mature years, focusing its innovation on marketing more than products. It’s hard to think of another category that can make that boast. And if there was any fear that things were getting staid, the arrival on the scene of Bang Energy and other performance energy brands as a disruptive force provided a fresh burst of energy. Bang, too, operates as a fiercely independent company.

As I was submitting this column, a shock had just registered to this equilibrium: PepsiCo had announced that it had a deal to acquire Rockstar from its founder, Russ Weiner, for $3.85 billion. As I’d reported in my newsletter, Beverage Business Insights, a few weeks earlier, this seemed to be the first prong of a two-pronged assault on the category: by acquiring Rockstar, and thereby voiding its contract, PepsiCo would be freed up to pursue an alliance with key insurgent brand Bang Energy, something that’s not possible as long as Rockstar has a lock as Pepsi’s exclusive partner in the category. Maybe by the time you read this, something along those lines also will have been announced.

There are a lot of puts and takes to sort out in this. Despite a continued run of interesting innovation, Rockstar had been on a slide for several years, the apparent result of a disinclination by Weiner to invest significantly in the brand and PepsiCo’s own lack of focus. Just a few weeks earlier, on Pepsi’s quarterly investor call, CEO Ramon Laguarta had seemed to acknowledge as much by saying both parties need to step up. Once Rockstar is entirely in Pepsi’s hands there is the risk that innovation will slip and pricing get more aggressive, but at least it will be in Pepsi’s power to step up investment. And with the contractual handcuffs off, it can reach out to other outside brands, perhaps in natural energy, and accelerate efforts to offer energy extensions under the Mountain Dew, Pepsi-Cola and perhaps other internal brands. Bubly Energy, anyone?

A word on the deal’s valuation. Without delving into the math, it seems rich for a brand that’s in fourth place domestically and declining, a far cry from the leader or close No. 2 that strategic buyers like to assure investors they’re acquiring. Part of the valuation can be attributed simply to the contract issue. Rockstar “had lost its fastball years ago and was in decline. At this point the signed agreement with Pepsi was the most valuable thing Russ owned,” as one former employee told me. But I view it another way. It may have as much to do with PEP’s optics on Wall Street. Much as Muhtar Kent did at Coca-Cola when he was ascending to the ceo suite with his $4.1 billion acquisition of Vitaminwater and Smartwater marketer Glaceau, PepsiCo’s Laguarta may wish to make a statement that he is bringing a new dynamism to the company, an assurance that he’ll be more decisive in exploiting promising spaces than his predecessor Indra Nooyi, with her preference for modest, “bolt-on” acquisitions. To my recollection, Kent’s move on Glaceau helped accord Coca-Cola a richer stock multiple than its peers for several years, counterbalancing the high price he paid. Lately PepsiCo has ceded ground to Coke and its Body Armor brand in sports drinks, but this would put a win on the board in another category, one with better growth and margin dynamics. So, SodaStream first, now Rockstar, maybe Bang next.

The two deals, present and potential, have significant ramifications on the distribution side, too. With Rockstar’s exclusivity voided, Pepsi’s remaining independent bottlers should be freer to pick up complementary energy brands. In the northwest quadrant of the U.S., where Rockstar has continued to employ some independent distributors, the brand will migrate to the blue system, opening the doors of those indies to newer brands in a region that skews high for energy drinks.

If the Bang piece falls into place, those distribution ramifications will be far greater. For beer houses seeking to counter the overall decline in their core category with a greater NA presence, Bang has proved invaluable as a high-margin, fast-growth brand that can anchor a broader NA portfolio. Its exit to Pepsi would precipitate an upheaval comparable to the one Monster did when it exited the Bud system for Coke years back: send some wholesalers scrambling for replacements, while possibly prompting others to exit the NA category entirely in disgust. It’s a prospect I personally find disheartening, since I continue to believe that a motivated beer network can provide an excellent route to retail for promising new categories. Since both Anheuser-Busch and Molson Coors lately have been insisting that NAs now are a key part of their strategy, any Pepsi/Bang alliance might put pressure on them to land another meaningfully developed non-alc brand to serve as such an anchor, perhaps Monster, which is losing faith that Coke will eventually yield an exit, or Essentia Water.

Longtime beverage-watcher Gerry Khermouch is executive editor of Beverage Business Insights, a nearly daily e-newsletter covering the nonalcoholic beverage sector.