Monster Close to Coke Arbitration Decision, Exploring Alcohol Innovation

Executives for Monster Energy Corp. struck an upbeat tone at the company’s 2019 annual shareholder meeting on Thursday, projecting that the brand’s latest release, REIGN, will achieve over $300 million in sales this year.

The Corona, Calif.-based company hosted a live webcast of the business discussion and question and answer portion of the meeting yesterday afternoon, during which chairman and CEO Rodney Sacks and Vice President Hilton Schlosberg addressed a number of topics.

The company shared an update on arbitration hearings with Coke; the two companies are engaged in mediation to resolve a dispute over interpretation of terms in their 2015 distribution agreement which prevents the soda giant from launching a product that will directly compete with Monster. Sacks said the arbitration had been completed and that the decision will be announced by the end of the second quarter. He affirmed that Monster would stand by the outcome of the arbitration hearings and that the two beverage companies “will continue to work together as partners regardless.”

Sacks declined to offer an update on Monster’s lawsuit against rival performance energy drink Bang, other than to note that the next court hearing is scheduled for June 17. Bang’s parent company, Vital Pharmaceuticals (VPX Sports), is also currently suing Monster over trademark infringement claims complaint in a separate case.

Going further on the company’s relationship with Coke, Sacks said it was too early to assess the commercial impact of Coca-Cola Energy, which launched in April in Hungary and Spain, but that the company is working with the soda maker and its franchised bottling partners to “try and get to a point where we are all happy with where Coke Energy goes on the shelf vis-a-vis ourself so… that ultimately Coke is incremental and not competitive to us.” Monster only recently completed its transition into Coke’s national distribution system following its departure from New York’s Big Geyser in April.

Sacks also said Monster is waiting until the tail end of its non-compete contract with Coke covering non-energy drinks before it begins exploring potential M&A moves, calling such discussions “not appropriate” under current conditions. The company will begin to “step up” closer to the agreement’s end in June 2020, he said, and will not be limited exclusively to non-alcoholic products.

In response to being asked if Monster was considering launching a “high ABV, high caffeine” beverage similar to Four Loko, Sacks said: “I’m not sure we would consider Four Loko, but there are other products in the alcohol side, whether its on the malt side, the seltzer side or in the hard alcohol, spirits side, there may well be some good opportunities. We are looking at some of the them at the moment, and we haven’t made any decisions to do anything, but that’s something we would certainly be open to.”

For the moment, however, Monster is focusing its attention on REIGN which, despite the legal battles with VPX, has enjoyed a strong start since entering the market in early 2019. The company reported sales in excess of $70 million through the end of May, with projections of soon being a “$300 million brand,” according to Sacks. The line is in over 130,000 points of distribution already, and is set to make further gains as the company manages its transition from convenience stores into other retail channels and chains like Walmart. Sacks said the brand’s success thus far confirmed to Monster that separating REIGN as its own standalone brand was the right decision.

“We really do operate those two brands independently,” he said. “The formulas are different, they relate differently to consumers, they have a different effect on consumers.”

As for REIGN’s 3.2% market share after two months on the market: “Pretty damn good,” said Sacks.

The company was also bullish on sales figures in unmeasured channels, naming Costco and Amazon as segments not covered by Nielsen data reports. Schlosberg claimed Monster’s sales in chain stores like Dollar General, Lowe’s and Home Depot were growing significantly despite “not being accurately reflected in Nielsen numbers.” He said retailers in these channels have an “appetite for a number of other products and product lines, including REIGN.”

Wells Fargo Securities analyst Bonnie Herzog pointed out in her analysis of the meeting that Monster is approaching a critical juncture in its relationship with Coke this month, when the soda maker has the option to reduce its stake in the energy drink brand. In turn, Monster could also reduce Coke’s two seats on its board of directors. However, she said she believes Coke’s intention behind the launch of Energy is to extend its flagship brand rather than take market share from Monster; if anything, Herzog noted, Coca-Cola Energy is poised as a more serious threat to Red Bull.

“We expect (Coke) to continue to maintain two board seats for now — and do not expect (them) to sell any shares in the coming months (and likely keep the company’s ownership stake in MNST closer to approx (18%),” she wrote. “Furthermore, we were encouraged that MNST management also views their relationship with KO as good and sees no changes with regards to how it operates in conjunction with KO.”

Herzog noted that, despite REIGN’s strong start, lingering concerns over Monster’s pricing and retail strategy remain.

“We expect further margin pressure over the (long term) driven by negative geographic/channel/product mix as MNST’s growth reflects continued shifts away from the higher margin c-store channel, faster growth in lower margin (international markets) and new innovation that is mostly margin dilutive,” she wrote.