1. The Energy Drink Industry Kurt Ondash, Hugh Stewart, Andrew Brown, Mike DiChiara

2. Why the Energy Drink Industry? College students a major target population Substantial industry growth in past decade Similar ingredients lead to importance of pricing strategies Health concerns and side effects

3. Functional Beverage Energy drinks categorized as a Functional Beverage ▫A non-alcoholic drink that includes in its formulation ingredients such as herbs, minerals, vitamins, amino acids and/or additional raw fruit or vegetables ▫Often claim specific health benefits

4. Functional Beverage Industry US Functional Beverage Industry Energy Drinks 63% Nutraceutical Drinks 10%

5. Energy Drinks Beverages that contain caffeine in combination with other presumed “energy enhancing” ingredients such as taurine, herbal extracts and B Vitamins Energy drink segment includes options such as shots, ready-to-drink and powder forms Focusing on the traditional canned energy drink

6. Industry Analysis

7. Perceived effects: ▫Increased mental performance ▫Increased physical performance Potential ingredients: ▫High level of caffeine ▫Herbs ▫B vitamins ▫Guarana ▫Taurine ▫etc. Background

8. Financing and Distribution Financing ▫Use existing infrastructure  AMP using PepsiCo ▫Create entirely different company  Red Bull Distribution ▫Usually use large beverage companies  Monster uses Coca Cola

9. Typical Customer Originally: ▫Target athletes Currently: ▫Young adults (teenagers and people in their 20s) ▫Overworked individuals ▫Hip hop crowd ▫Extreme Sports Enthusiasts

10. Firms in the Industry Only including energy drink cans NOT energy shots or vitamin water About 200 brands Over 300 varieties of energy drinks Top three energy drinks: ▫Red Bull ▫Monster ▫Rockstar

11. Herfindahl-Hirshman Index (HHI)

12. Barriers to Entry Barrier to entry is not extremely high ▫Industry very profitable ▫Low initial investment if infrastructure in place Hard to compete with leading energy brands ▫Top 2 energy drinks control 80 percent of market

13. Product Differentiation Energy drinks are different based on: ▫Ingredients ▫Health (low-calories, low-sugar, low- carbohydrates) ▫Countries drinks are sold ▫Regulations

14. Top Energy Drink Sales 2010-2012

15. Top 3 Energy Drinks #1 #2 #3

16. Red Bull Launched in Austria,1987 Started by group of investors More than 35 billion cans sold 5.2 billion cans sold in 2012 In 165 countries Grew 15.9% in sales in 2012 Invests heavily in Formula 1 Championships Slogan: “Red Bull gives you wings”

17. Monster Launched by Hansen Beverage Corporation Over 25 different energy drinks sold Coca Cola Used as distributor Advertises by supporting “the scene, the bands, our athletes and our fans” Over 8 billion cans sold since product launched Slogan: “Unleash the Beast!”

18. Rockstar Created in 2001 as independently owned venture 20 different flavors In 30 countries Uses PepsiCo as distributor Gained market share by selling a drink that is “twice the size of Red Bull, but sold at the same price” Slogan: “Party like a Rockstar”

19. Pricing Strategies

20. Main Pricing Strategies Tacit Collusion ▫Promotional Strategies Price Leadership Second Degree Price Discrimination ▫Drink Sizes ▫Drink Quantities

21. Tacit Collusion

22. Seemingly independent, but parallel actions among competing firms Not a formal agreement Seen in energy drink industry with price matching

23. Tacit Collusion A lack of significant product differentiation and production costs Similar ingredients found across all brands: ▫B-Group Vitamins ▫Taurine ▫Ginseng

24. Promotional Strategies Similar promotional strategies across the industry ▫Focus on sponsoring extreme sport athletes/events ▫Promote brand image by targeting events with “high energy” Emphasize the overall experience, not just the drink

25. Promotional Strategies Each of the major brands employ on campus student reps Goal is to create brand awareness ▫Free giveaways ▫Providing energy drinks at parties ▫Promoting on-campus events

26. Tacit Collusion Industry dominated by 2 major firms: ▫Red Bull (42% market share) ▫Monster (37% market share) Consistent industry growth in sales with a small number of competing firms

27. Tacit Collusion

28. Price Leadership

29. Occurs when a firm leader in its sector determines the price of the product Competitors may choose to lower prices in hopes of capturing market share Energy Drink Price Leader: Red Bull

30. Price Leadership Raw data regarding prices collected from: ▫Wal-Mart (wholesale retailer) ▫Fastrac (gas station) ▫Universal Deli (corner store) Survey taken by 100 current college students: ▫Energy drink consumption/preferences

31. Price Leadership

32. Wal-Mart Energy Drink Prices:

33. Price Leadership Fastrac Energy Drink Prices:

34. Price Leadership Universal Deli Drink Prices:

35. Price Leadership Survey shows 60% of students prefer to consumer energy drinks with alcohol Red Bull Vodka very popular among college students Red Bull is only energy drink offered at most bars

36. Second Degree Price Discrimination

37. Induce customers to select into high and low price groups themselves. Key constraint: you can’t make the inexpensive version too attractive to those willing to pay more. Often firms cannot distinguish between groups of consumers based on observable characteristics ▫Offer a menu of alternatives

38. Second Degree Price Discrimination Each brand offers a variety of different sizes The Starbucks example holds true in the energy drink industry 42% of students prefer a medium sized 12oz. option

39. Second Degree Price Discrimination Each brand offers a variety of different quantities to purchase Different product packages offered depending on store type ▫Individually, 4 pack, 12 pack, 24 pack 77% of students prefer to purchase individually

40. Second Degree Price Discrimination Versioning: create different versions of virtually the same product to appeal to different types of buyers Customers choose the version that best meets their needs

41. Recommendations

42. Industry Regulation FDA limits caffeine content of cola-type soft drinks to 0.02% caffeine, or 71mg/12 fluid oz At least 130 energy drinks exceed this level EU requires energy drinks to have a “high caffeine content” label Canada requires labels indicating that Red Bull should not be mixed with alcohol

43. Regulation FDA does not require warning labels advising proper use or amount of caffeine in product OTC caffeine-containing stimulants must contain specific warnings and directions on product label Striking inconsistencies between OTC stimulant medications and energy drinks

44. Caffeine Comparison Energy DrinkOunces per canTotal Caffeine (mg) Red Bull8.480 Monster16160 Rockstar16160 NOS16250 SPIKE Shooter8.4300 Wired X50524505

45. Health Concerns Adverse side effects and increased health risks have been linked to consumption ▫Includes elevated blood pressure, cardiac arrhythmia and seizures Lack of adequate labeling, aggressive advertising, and consumer demographics all make risks of energy drinks greater Caffeine intoxication, dependence and withdrawal

46. FDA Actions Announced investigation into energy drink related deaths Congress sanctioning preliminary exploration into caffeine and stimulant levels, and marketing tactics In response Red Bull and Monster hired lobbying firms 2010 – under threat of further FDA restrictions, Four Loko agreed to remove stimulants from product

47. Investment Recommendation Increased regulatory scrutiny makes industry future very uncertain Monster Beverage Company (MNST)

48. Recommendations Development of lower caffeine products Focus on creating a healthier alternative from both a ingredient and marketing perspective ▫Potential regulations could shift target market Regulation could create opportunities for market/price leadership Consumers have shown willingness to pay premium for healthier option