From The Fall 2002 Issue of Natural Grocery Buyer

Energy Drinks Amp Up Profits

Joseph P. Lewandowski

The names of energy drinks convey power, strength, speed, and yes, even virility—Red Bull, Go Fast, Erektus, Dynamite, Flying Horse, Warp 4. Whether these so-called "energy drinks" deliver the physiological benefits they claim is a debate that may never be settled.

But there's one thing these drinks do deliver—big profits. Although the energy drink category is barely two years old, industry experts believe it represents much more than a fad driven by hyperactive 20-somethings. It's here to stay.

"Energy drinks have an allure, almost a sexual tension, a mechanism that people believe will exhilarate them," says Tom Pirko, a leading beverage industry analyst with Bevmark LLC in Santa Barbara, Calif. "I think we've seen that the category has legs. This is a niche, and it's proven to have the right qualities to maintain it. The issue is how big [the category] will become."

Here's what experts say about how to cash in on the category:

• Although the energy drink category is growing in meteoric fashion, it will remain a niche and occupy only a tiny percentage of the overall nonalcoholic beverage market.
  
  
• Convenience stores, liquor stores and bars will continue to sell energy drinks, primarily, as impulse items. Although grocery stores stock small quantities, these drinks never will become grocery staples. Grocers can, however, successfully sell single drinks from coolers at the front of stores.
  
  
• Much like the early 1990s microbrew craze, dozens of energy drink companies are vying for market share. Fewer than 10 are likely to survive.
  
  
• Dominant players will have well-established distribution systems, such as Anheuser-Busch Co., PepsiCo, Coca-Cola Co. and Hansen Natural Corp., all of which have introduced energy drinks.
  
  
• Drink buyers are young adults between 18 and 30.
  
  
• Beverage companies will start marketing the drinks to easily impressionable teens, ages 13 to 17, who have money to spend on convenience items.
  
  
• Energy drinks will likely spur manufacturers to introduce enhanced drinks claiming even greater physiological benefits—think Viagra in a bottle.
  
  
• Although the sugar- and caffeine-loaded drinks are often scorned by health advocates, criticism won't slow sales growth.

The energy drink category was created by Red Bull, an Austrian company that introduced its trademark brand to Europe in 1987. That year, the company sold 1 million cans. The brand came to the United States in 1997, and last year Red Bull sold 1 billion cans worldwide.

Overall, the category produced sales of $275 million last year, more than double 2000 sales.

This rapid growth is motivating major beverage companies to introduce their own brands: Anheuser-Busch makes 180; Cadbury-Schweppes, Venom; PepsiCo, SoBe Adrenaline Rush and AMP; and Coca-Cola, KMX. The competition is nicking Red Bull—its market share slipped 12 percent last year—but the company still holds a commanding lead with 51.4 percent of the market.

Smaller players struggling to stay alive in regional markets are hoping to be bought out by the majors. Sales for Go Fast, an energy drink made in Denver by Go Fast! Sports Inc., are growing by 40 percent to 60 percent per month, says Heather Hill, marketing director. So far it distributes only to convenience and specialty outlets, such as bicycle and motorcycle stores, in Colorado, Nevada and Utah.

Although the company lacks distribution muscle, Hill says Go Fast will gain an edge with consumers because it's fortified with more minerals, vitamins and herbs, and tastes better than other energy drinks.

"I think the consumer is becoming a lot more educated about what's in the can," Hill says, "Most [other drinks] are high-sugar water. But Go Fast uses a lot more good ingredients."

Go Fast, like most small companies in this category, is relying on guerilla marketing techniques to spread product news—it sponsors sports festivals, concerts and extreme events and is working hard to place its product in bars. Red Bull owns the tavern market with its wildly popular Red Bull and vodka mixed drink.

Hill believes Go Fast will gain market share, but will never compete at the Red Bull or PepsiCo level. "There is room for the little guys to become part of this category, but it's going to be a long, hard, competitive road," she says.

Although the going will be tough for small companies, the sheer size of the nonalcoholic beverage market still holds promise for interesting new drinks, says Michael Langenborg of Santa Rosa, Calif.-based Natural Planograms, a category consultant company specializing in health food.

The soft drink market is worth $56 billion; a company grabbing even a small portion will have big payday potential. The sports drink market, worth about a $4 billion share of the overall market, is a prime example. It's growing briskly at about 8 percent annually with no slowdown expected, especially as sugar-laden soda pop drinks come under fire for their negative health effects. Similarly, sales of bottled water total just more than $6 billion, and the category is growing at more than 10 percent a year.

"The numbers are staggering," Langenborg says, "That's why companies like Pepsi and Coke are going into these markets." And with their distribution muscle alone, major companies can gain market share without spending much on advertising campaigns.

Overall, energy drinks will continue gaining visibility and producing profits for some manufacturers and retailers. Still, explains John Sicher, publisher of Beverage Digest, the energy drink category will never reach the behemoth status of soft drinks. Last year nearly 20 million cases of energy drinks were sold in the United States, and he expects the category to top out at 100 million cases soon. In comparison, more than 10 billion cases of carbonated soft drinks were sold in 2001.

"It won't even be a speck on the wall in comparison to soft drinks," Sicher says.

No doubt, though, many competitors want to be part of that speck.