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  • Competition in Energy Drinks. Sports Drinks. and Vitamin-Enhanced Beverages

    John E. Gamble University of South Alabama

    A lternative beverages such as energy drinks, sports drinks, and vitamin-enhanced bever- ages were the stars of the beverage indus-

    try during the mid-2000s. Rapid growth in the category, coupled with premium prices and high profit margins made alternative beverages an important part of beverage companies' lineup of brands. Global beverage companies such as Coca- Cola and PepsiCo had relied on such beverages to sustain volume growth in mature markets where consumers were reducing their consumption of carbonated soft drinks. In addition, Coca-Cola, PepsiCo, and other beverage companies were intent on expanding the market for alternative bev- erages by introducing energy drinks, sports drinks, and vitamin drinks in more and more emerging international markets. Global beverage produc- ers had not been the only ones to benefit from increasing consumer demand for alternative bever- age choices. Entrepreneurs such as the founders of Red Bull GmbH, Rockstar, Inc., Hansen Natural Corporation (maker of Monster Energy), Living Essentials (maker of 5-Hour Energy), and Energy Brands (originator of glaceau vitaminwater) had become multimillionaires through their develop- ment and sale of alternative beverages.

    However, the premium-priced alternative beverage market had been hit especially hard by the lingering economic downturn in the United States. Sales of sports drinks declined by 12.3 percent between 2008 and 2009, and sales of fla- vored and vitamin-enhanced waters had declined by 12.5 percent over the same period. The sales of energy drinks fared better, but 2009 segment sales exceeded sales in 2008 by only 0.2 percent. Industry analysts were undecided on what

    percentage of the poor 2009 performance for alter- native beverages was related to the overall econ- omy and how much could be attributed to market maturity. Beverage producers had made various attempts at increasing the size of the market for alternative beverages by extending existing prod- uct lines and developing altogether new products. For example, PepsiCo had expanded its lineup of Amp Energy drinks to 12 flavors, expanded SoBe vitamin-enhanced beverages to 28 flavors and variations, and increased the Gatorade lineup to include dozens of flavors and variations. Bever- age producers were also seeking additional growth by quickly launching concentrated two-ounce energy shots to garner a share of the new beverage category that originated with the development of Living Essentials' 5-Hour Energy. Some beverage producers were also moving to capture demand for new relaxation drinks that were designed to have a calming effect or help those with insomnia.

    While attempting to expand the market for alternative beverages and increase sales and mar- ket share, beverage producers also were forced to contend with criticism from some that energy drinks, energy shots, and relaxation drinks pre- sented health risks for consumers and that some producers' strategies promoted reckless behavior. Excessive consumption of high-caffeine-content beverages could produce arrhythmias and insom- nia, while mixing alcohol with energy drinks could mask the consumer's level of intoxication and lead to increased risk-taking and other seri- ous alcohol-related problems. In addition, many physicians warned consumers against consuming

    Copyright 1!:1 2010 by John E. Gamble. All rights reserved.

    Khalld Golden's personal copy

    n J> en m c.n

  • C-76 Part 2 Cases in Craft ing and Executing Strategy

    relaxation drinks that contained the potentially harmful ingredients melatonin and kava. But as 2011 approached, the primary concern of most producers of energy drinks, sports drinks, and vitamin-enhanced beverages was how to best improve their competitive standing in the marketplace.

    INDUSTRY CONDITIONS IN 2010 The global beverage industry was projected to grow from $1.58 trillion in 2009 to nearly $1.78 trillion in 2014 as beverage producers entered new geographic markets, developed new types of beverages, and continued to create demand for popular drinks. A great deal of industry growth was expected to result from steady growth in the purchasing power of consumers in developing countries, since the saturation rate for all types of beverages was high in developed countries. For example, market maturity and poor economic conditions caused the U.S. beverage industry to decline by 2.1 percent in 2008 and by 3.1 per- cent in 2009. The 2.3 percent decline in the vol- ume sales of carbonated soft drinks marked the

    Exhibit 1 Dollar Value and Volume Sales of the Global Beverage Industry, 200~2009, with Forecasts for 2010-2014

    Dollar Value Volume Sales Year ($ billions) {billions of liters)

    2005 $1,428.4 391.8

    2006 1,469.3 409.1

    2007 1,514.1 427.3

    2008 1,548.3 442.6

    2009 1,581.7 458.3

    2010* 1,618.4 474.9

    2011 * 1,657.6 492.1

    2012* 1,696.1 508.4

    2013* 1,736.5 525.8

    2014* 1,775.3 542.5

    *Forecast.

    Source: Global Beverages Industry Profile, Datamonitor, March 2010.

    fifth consecutive year that U.S. consumers had purchased fewer carbonated soft drinks than the year before. Industry analysts believed that while carbonated soft drinks would remain the most-consumed beverage in the United States for some time, annual sales would continue to decline as consumers developed preferences for bottled water, sports drinks, fruit juices, ready- to-drink tea, vitamin-enhanced beverages, energy drinks, ready-to-drink coffee, and other types of beverages.

    As consumer preferences shifted during the 2000s, sports drinks, energy drinks, and vitamin- enhanced drinks had grown to become important segments within the industry in 2010. In addi- tion, such alternative beverages tended to carry high price points, which made them attractive to both new entrants and established beverage companies such as the Coca-Cola Company and PepsiCo. Sports drinks and vitamin-enhanced beverages tended to carry retail prices that were 50 to 75 percent higher than similar-size carbon- ated soft drinks and bottled water, while energy drink pricing by volume might be as much as 400 percent higher than carbonated soft drinks. While the alternative beverage segment of the industry offered opportunities for bottlers, the poor econ- omy had decreased demand for higher-priced beverages, with sales of sports drinks declining by 12.3 percent between 2008 and 2009 and the sales of flavored and vitamin-enhanced waters declining by 12.5 percent over the same period. The economy had also impacted the sales of energy drinks, but only by slowing the growth in volume sales to 0.2 percent between 2008 and 2009. Among all types of beverages, only energy drinks and ready-to-drink tea experienced vol- ume growth between 2008 and 2009. Exhibits 1 and 2 present sales statistics for the global and U.S. beverage industry.

    Worldwide dollar sales of alternative bev- erages (sports drinks, energy drinks, and vita- min-enhanced beverages) grew by more than 13 percent annually between 2005 and 2007 before slowing to about 6 percent annually between 2007 and 2009. Demand in the United States had con- tributed greatly to the worldwide growth in alter- native beverage consumption, with the United States accounting for 42.3 percent of the indus- try's worldwide sales of $40.2 billion in 2009. In the United States, sports drinks accounted for

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  • Case 5 Competition in Energy Drinks, Sports Drinks, and Vitamin-Enhanced Beverages C-77

    Exhibit 2 U.S. Beverage Industry Volume Sales by Segment, 2009

    Category Volume (millions of gallons) Market Share Growth Share Point Change

    Carbonated soft drinks 13,919.3 48.2% - 2.3% +0.4 Bottled water 8,435.3 29.2 - 2.7 +0. 1

    Fruit beverages 3,579.2 12.4 - 3.7 - 0.1

    Sports drinks 1,157.8 4.0 - 12.3 + 0.4 Ready-to-drink tea 901.4 3.1 1.2 + 0.1 Flavored or enhanced water 460.0 1.6 - 12.5 - 0.2

    Energy drinks 354.5 1.2 0.2 0.0 Ready-to-drink coffee 51.5 0.2 - 5.4 0.0

    Total 28,859.0 100.0% - 3.1% 0.0

    Note: Totals may not match data reported by Datamonitor because of differences in research methods.

    Source: Beverage Marketing Corporation, as reported in ':0. Market in Decline," Beverage World, April2010, p. 52.

    nearly 60 percent of alternative beverage sales in 2009, while vitamin-enhanced drinks and energy drinks accounted for about 23 percent and 18 percent of 2009 alternative beverage sales, respec- tively. Exhibit 3 presents alternative beverage dol- lar value and volume sales for 2005 through 2009 and forecasts for alternative beverage sales for 2010 through 2014. Exhibits 4-7 present statistics on the relative sizes of the regional markets for alternative beverages.

    Exhibit 3 Dollar Value and Volume Sales of the Global Market for Alternative Beverages, 2005-2009, with Forecasts for 2010-2014

    Dollar Value Volume Year ($ billions) (billions of liters)

    2005 $27.7 9.4 2006 31.9 10.3 2007 35.5 11.1 2008 37.8 11.9 2009 40.2 12.7 2010* 42.8 13.5 2011 * 45.5 14.4 2012* 48.0 15.1

    2013* 50.8 16 2014* 53.5 16.8

    *Forecast.

    Source: Global Functional Drinks Industry Profile, Datamonitor, April2010.

    Even though energy drinks, sports drinks, and vitamin-enhanced drinks were all catego- rized as alternative beverages, the consumer pro- file varied substantially across the three types of beverages. While the profil

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