For awhile, it was Red Bull that was synonymous with energy drinks. Then Monster came along, and turned into one of the best performing stocks of all time. And now there's another company showing explosive growth, with a surging stock and that's Celsius Holdings. But where did Celsius come from? And why do some make it in such a crowded field? And why is energy drinks such a hot category? On this episode of the
Odd Lots
podcast, we speak with Mark Astrachan, an analyst at Stifel Nicolaus, who specializes in the space. We discuss the keys to winning, and the broader competitive landscape of the industry. This transcript has been lightly edited for clarity
.
Key insights from the pod:
How long has Celsius made energy drinks for? — 07:23
How do beer and legacy soft drink distributors find innovative products to stock on their trucks? — 08:02
Bang replaces Monster, Pepsi goes after Celsius — 10:37
Who decides which drinks get stocked and distributed? — 13:31
The energy drink category at retail approaches $11 to $12 billion — 19:45
Are energy drinks taking share from more more traditional soft drinks? — 21:20
What’s the process for a new flavor or brand to enter the market? — 28:24
What's the biggest disruption threat to the energy drink space? — 30:09
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Joe Weisenthal (00:00):
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway (00:15):
And I'm Tracy Alloway.
Joe (00:17):
Tracy, we are in the office drinking Celsius energy drinks. I'm just going to start this one, like really directly.
Tracy (00:22):
Wait, should I do the ambient sound?
Joe (00:25):
Oh yeah, let's do it.
Tracy (00:28):
There we go. You can't get better than being in the office drinking Celsius at, it's not that early actually, it's nine in the morning. So we needed the caffeine boost.
Joe (00:38):
This is actually my second one of the day. I'm on my second can of the Celsius Energy drink and also, I had a coffee today. So I consumed a lot of caffeine. I love caffeine.
Tracy (00:50):
People are always asking ‘Oh, does Joe just not sleep? How does he get up so early in the morning?’ The answer is no, he doesn't because he has like three Celsius and two coffees and who knows what else.
Joe (01:00):
Okay, so we could just talk a lot about my weird sleep patterns or my caffeine consumption patterns. But speaking of Celsius Holdings, this energy drink that we're both drinking in the office right now — speaking of Celsius, it's owned by a company called Celsius Holdings. This was like a $3 stock in 2018 and today it's a $167 stock.
So just an absolutely extraordinary mega home run winner for the company behind this energy drink. And the thing is, I don't know why, and I don't know why I am drinking it, like why am I drinking Celsius and not Monster or Red Bull? I don't know. It's something in the air.
Tracy (01:40):
Well, I was going to ask, because you introduced me to Celsius and you're like ‘Oh, we got to go get a Celsius.’ And at the time had never heard of it before. How did you hear of it? Why did this become a thing?
Joe (01:50):
I think, you know, I go to the gym and it seemed like the cool people at the gym were drinking it, or they have it in the refrigerator at my gym and I think, like, I don't know, I probably saw someone on Instagram drinking it, and then I started drinking and then I posted about it, and then someone was like ‘Oh, you know, it's publicly traded,’ which I didn't even realize. And then I've been obsessed, partly ironically [but] I don't know, I've just sort of been fascinated, like, where did it come from? How does this happen that a new brand emerges and we're all drinking it? I want to know where it came from because now it’s everywhere, but I don’t know why.
Tracy (02:25):
Well, also the weird thing about energy drinks is I feel, you know, if you go into a 7/11 or a bodega or whatever, there are so many of them.
Joe (02:34):
So many.
Tracy (02:35):
And there seem to be new ones all the time, and it's difficult to keep track and yet some of them really do have staying power. So we did an e pisode previously about Monster. That stock has been absolutely phenomenal over the years. Red Bull is the other classic one. I don't know, it just feels like it's such an interesting product in that there must be insane amounts of competition, but if you can get it right, it seems like it can be really, really profitable.
Joe (03:04):
I mean in the end I know that supposedly it says on the can of Celsius, it's fat burning. I’m skeptical of any of those claims, but whatever, I'm not a scientist. They all seem the same, which is a lot of caffeine and then either some sugar or an artificial sweetener of various sorts, some different flavors. None of them are that great.
Tracy (03:25):
You're not really drinking them for the taste.
Joe (03:27):
Not really, but again, they are kind of the same. So why do people gravitate? Why do some people drink Celsius? Who drinks Monster? Who drinks a Red Bull?
Tracy (03:35):
Who is drinking those Swedish Fish flavored energy drinks? That’s what I want to know.
Joe (03:40):
This gets to the other thing, which is that, as you mentioned, if you go into any bodega or 7/11, there's so many different brands of energy drinks these days, and some of them are really weird. Like there are Skittles flavored ones, and I think an Oreos flavored one and a Swedish Fish flavored one and one's aimed at gamers, it's all very strange.
So how do you win? Why do some companies win? And you know, you mentioned, some of them are just such big winners like one of the best performing stocks of all time. It's performed better than Amazon over the year. Celsius, obviously just incredible. So, like, there's so much money in the space for those companies that can get it right between distribution, branding and product. And so I think the question is, what does it take? Why do some companies catch fire?
Tracy (04:24):
Yes, I have many, many questions.
Joe (04:26):
I have many questions. So in 2021, we did an episode as you mentioned on the incredible performance of Monster Beverage. Our guest then was Mark Astrachan, he's an analyst at Stifel Nicolaus and we have him back two years later. Actually that was February 2021, so about two and a half years later and now we are talking about a new energy drink winner named Celsius. So Mark, thank you for coming back on Odd Lots.
Mark Astrachan (04:50):
Thank you for having me. I think the last time I was doing this; I was locked in my six-year-old son's bedroom doing this.
Tracy (04:57):
I remember!
Mark (04:58):
It's nice to be in person.
Joe (04:59):
All in person, all three of us. You are drinking the sparkling [orange], it's apparently the top selling Celsius flavor, sparkling orange.
Mark (05:05):
Yeah, it’s the orange flavor.
Joe (05:06):
How do you get to be the energy drink guy?
Mark (05:09):
You show up. I started covering Monster as the only publicly traded energy drink company, probably about, oh gosh, 17 or so years ago. At the time it was, ‘Hey, well this is a fad. When is it going to go away and why are you recommending this thing?’ And 17 years later, nobody's asking about the fad piece, just about the new brands coming in. So it's sort of like, I can't get out of my own way at this point. People want to talk about the space and it's sort of ballooned around me.
Tracy (05:36):
How many energy drinks do you need to drink as part of this job?
Joe (05:40):
That's a good question.
Mark (05:42):
On certain days you can drink a lot. On certain days you get home at like nine o'clock at night and you wonder why your hands are still shaking and you remember, right, I had six or seven of these over the course of a day, especially during earning season, during trips to go see energy drink companies, to go to trade shows and whatnot.
Joe (05:56):
Oh God, we're going to talk for like three hours about this. No, but it's interesting. I want to get to like, why are we drinking Celsius and not others? Right before the recent Celsius earnings, and I think they hit it out of the park, I went to my local bodega because I wanted to pick one up before going to the gym and I looked, and I didn't see them. There were like none on the refrigerator.
I'm like, ‘Oh, what's going on? It turned out the answer was literally the day before they got a whole new Celsius refrigerator. The Celsius had been moved to their own refrigerator within the bodega, and they had way more, I just didn't see it at first. So that was like a sign to me, like, oh man, they must be doing really well and they must be moving a lot of product if there’s a special Celsius branded fridge. When you do your work as an energy drink analyst, is that what you're looking at? Are you counting the number of cans on the shelf? What does that field work [entail]?
Mark (06:54):
Probably back in the day you could do that. At this point, you're talking to folks who are putting the product on the shelf, you're talking to the distributors that are managing the folks that are going into stores every day and resetting and you also have what we like to call scanner data, which is basically data that we pay for that measures how much product is purchased on a weekly or biweekly basis. So you sort of cheat, and you get to see the revenue, you get to see the volumes and you can slice and dice the data into grocery stores and into convenience stores and all sort of which ways and have a whole lot of fun with it.
Tracy (07:23):
My favorite brand of analyst research is always when they just send people outside to the stores. Like, they send them all to the shopping mall to measure retail footfall and things like that. But Mark, why don't we start sort of at the beginning and maybe go back in time because Joe mentioned the Celsius stock chart. I'm looking at it going back to, I think, 2007. What is this company? Were they always making these energy drinks? Because Celsius itself, I feel like, is fairly new, or at least I had only heard about it relatively recently. What have they been doing for the past more than a decade?
Mark (08:02):
Essentially the same thing, it's just a question of showing up and getting increasing brand awareness, people knowing the product and sort of trying it and trying it again. I like to call it a 10- or 15-year overnight success in that the product has always essentially been the same. You have a lot more iterations of it today, but essentially, it's the same product and it had struggles for a while in terms of getting the product on shelf, getting people to understand what it was or why they wanted to drink it.
And then it sort of blossomed as you had more product on the shelf. You know, the joke of course is like 80, 90% of success is showing up and then once you get there, you have to figure out how to keep people coming back and, in this case, consuming the product. And so I think that's an interesting sort of story in and of itself, in that you have to understand how to get on shelf or understand why these products get on shelf because that's really what drives a lot of the opportunity to be successful.
So as you can imagine, it starts with money. You have a bunch of beer and legacy soft drink distributors selling the stuff and they're always on the lookout for the newest and latest and greatest products to increase consumption of stuff on their trucks. You think about a beer or soft drink distributor, you got a truck, you've got stuff on shelf and so if it's selling well, great [but] if it's not selling well, you're trying to figure out what you can put on the shelf. From a volume standpoint, you think about beer distributors and volumes have been declining for a long time so they’re always looking for things, especially outside of alcohol, to put on those trucks that ultimately sell.
If you go back 15 years ago, Monster, which was the up and comer at the time, goes and does a deal with Anheuser-Busch. A few years later, Coke gets a little bit jealous and says, ‘Man, this is doing really well,’ [so] they strike a deal. So you have 50% of Monster's business in the late 2000s going through Monster or going through Anheuser-Busch [and] 50% going through Coke.
[In] 2014, Monster and Coke announced a big asset swap, including Coke taking what's now a 20% stake in Monster. As part of the deal, Monster has to put all of its distribution into the Coke system. So you leave 50% of the Anheuser-Busch network high and dry, they're looking for products to replace. Our math is like a billion dollars of profit at that point that the beer distributors lost when Monster decided to go to the Coke system. So we're talking lots and lots of money, but we're also just talking about trucks that go to the same store at the same time of day, every day with the same driver. You already paid for the truck, and so you're trying to figure out a product that you can put on there to make money. So those distributors went out and found a brand called Bang.
Joe (10:30):
I've had some of that, it's not bad, their flavors are a little more candy flavored, like bubblegum flavor. I go back and forth, but anyway keep going.
Mark (10:37):
So Bang replaces Monster in a lot of those Anheuser-Busch houses. They do it across the country, they move from the 50% to a hundred percent distribution by late 2017, 2018. The product is just flying off shelves, hundreds and hundreds of percent growth. The brand goes from a nothing sort of like where our Celsius was 10, 15 years ago to a four or five market share and starts to get the attention of Monster and a whole bunch of these other companies. By 2019, run rate revenues were probably approaching a billion dollars at retail.
It's got something in the high single digits of market share. Like a lot of brands, you look for the better distribution and so by early 2020, Pepsi decides to go out and buy a brand that they had a long time distributed called Rockstar because Rockstar had an exclusive relationship with Pepsi that didn't allow Pepsi to sell any other energy drink brands. And once they bought Rockstar, they allowed themselves to go out and do more distribution deals, including going after Bang. So early 2020 Bang moves over to the Pepsi system. The Anheuser-Busch distributors who've been selling Bang and making lots of money doing it are like, uh-oh now what, and they go out and they find this brand Celsius.
And they put it on trucks and essentially at that point, it's kind of muscle memory to put the product in the same space that Bang was losing to go over to the Pepsi system. And all of a sudden Celsius is everywhere. And obviously it’s getting on the shelf. As I said, 80 to 90% of success is getting there and then once you get there, you've got to keep it.
Tracy (12:17):
So Monster kind of shot itself in the foot with the Coke deal it sounds like, or at least they made a hole for a potential competitor to come in and fill?
Mark (12:24):
Well, they didn't. I mean, Monster stock’s probably up four or five X from 2014, 2015. Monster got great distribution through Coke domestically, but what they got more was national.
Tracy (12:39):
Joe has had so much energy, he just knocked over his Celsius.
Joe (12:42):
I just spilled my can on my keyboard. I was worried I was going to do that. Well, okay, keep going. It’s not too bad.
Tracy (12:48):
They really work! We’re literally buzzing in the studio.
Joe (12:50):
Keep going, keep going.
Mark (12:52):
Monster also got big international distribution through Coke. Coke is one of the biggest, if not the biggest and best distributed brands around the world and they have their distribution system. So Monster got a great distribution from Coke, but yes, they also gave up their slots with others and sort of created opportunities for other brands to come in.
But I also think, and we will probably touch on this, there's an evolving consumer taste going on here as well, right? So it's not just, ‘Hey I want to drink this Celsius,’ there's a reason behind it, or why Ghost or C4 or Alani Nu or all these other upstart brands have done what they've been able to do.
Tracy (13:31):
I definitely want to get into that but before we do, I have a sort of like distribution versus customer preference question. I actually don't drink a lot of energy drinks on a normal basis, but I do drink a lot of Diet Coke and things like that. And at my local CVS, they are constantly running out — actually the irony is I mostly drink caffeine-free diet Coke — and they're constantly running out of it.
Like, it is a certainty that every week they will run out of caffeine-free Coke, but they will have hundreds of bottles of vanilla flavored Coke and God knows what else. And my question is, it is clear that consumers are expressing a preference here by buying the stuff they like and leaving the stuff that they don't. And yet the shelves seem consistently filled with, it feels like things that the brands are trying to push. So how do the decisions about what to stock and distribute actually get made?
Mark (14:26):
Well, I guess in theory it should get made on analytics and what people are consuming and so going through the data that I alluded to before on what people are purchasing, I mean essentially that's what drives the decision. I think your caffeine-free Diet Coke is probably one of those brands that may be a little smaller today than it was 10 or 15 years ago.
Tracy (14:44):
No one cares about my preference.
Mark (14:45):
It's sort of like, there was an old Simpsons episode when I think somebody bought Al Gore's book and it went through all of these like machinations and like back to him and all of a sudden somebody bought [it], and he put on a record and said celebrate good times.
Joe (15:03):
I'm sort of thinking there's like that domino meme, it's like Monster signs a deal with [someone], and then like one distributor has a hole to fill and then the next distributor then has a hole to fill. And like, there's a big game of musical chairs and suddenly we're drinking Celsius. So one of my questions is, if you look at some of these big distributors like Pepsi or an Anheuser-Busch that is sort of seen as, okay, beer consumption is down, we need something to fill this gap because we just lost this client or partner to another distributor, etc. What is the process by which they go out and find the next one? Is it a sort of mutual bidding thing where like the small upstart energy drink companies try to fill that spot? How does that process work? Do they look for a brand that seems to have something like, talk to us about how that works?
Mark (15:55):
I think it's all of the above. I don't think there's any special secret sauce here. I think you can kind of arrive at the same answer in a lot of different ways. Remember, you have all these companies that are going in and out of stores all the time, that they're talking to distributors, talking to companies and so they have some idea of what's selling and what's not selling. They have some idea of where consumer tastes are evolving to. And so some of it is you're just trying to find the next big thing.
Even though there are various examples where you've tried and failed, and you've moved on to the next thing. And so from their standpoint, you can put a whole bunch of stuff on the truck and what works you stick [with],and the rest you kind of move on with. And I think there's a lot of examples of that. I think people talk about the big winners over time and forget some of the smaller brands at the same time that have tried and failed. I mean, gosh, remember the Jolt brand in the eighties, right? That was an energy drink before its time and yet it never really took off.
Joe (16:45):
I used to drink Surge when I was in high school. That was another one we used to get. I mean ,obviously distribution and just sort of the pure muscle of the trucks and everything and shelf space is important. But what about the role of a brand? And so, you know, Celsius seems to have an athletic, like I mentioned, I saw the people at my gym drinking it and was like what’s that? It seems like they've sort of branded themselves as kind of the one for like athletes and they have this fat burning claim, which like I said, I'm skeptical of, but how significant is that in terms of the staying power for these companies?
Tracy (17:22):
Alani Nu is supposed to have vitamins as well, right?
Mark (17:25):
They all have vitamins.
Tracy (17:29):
Oh really?
Mark (17:29):
Monster has vitamins.
Tracy (17:30):
Monster has vitamins?
Mark (17:30):
Of course, you can get your B12 fix anytime you want.
Tracy (17:33):
No more Flintstones vitamins for me.
Mark (17:37):
Something like that. I think it evolves into a question of who’s drinking this in brand positioning. If you go back 15, 20 years ago and maybe even longer, Red Bull created this category in most of the world. But it evolved into a product that was consumed or still is consumed by 18- to 35-year-old, largely white-collar males more consumed on premise than any other brand, meaning bars and restaurants.
Monster decided that they wanted to go after a different clientele. They offered a 16 ounce can, they geared it on a more value-oriented proposition. Selling essentially twice the volume for the same price as Red Bull. It evolved into more of a blue-collar construction worker, sort of not on premise, not bar and restaurant business that was and still is the core consumer of Monster today.
Rockstar was a brand around 15, 20 years ago that did kind of the same thing, sort of positioned itself as a little bit more value priced as it evolved over time. And then really the category didn't do a whole lot. You had Five-Hour Energy, if you remember that, that came in maybe late 2000s, early 2010s and was offering obviously a shot so in a really concentrated form of caffeine. But you had a period there that nothing else was really changing until really Bang came along and sort of positioned this as more of a performance gym-oriented brand as Joe was talking about.
I think you had a whole lot of other brands and people that saw the success of this and tried to figure out how they could participate in this category because remember, it all goes back to the money, it all goes back to the category's importance to the store selling this stuff. Volumetrically, a lot of beverage categories are declining, energy as a category continues to grow because the selling prices are higher. You make more money selling an energy drink, it becomes a bit of a self-fulfilling prophecy here. So you want to put more stuff on the shelf. I mean, interestingly too, it continues to evolve. I was looking at this the other day, total distribution points for energy drinks are up over 40% over the last three years in stores. There aren't many or any other categories that you could say that about in beverages that have seen shelf space increase, I mean seltzers and things like that, which are now on the decline.
Tracy (19:46):
What kind of stores are they going into? Where's the expansion coming from?
Mark (19:49):
It's coming from everywhere, but the bread and butter is convenience stores, 70% of energy drinks sales are largely sold in convenience stores, 7/11, Speedway, places like that. So back to what I was saying, it's just different propositions. So Celsius, I mean, uniquely, it's very interesting, is a little bit more older male and female, it's a little bit younger female which is very different than the Monster and Red Bull consumers.
Alani Nu knew, you talked about, more older females. C4, Ghost is a younger, more performance and lifestyle brand folks going after the gym. And so each of these has sort of found a niche and if you look at the Venn diagram, there's probably overlap somewhere in there, but they've kind of found their niche.
And what's really fascinating is that the whole category continues to grow and so Monster continues to grow, Red Bull continues to grow. Sure, they're losing a little bit of share around the edges, but the category, who would've thought? 15, 20 years ago, when I started covering the energy drink category, that here we are in 2023 and the category is going to be growing 15% on a dollar basis. In ‘23 it was up 10%, in ‘22, 15%, in ’21, I mean, these are remarkably big numbers for a category now that it retails is probably approaching $11 or even $12 billion.
Joe (21:03):
By the way, Tracy and Carmen, actually I shot my keyboard. You could keep this in, but my keyboard is ruined because of the Celsius so I can’t type to you right now.
Tracy (21:12):
A Celsius casualty.
Joe (21:14):
While we've recorded this, I've ruined the keyboard, my computer is unusable. Anyway, go for it Tracy.
Tracy (21:20):
I have two quick questions. First, are energy drinks taking share from more traditional soft drinks? Have we seen any evidence of that?
Mark (21:31):
Yes, for certain.
Tracy (21:32):
What's driving that? Is that just like preference? People want less sugar?
Mark (21:37):
No.
Tracy (21:38):
We're all more tired and need more caffeine?
Mark (21:40):
There is still sugar in energy drinks. So it actually starts with that, I think it's funny, you ask consumers about what they want to drink or eat, and they'll tell you, oh, it's all about healthy food and drink cleaner label. And yet what I just told you about the growth of energy drinks would be the almost exact opposite of that and that the list of ingredients is vast.
Mark (22:00):
And I don't think anybody is claiming these are good for you, but what they do is provide a function. Joe's comments at the beginning of this notwithstanding, right? People are in fact sleeping less, they're looking for more energy, they want to do more with their day, and these provide caffeine and sure, it's the same as basically a coffee in a lot of instances in terms of caffeine, but it's a different delivery mechanism. You think about younger consumers, maybe they don't want to drink coffee. Maybe it's hot outside, you don't want a coffee, maybe you don't want a latte. And by the way, the value proposition here also helps think about the price of a coffee at Starbucks today versus what it was 10 years ago. It's probably double where it was. Go in and drink your fancy latte and it’s probably six or seven dollars before you get out the door.
Energy drink prices have gone up like a lot of other categories, but you can still get a Monster for under $3. You can get a Celsius for under $3 if you get it on promotion, which is how a lot of people buy this it's two for $5.50, 2 for $6, you know, three for $7, whatever the promotion is and so the value proposition here is also greater and it just has a different taste. And so it starts with a function, moves to the taste and you do a good job of innovating. I think one of the things too, we talked about this on a previous podcast, which is Monsters really expanded usage occasions. You know, who would've thought putting coffee in an energy drink together would've made sense? And that's a billion-dollar category today. Juices, tea, zero sugar, full sugar, there's just a whole bunch of different offerings out there for folks. You talked about the candy products, there's flavors out there that have partnerships with some of these companies.
Joe (23:25):
Well, we got to get into that.
Tracy (23:26):
This was going to be my next question, although I have to say I have a really great product idea now, which is pumpkin spice Celsius.
Joe (23:32):
Oh yeah, go for it.
Tracy (23:33):
Don't you think? For fall? We could be millionaires. Joe, we’ll pitch it.
Mark (23:37):
You should tell the marketing folks; I could put you in touch with them. Assuming they’re not going to listen to this.
Tracy (23:59):
Who is buying Swedish Fish flavored Ghost Energy drinks, and I think there's like Sour Patch Kids and a bunch of different things like what adults are drinking this.
Joe (24:11):
So Ghost is a different brand.
Mark (24:13):
These are different brands. Ghost is at least minority owned by Anheuser-Busch and C4, which is minority owned by Keurig Dr Pepper. Each of those brands have partnerships. They have license agreements with candy companies in the case of Mondelez's and M&M’s, Wrigley, Mars.
Tracy (24:31):
Please tell me there aren't M&M’s flavored energy drinks.
Joe (24:33):
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I’m totally up for trying any of these but I cannot bring myself like I'm sort of a glutton. I have yet to bring myself to try the Skittles flavored. Does C4 make it? Who makes the Skittles flavor one?
Mark (24:49):
Skittles and Starburst are the two big ones.
Joe (24:51):
I can't drink that.
Mark (24:55):
It’s differentiation amongst consumers. I guess it's a hard thing to figure out exactly who's drinking that, it would suggest probably more of a younger consumer. I think it's interesting if you look at the growth of those brands, a lot of the growth is coming from those candy licenses. You know, who knows who exactly is drinking that. But yes, I think that's probably a good way to think about it. It’s probably not the same consumer as the Monster and the Celsius.
Joe (25:19):
But unlike with alcohol, you don't have to show your age to buy an energy drink, right?
Mark (25:22):
It depends on where you are in the world.
Joe (25:25):
But not in the US, right?
Mark (25:28):
Not in the US but there are limits, you know, the FDA has limited or has looked at the caffeine content, has looked at the other ingredients in there. This was a big deal 10 to 12 years ago when the CEOs of Red Bull, Monster, Rockstar were put in front of Congress to testify about the health of this and it all checked out.
But various governments, I think Canada limits the amount of caffeine. There are countries like the UK, which I think you can't buy it if you're under 18 so there are limitations. But I suppose telling an under 18 in the UK not to drink an energy drink just makes them want to drink it more.
Tracy (25:59):
Joe, we should do market research and go out to a couple convenience stores and ask them who is actually buying the candy flavored Ghosts?
Joe (26:07):
Who is buying the Starburst flavored? Ooh, I'll try it. You know, let's try it. I’ll try it one day. I’m just not ready yet.
Mark (26:14):
It’s a big can too.
Joe (26:16):
It’s a big can, yeah. The Celsius seems like it's part of, its differentiate. It's sort of like a slender, elegant can, whereas the other ones are sort of like these, like big in your face garish brands. It seems like Celsius is for refined, sophisticated people like myself and Tracy.
Tracy (26:32):
Who then spill it on their keyboards.
Mark (26:33):
We say this and the growth in all of these brands is just off the charts. You know, Ghost continues to just grow triple digits. C4 grows strong double digits. It's great.
Tracy (26:44):
So just on that note you know, I'm getting the sense that the product matters, you want to make something that consumers actually want to drink. The branding matters, you need them to be aware of it. The distribution matters because they have to be able to buy it from somewhere convenient probably. Can you give us an example of an energy drink that maybe petered out or was unsuccessful, just so we can sort of compare and contrast some of the things that matter here.
Mark (27:12):
Well, I mentioned Jolt, that was kind of the original energy drink, even if it wasn't called that at the time. I think it was just a little bit before its time this idea of selling a super caffeinated carbonated soft drink. Five Hour Energy is a shell of its former self from 10 to 12 years ago.
Tracy (27:26):
Oh, I completely forgot about that.
Mark (27:28):
And you've had a whole bunch of smaller brands. You know, Coke had tried, Pepsi had tried, there was a whole bunch. SoBe if you remember that brand.
Tracy (27:36):
SoBe, yes.
Mark (27:38):
There's just a whole bunch of those little brands that they've tried and failed. It’s interesting [that] these big companies are really good at the distribution side [but] they’re sometimes less good at innovating original products. And so with the energy drink category, it became a while ago, if you can't beat them, distribute them.
So in the case of Coke and Pepsi, they tried this, this probably would've been a better conversation 15 years ago. But ultimately the reason why they went out and bought or did partnership agreements is because these smaller brands tend to move a little bit faster than the big companies. They can innovate faster; you don't need as much market research to get the product to market and so they can do just amazingly different things than some of the bigger companies. The bigger companies can push the product through the distribution system, and everybody wins.
Joe (28:24):
So is there more room for more upstarts? I mean, you look at a chart like the Celsius chart and I'm sure it has all kinds of entrepreneurs, and you know, maybe we'll come up with an energy drink aimed at people working in the media, or maybe we come up with an energy drink to nail skateboarders or something. Whatever it is, there’s some demographic or like eSports players or whatever it is. Like if someone has a new idea for a brand or a new flavor, what do they do? What's the next step? Is there capacity to take on new brands? Like what is the battle?
Mark (28:55):
The growth of the category, and we're talking specifically about energy here, but you could probably make the same argument for a lot of new age beverage brands. There's a capacity to add energy drinks to shelves because the consumers want to buy it. They want to try all the products and you can figure out if it works later. And so you start small, and you move up the distribution food chain, right?
You've got a lot of local distributors that aren't named Anheuser-Busch or Coke, and they're always looking to get in stores and so you can try to figure out how you get the product out there. Go to a mall if people still go there and sample the product, parking lots of grocery stores, wherever it may be but sampling, you can do athletes event sponsorships, things like that. Get the awareness out there a little bit. You have a different value proposition or a different functional proposition of the product. Get on the shelf in a few markets and figure out how the repeat purchase looks like.
If it's doing well, you move on to bigger distributors, it can give you more geographic reach, and so forth and so on. Obviously, it starts with just a product that has a little bit of a differentiated positioning or maybe a different packaging differentiation, whatever it may be. But sure, there's opportunities all the time. Think about disruption in the energy spaces we talked about, there's so many brands out there now. Think about isotonic like sports drinks, Body Armor didn't exist how many years ago and now it's really big brand.
Tracy (30:10):
What's the biggest disruption threat to the energy drink space? Like what would be the thing that would make you have to rush out and I guess rewrite all of your research?
Mark (30:23):
I don't know if I've ever actually thought about that. I assume it will just continue to grow forever, right?
Joe (30:28):
Just assume it'll grow forever.
Tracy (30:30):
I’m sure that's a much healthier attitude to take.
Mark (30:32):
I think one of the big things that, knock on wood, has come and gone is the regulatory side of this. I think if we all figure out these are bad for you in a really bad way, but clearly the FDA has looked at this and that's not the case. I think maybe it's evolving taste. What's the next iteration of this? Can you make a truly healthful energy drink that people want to drink? Is there a new category we're not thinking about, new ingredients that potentially work together that give you the same effectiveness in different forms?
But I feel like the product works because it delivers on what it's supposed to deliver on. And so at the end of the day, I think if people like the taste of it and you want the caffeine and you need to do more stuff in the day, you're going to keep drinking an energy drink. The question is, what brand are you going to drink?
Joe (31:19):
Another question I have about the product creation is like, let's say Tracy and I had an idea for a brand, we came up with a cool looking can and a cool looking name and figured out the demographic that we wanted to target. Do we actually need to be in the business of creating the liquid itself or are there third-party companies that would like to handle that? You work with them [and say] we want something tangerine and marshmallow flavor.
Tracy (31:46):
Pumpkin spice.
Joe (31:47):
Pumpkin spice. Like are there third-party companies that we don't know their names that sort of like do the actual creation of the liquid side?
Mark (31:54):
Yes, that’s the short answer. I mean, there are lots and lots of companies behind the scenes that will help you from idea to shelf. There are flavor and fragrance ingredients companies that create the flavor. There are co-packers as they're called, who produce the products for you. You put it in a warehouse, you put it on a truck, and you put it on a shelf. So yes, there's lots of different ways if you wanted to get a product to market that you could do that.
Tracy (32:22):
I just have one more question, which is kind of where does this all end? Like, what is the end of the energy drink boom? And I know there's a lot of saturation in the US right now, but are we seeing more pickup, for instance, in international markets?
Mark (32:37):
From a US standpoint, the growth continues to be phenomenal as I mentioned, probably better than I think anybody had thought. And so, you know, the question is how big can the category become over time? And I guess the law of large numbers at some point catches up to the category but I could've would've said that five, 10, 15 years ago, and here we are. I think, you know, the profitability piece continues to push the retailers to sell it. I think the consumers continue to want to buy it. So domestically it seems like we continue to go. International is the big opportunity at this point. Monster is just an example, 40% of their business is international. That’s a really big number at this point, I think you’re talking almost three billion of revenue.
Tracy (33:20):
Are they taking share from Red Bull? Because Red Bull is always the one I think of as international.
Mark (33:24):
They’re taking insane amounts of share from Red Bull outside the US. In the US, Monster and Red Bull are seeding shares a lot of the brands that we're talking about. But outside the US, Monster’s growing like a weed partly through the benefit of Coke distribution, partly through innovation, partly through just increasing shelf space, brand awareness, a lot of the athlete event sponsorships that they do but they've done it phenomenally well. The question is, can it be 70, 80% international at some point, maybe.
Celsius, not surprisingly, has looked at what Monster has done outside the US, and they've started talking about international plans, probably in part or largely through the Pepsi system because of the relationship they have in the US. So that'll be a very interesting thing to watch over the next several years as that develops. There are some energy drink brands outside the US but largely in these international markets. It's a Monster and Red Bull game and Celsius I think can have success in trying to do what they've done in the US, which is that same older consumer, different positioning of the product and create more category growth over time.
Joe (34:27):
Mark Astrachan, thank you so much for coming in. We'll have you back in two and a half years [to talk about] whatever the next brand is. Is there one other brand that we should look out for? Are there any other publicly traded ones?
Mark (34:41):
Not of size.
Joe (34:43):
All right. Well thank you so much for coming back on Odd Lots.
Mark (34:45):
Absolutely, thanks for having me.
Joe (34:47):
That was great.
Tracy (34:48):
Thanks Mark, that was fun.
Mark (34:49):
I can't believe you took down your keyboard.
Joe (35:04):
Tracy, should we start the pumpkin spice? I think I sound jittery. I think I actually may have had too much caffeine. I feel jittery right now. I think I overdid it today.
Tracy (35:12):
We should white label our own energy drink. I think that'd be fun.
Joe (35:16):
It would be a really fun project or at least see what it entails. We could get, like, you know one of those AI image generators to come up with a name or come up with a brand and then like build this whole thing around it and then actually see what it would take to get this sort of liquid made and go to the cannery. It would be a fun project.
Tracy (35:35):
I feel like the most difficult thing to do and the most crucial thing to do would be to get that distribution deal with a Coca-Cola or an Anheuser-Busch or something like that. I feel like that’s really what you need for success.
Joe (35:50):
Neither of us could talk today, I think we should just wrap it up because I think I'm just so over-caffeinated.
Tracy (35:56):
The other thing I was thinking about was Mark's point about one of the reasons this market is growing is because people are tired, and they need energy to do stuff. It kind of made me think about how self-medication is just so much more accepted and endemic today than it used to be. And I was thinking, I clearly have had too much caffeine, but I was thinking about what would be the ultimate disrupter to the caffeine segment or the energy drink segment? What if you got like an Ozempic-type thing for energy? I guess it's called Adderall. But what if you got something like that, that completely came out of nowhere and just made everyone energetic?
Joe (36:40):
So the one thing that we didn't bring up in the conversation, but what I've noticed is that more and more in Manhattan, I'm noticing on the shelves at bodegas, various, frankly, weed drinks. Whether it's THC or CBD, like the CBD infused ones but I'm seeing THC ones, and I don't know whether they're hemp infused or like actual marijuana, but clearly that is a category that I'm starting to see more and more on the shelf in Manhattan. I'm not entirely clear what's totally being legally distributed, etc., but it sort of feels like, you know, to your point about self-medication, it's like you have your Celsius in the morning.
Tracy (37:27):
And then your THC drink in the evening?
Joe (37:28):
You're like super jittery, right? Like, you're super jittery and how do you get to sleep? Well, then you have your opposite drink at night that sort of mellows you out. So I wonder if that's going to be a category to watch for all these companies.
Tracy (37:42):
Interesting. Well, shall we leave it there?
Joe (37:46):
Let’s leave it there.