Activity in the energy drink market could pick up after a recent investment and distribution deal between PepsiCo Inc (NYSE: NASDAQ:PEP) and Celsius Holdings Inc (NASDAQ: CELH). The deal could help Pepsi make up for losing distribution of Bang, but also creates the question of what’s next for rivals Coca-Cola Company (NYSE: NYSE:KO) and Monster Beverage Corporation (NASDAQ: NASDAQ:MNST).
What Happened: PepsiCo announced a long-term distribution deal with Celsius recently. The partnership makes PepsiCo the preferred distribution partner globally for Celsius, and also sees the larger drink company making a $550 million investment in Celsius. Pepsi will receive convertible preferred stock and have an estimated 8.5% stake in Celsius.
The deal between PepsiCo and Celsius comes after Pepsi parted ways with distributing Bang, a growing energy drink brand. Stifel analyst Mark Astrachan pointed to Pepsi potentially buying out Monster or Celsius at the time the Bang deal was terminated.
“We view the announcement as positive for the largest energy drink brands as transitioning distribution is likely to be quite disruptive and could hurt shelf space as Bang’s total distribution points increased 50% under PepsiCo’s distribution,” Astrachan said at the time.
The analyst said PepsiCo could double Celsius’ current distribution and help with international expansion. Celsius was listed as the fourth-largest U.S. energy drink brand at the time, with a 4.1% market share.
Pepsi’s market share without Bang was seen at around 5.5% and Bang was listed at 6.4%.
The deal from PepsiCo is drawing parallels to one created years ago between Coca-Cola and Monster, and could be the precursor to increased investment by Coca-Cola.
Related Link: PepsiCo Isn't The Only One Bullish On Celsius: This Analyst Explains Why It's A good Bet
Why It’s Important: A filing from Constellation Brands Inc (NYSE: NYSE:STZ) recently confirmed a rumor from last year that the company explored a merger with Monster.
The new deal between Pepsi and Celsius could make things harder for other energy drink companies, given PepsiCo’s massive distribution network and its power to push for shelf space with bartering power of its beverage and snack brands.
Monster CEO Rodney Sacks mentioned competition in the energy drink sector on the company’s recent earnings call.
“There will be a lot of fighting going on, you have all of these sort of performance brands basically fighting for some more shelf space, and obviously we will do the same,” Sacks said.
The Pepsi deal with Celsius could also lead to increased talks of Coca-Cola acquiring Monster outright, a company in which it owns a 19% stake along with a distribution partnership.
Forecasts point to the U.S. energy drink sector hitting $20 billion by 2025, or nearly double the total from 2015.
Acquiring Monster could help Coca-Cola increase its market share in energy drinks, but more importantly, it could potentially give it a backdoor way to play the alcoholic beverage market and the growing hard seltzer sector.
In the fourth quarter of 2022, Monster Energy will release its first alcoholic product.
“Beast Unleashed will leverage Monster’s brand equity, while carving out its own unique space in the beverage alcohol sector and will be distinguished from the many hard seltzer brands that have become so ubiquitous over the last several years”
The company plans to leverage alcohol to grow its business going forward.
“Our alcohol innovation pipeline is robust, with a number of additional innovative product lines currently under development”
Up until now, Coca-Cola has remained very hands off with alcoholic beverages in the United States. The company signed deals with Molson Coors Beverage (NYSE: TAP) to create alcoholic versions of Topo Chico and Simply Lemonade. The company also partnered with Constellation Brands on an upcoming alcoholic version of Fresca.
Coca-Cola also partnered with Brown-Forman Inc (NYSE: BF/A)(NYSE: BF/B), the owner of the Jack Daniel's brand, to launch a ready-to-drink canned version of the popular alcoholic “Jack and Coke” beverage.
An acquisition of Monster ahead of the company’s alcoholic beverage launch could give Coca-Cola a new way to tackle the alcoholic beverage market. The company could even look to Molson Coors as a distribution partner for its alcoholic beverages, or consider a joint venture with the company.
Other Targets: If Coca-Cola or Constellation decides to go a different route in the energy drink space, there are several fast rising companies. This includes ZOA Energy, which counts The Rock as a co-founder.
ZOA expanded into the pre-workout supplement category this year and also had a promotional partnership at Comic-Con with the upcoming Warner Bros Discovery (NASDAQ: WBD) title “Black Adam” starring The Rock.
There is also Ghost Energy, which like Celsius has seen a strong growth profile in recent months in the energy drink space.
C4, owned by Nutrabolt, counts Kevin Hart as an investor in the company. C4 is exclusively distributed by Molson Coors.
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