Energy Drink Sales Growth Running Out of Steam?

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Energy Drink Sales Growth Running Out of Steam?

By Barbara Grondin Francella

NEW YORK -- For the last few years, energy drinks have lit up the convenience store industry's packaged beverage category, boasting double-digit sales growth and unflagging profit margins.

While the energy drink category accounts for more than 18 percent of total c-store packaged beverage sales according to Nielsen Co. data, the powerhouse category is exhibiting signs of fatigue.

"Growth over the last several years has been explosive and at a certain point, that explosive growth is very difficult to sustain," Krista Faron, senior analyst, Mintel Research Consulting, based in Chicago told CSNews Online. "We are seeing a slowing pattern, but we're not at a plateau. We are still forecasting growth."

Energy drinks sales increased by 39.6 percent in 2006 and grew another 29.7 percent in 2007, according to Convenience Store News 2008 Mid-Term Forecast Study, released in August. The study projects that 2008 sales will only increase 19.9 percent.

Mintel is forecasting even more modest growth--15 percent--in energy drinks this year.

"It’s impressive growth for any other category—but for energy drinks, it represents a slowdown," Faron noted.

For the 52 weeks ending Aug. 9, 2008, sales of alternative beverages, a segment dominated by energy drinks, were up 16 percent compared to a year ago, reaching $3.7 billion, Nielsen Co. data revealed. Unit sales, however, rose a smaller 7.6 percent. (Energy shots are not included in these figures.)

"To expect 30- or 40-percent sales gains every year wouldn't be realistic," said Gerry Khermouch, editor, Beverage Business Insights. "But the question is how much is [the slow down caused by] maturity of the market, and how much is caused by the economic climate?"

Energy drinks are somewhat more susceptible to the economic downturn than other drinks, because a large percentage their loyal customers are blue-collar workers, specifically construction workers, Khermouch said.

"When big energy drink markets, like Southern California, see construction dry up, these workers aren't out buying anymore," he explained. "The largest channel for energy drinks by far, is convenience stores. Because people are driving less and [have less money to spend], they aren't in the stores as often. This summer, Coke and Pepsi executives were talking about a 10- to 15-percent decline in c-store traffic and more recently they were talking about 20- to 25-percent decline."

Still, for younger consumers, energy drinks are still a relatively affordable luxury, Khermouch said, noting there has been significant promotional pricing in some markets.

The discounts may keep energy drinks affordable in troubled markets, but in the past, energy drinks have held their retails in the face of much greater competition, which casts doubt on whether or not discounts are ultimately beneficial or needed for this beverage segment.

"We're seeing other channels discount energy drinks heavily now and some c-store chains have been for a couple years," said Phil Smallwood, category manager for ampm stores, BP’s franchised c-store chain based in La Palma, Calif. "The real question is will there be a breakout in terms of everyday price points? Will we have premium brands and value brands?"

Despite the pressure on price, lower-priced (but higher-margined) private- and controlled-label energy drinks have not been runaway successes, Khermouch noted. Last November, 7-Eleven unveiled Inked, a proprietary energy drink targeted at consumers with body art (specifically 18- to 40-year-old men and women.) Two varieties of Inked, priced at $1.99 for 12 ounces and produced by Cott, are packaged in cans designed to look like brightly colored tattoos. (7-Eleven declined further comment on Inked. It is still sold in many of its stores.)

Also last fall, Alimentation Couche-Tard's Circle K Southeast Division, operator of 366 convenience stores, launched the division's first wholly owned, proprietary energy beverage called GazZu, created in partnership with independent energy drink producer BooKoo Energy. The goal: appeal to all customers with a first-rate offering in a first-rate packaging.

"There are few food or beverage categories that have been immune to private label—beer and energy drinks are two I can think of," said Khermouch, who questions the wisdom of these private label products in this category. "The lack of success [of private label] is a sign of how brand-conscious and brand-loyal energy drink users have been. If you have a consumer who is happy or willing to pay a super-premium price for a Red Bull, Rock Star or Monster, why would you want to trade him down to a private label brand, even if there is nice margin there?"

In May 2007, BP plc introduced the private label energy drink Unbound, then later partnered with Hansen's Natural Corp., marketers of Monster energy drinks, to offer Unbound to other retailers, such as CVS drug stores. "We offer it as an alternative to the other brands," Smallwood noted. "Even if people are trading a Monster for an Unbound, the penny profit is more favorable with a private label."

Still, Khermouch said the future of private label energy drinks is up in the air. "Red Bull, in particular, has shown distributors evidence that the typical Red Bull purchaser buys another drink with Red Bull. If anything, the branded energy drinks are spurring other purchases," he said.

Despite the segment's slowing sales growth, the c-store industry remains well positioned to profit from energy drinks. A decade after energy drinks first hit the market, Khermouch is amazed mass merchants and wholesale clubs haven't grabbed a larger share of the business.

Indeed, compared to other products in the c-store cooler, the alternative beverages segment remains a clear winner. Sales of carbonated soft drinks, the packaged beverage category's leader, fell by nearly 1 percent to $8.45 billion in the 52 weeks ending Aug. 9. Unit sales were off 4.4 percent for the period.

Bottled water, the third-largest segment, is doing a bit better; it rang up more than $2.6 billion in c-store sales for the period, a strong 9.3-percent increase on unit sales growth of almost 4 percent. Also, sales of ready-to-drink iced teas rose 8.1 percent to nearly $1.07 billion, on a nearly 7-percent jump in unit sales.

However, sports drinks, an almost $2 billion category, saw sales rise 1.7 percent during the 52 weeks, but unit volume declined by a similar percentage. Sales of juice, a $1.8 billion segment, rose less than 1 percent, as unit volume dropped 3.1 percent.

"Energy drinks have been the catalyst for the entire packaged beverage category for the last five-plus years," Smallwood said.

Plethora of Products
With the segment forecast to hit nearly $5 billion this year, manufacturers looking for a piece of the action have flooded the market with new items. Last year, there were 187 product launches. Through August this year, there were more than 270.

At the NACS Show earlier this month, new energy drinks on exhibit included Power Trip, from a privately held Florida-based company that extols the health benefits of its energy formulation, and recently signed an agreement to take over worldwide sales and distribution for Hooters Energy Drink, as well as the Lance Armstrong-endorsed FRS Healthy Energy drink.

Also at the show, Coca-Cola announced it had reached a distribution deal with Hansen to distribution Monster energy drinks. "The deal broadens our beverage portfolio and provides more selection and one-stop shopping for c-stores," said Tiffany Stone, group director of small store commercialization strategy for Coca-Cola, which already sells Full Throttle, Nos and Rock Star energy drinks. (See "Coca-Cola to Distribute Monster Energy Internationally," by clicking here.

"As with any big trend, you see a flurry of new product activity," Mintel's Faron said. "We're seeing some launches from smaller categories, reaching out to very, very targeted audiences, with no long-term viability, or products mirroring others on the market, without even a lowest price point necessarily. Most of these won't be around in six months."

In an effort to expand the consumer base, manufacturers are introducing hybrids, including energy waters, teas, sodas and juices, often touting energy sources other than caffeine, including acai, guarana, green tea and other antioxidants and various vitamins.

"It's increasingly difficult to distinguish between functional drinks and energy drinks—the blurring is so pronounced," Faron said. "Ocean Spray's Cranergy is the epitome of hybrids, and likely where the energy drink category is going. But it probably doesn't matter to the consumer. They care more about taste and benefit—what category the drink falls into is probably secondary."

At ampm stores, cold vaults typically feature 30 SKUs, including a variety of drinks from segment leaders Red Bull, Rock Star, Monster, SoBe and AMP, according to Smallwood. He considers two things when selecting products: differentiation and marketing support.

"We need to believe the product will bring a new consumer to the category, instead of trading off the sale of another energy drink," he said. "Carrying around an energy drink is like a badge of honor. The brand, the label, the look is somewhat of a status symbol. Those drinks with the 'it' factor are a one-in-a-million deal. We're not taking a chance on too many new ones."

The story of energy drink sales at ampm is a tale of two coasts. "On the West Coast, where the market for energy drinks is more developed, we saw greater volume percentage increases in the past," Smallwood said. "It is a tougher market in the West now, though we are still selling more on the West Coast than the East Coast."

The typical energy drink consumer, whom Smallwood pegs at 16 to 25 years old, has been greatly affected by the rising cost of gasoline and other expenses, he said. "We're seeing frequency of purchase go down. If a consumer bought three or four energy drinks during the week, he may only be purchasing one or two. Also, we're seeing consumers purchase less expensive caffeine fix, maybe tea or a carbonated soft drink."

The result: lower transaction totals and less penny profit, he said.

Unexplored Opportunities?
It is little wonder, then, retailers and manufacturers are trying to broaden the consumer base. The number of consumers drinking energy drinks has grown, but the core consumer has remained the same: overwhelmingly young and male, Faron said. Thirty-five percent of teenagers drink energy drinks, compared to 19 percent in 2003. Nearly as many 18- to 24-year-olds do, up from 20 percent five years ago.

As more and more men consume energy drinks, the female market remains under-developed. The number of male drinkers rose 64 percent in the last five yeas. And while the number of female drinkers grew 74 percent, women are still a much smaller percentage of total energy drinkers. Almost 20 percent of men say they drink energy drinks, but only 10 percent of women do.

"Somewhere around two-thirds of American consumers don't like conventional energy drinks," Khermouch said. "They are put off by ingredients, because they don’t know what taurine really is or don't want all that caffeine or are put off by the macho positioning."

"So, manufacturers are tempting to go after those consumers, some with the healthier energy drinks with all-natural or other healthier energy agents or no-calorie or low-calorie. But what strikes me is no one has actually succeeded doing that. We don’t even know if this is a real segment. If someone wants a jolt of energy, they may be perfectly content with what is already out there, a cup of coffee or something else. There may be a whole category of people where energy drinks don't work for them."

Two big launches—Arizona Green Tea Energy and Glacéau vitaminenergy—which Khermouch originally figured would be shoo-ins, haven't fully ignited, he noted.

"A few years into trying to expand the consumer base, especially to women, there hasn't been a big hit. But maybe we are just waiting for a company to have an entry that cracks it."