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Coke Builds Up its Caffeine Kingdom

22 August 2014 in Trading Ideas

Why stop at soda – especially when the grip your ubiquitous product has had on the US citizenry may be slipping.

Coca-Cola, fresh off its February purchase of a 10% stake in Green Mountain Coffee Roasters for $1.25 billion, said last week it will shell out $2 billion for a distribution and product partnership with energy-drink maker Monster Beverage that will ultimately give Coke a 16.7% stake in Monster.1

Behind the deal’s moving parts is a bid by Coke to place another big bet on a category that is growing faster than soft drinks overall.

On news of the deal, Monster’s shares jumped 30%. The stock also has a 22.3% weighting in the Caffeine Fix motif, which is up 7.7% in the past month. During that same time period, the S&P 500 has increased 1%.


So far in 2014, the motif is up 18%; the S&P 500 has returned 8.9%.

The Coke/Monster deal could have benefits for both sides. Between 2009 and 2013, Monster doubled its revenue. However, about 80% of the company’s top line is derived from the US, where its brand and Red Bull dominate.2

According to FT.com, analysts at Stifel believe that through the Coke partnership, Monster’s international market share could double to more than 15% — that could be worth another $300 million to $400 million in additional operating profit every year.

The market abroad could be especially key, given that Euromonitor reported that energy drink volume sales growth slowed to 8% in 2013, against 18% in 2012, hurt by health and regulation concerns, FT.com said.

Still, even 8% growth is likely more appealing – and apparently worth a $2 billion gamble – than the falling organic sales that analysts expect for Coke in 2014, which would mark its second straight years of declines. In its main North American market, where consumer choices for healthier options appear to be a factor, Coke is trying to fill that gap by raising prices and changing its marketing.

The other objective for Coke appears to be edging into faster-growing categories. Consumers still want to be wired, it seems – they’re just changing their ways of getting there.

1Miriam Gottfried, “Coke Isn’t Paying a Monster Price,” wsj.com, Aug. 15, 2014.

2The Lex column, “Energy drinks: Monster mash,” ft.com, Aug. 17, 2014.