Narrow-Moat Monster Poised to Expand Volume With Innovation Pipeline and Coca-Cola Alliance

Equity Analyst

Dan Su

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Although not the pioneer in energy drinks, Monster has earned its perch in this attractive category through innovations that resonate with consumers and effective marketing that keeps its core brand top of mind. The long-term distribution partnership with wide-moat Coca-Cola, effective since 2015, further advances Monster’s competitive standing, affording the firm impressive distribution breath and product availability that is hard to match by rivals. As such, we award a narrow economic moat rating for Monster. 

We see Monster as remaining well positioned to capitalize on favorable energy drink demand in the coming years, thanks to a sharpened focus on user activation and engagement by expanding consumption occasions and adding better-for-you options, including zero sugar versions of its classic recipes and plant-based drinks. In addition, we expect Monster’s efforts to reach more untapped consumers in vast emerging markets across Latin America and Eastern Europe to garner stronger support from the Coke system, now that Coca-Cola has scrapped its own energy offerings following a lackluster response. Monster has a two-pronged strategy in place, maintaining a premium positioning for the core Monster trademark in the modern retail and convenience channels, while rolling out Predator and Fury brands at more affordable price points to tap consumers not as well-heeled as the traditional Monster demographic. We believe the Coke system’s close ties with the traditional trade will be particularly helpful to this affordability endeavor. 

Despite our sanguine view, Monster’s growth outlook is not without risks. Regulatory scrutiny and administrative restrictions on caffeine content and marketing constraints remain a threat to Monster’s brand image and volume demand in North America and Western Europe. Competition ferocity is on the rise as well, as beverage giant wide-moat PepsiCo brings strong tier-two energy brands onto its own distribution network, while various emerging brands target energy drinkers that look for new fares. That said, we believe Monster is poised to continue thriving thanks to an advantaged competitive position and management’s strong execution.

Business Strategy & Outlook

We believe Monster Beverage has carved out a narrow economic moat, thanks to strong brand affinity in the energy drink category and extensive distribution reach through a long-term partnership with the Coca-Cola system globally. The brand intangible-driven moat has helped the firm deliver returns on invested capital (including goodwill) that exceeded our estimate of its 7.5% weighted average cost of capital over the past 10 years, and we project excess investment returns to continue over the next decade. That said, Monster’s narrow focus on energy drinks (which represent a low-single-digit percentage of overall soft drink volume), regulatory headwinds, and uncertainties surrounding the ultimate renewal of the Coke distribution agreement in 11 years, combine to constrain our confidence in the firm’s ability to deliver excess returns for more than 20 years. We therefore cap our rating at a narrow moat. 

Monster’s intangible asset-driven moat is premised on the brand equity associated with its namesake Monster trademark. Although launched 15 years behind energy drink pioneer Red Bull, the Monster brand has amassed leading volume share globally (18% in 2023 versus 14% for Austria-based Red Bull GmbH, according to Euromonitor). And in its core North America market, where Monster generates two thirds of its revenue, the brand holds a whopping 44% volume share, far outpacing Red Bull at just 24%. We attribute this to Monster’s constant stream of innovation that resonates with consumers and a series of high-profile sports sponsorships, including Nascar and MotoGP World Championship, that serve to keep its brand top of mind with consumers.

We see structural factors in the $78 billion global energy drink category that are conducive to Monster’s brand equity. Favorable volume trends (averaging 6% in the US over the past decade, versus 2% in the overall soft drink sphere) fueled by demand from busy consumers looking for a quick and convenient energy boost have enabled top brands like Monster to increase sales and brand awareness with more productive spending in advertising and marketing. Based on our calculation, each incremental dollar that Monster spent on advertising and marketing drove $13.10 in increased revenue on average over the past five years, ahead of its larger nonalcoholic beverage peers Coca-Cola ($12.00), PepsiCo ($11.40), and Keurig Dr Pepper ($10.20). Moreover, brand differentiation is largely based on perceived functional benefits (such as mental alertness and improved energy level) and to a lesser extent flavor profiles, which underpin consumer loyalty and repeat purchase frequency. As such, private-label penetration is low in energy drinks, at low single digits versus the midteens or low-20s common in the domestic consumer goods sphere. As a result, Monster has been able to grow volumes at midteens rates annually over the past five years while keeping prices flat. Even though the firm does not publish retail-level product pricing information to facilitate an analysis of pricing trends, we’d point to Monster’s high gross margins (averaging 56% over the past five years, comparable with Coca-Cola at 60% and PepsiCo at 54%), as a strong indication of consumers’ willingness to pay a premium. 

We also view Monster’s success over the years in adding new product lines and pricing ladders under the Monster banner as evidence of its brand prowess in engaging and maintaining its loyal customer base. Ten product lines have been added to the Monster franchise over the past 20 years, including Monster Super Fuel (containing magnesium and electrolytes for workout enthusiasts), bubbly Juice Monster with various fruit flavors, non-carbonated tea-flavored Monster Rehab, and coffee-infused dairy-based Java Monster. We believe these line extensions have expanded consumption occasions and created more buzz for the existing consumer community while broadening the palate appeal to convert new customers to the trademark in the US and internationally. 

In addition to the Monster trademark, we see the firm’s distribution agreement with Coke as the second pillar to our economic moat rating. Effective since 2015, the initial 20-year partnership has essentially made Monster the exclusive energy play in the Coke system, giving Monster invaluable access to Coke’s extensive distribution footprint in the US and internationally, while enabling Coke to benefit from Monster’s strong volume growth in terms of distribution density to help offset stagnating trends in Coke’s core soda business. The tie-up has accelerated Monster’s share gains, enabling the firm to further distance itself from Red Bull in North America and to narrow the gap materially in Western Europe. According to Euromonitor, Monster’s global volume share received an immediate lift following the agreement, expanding to 17% in 2016 (compared with 13% in 2014), and continued to tick up steadily in the following years to reach 18% by 2023. In comparison, Red Bull GmbH’s volume share has stagnated at around 14% over the past decade, which we attribute to conservative product and marketing strategies from the family-owned business. Although Coke launched energy drinks under its own Coke trademark in 2020 in an attempt to go it alone, the product line was discontinued within 18 months due to weak performance. We believe Coke’s short-lived endeavor has reaffirmed the strength of the Monster franchise, and we expect the Coke system to reinforce its commitment to the leading energy drink brand. 

Aided by the Coke system, the Monster products are now sold in over 140 countries and territories around the world, affording brand recognition and product accessibility that is hard to match by its energy drink peers. Over the next 10 years, we think the Coke relationship should deliver more volume upside, particularly in emerging markets such as Latin America, where energy drink consumption volume remains low (at 8% of global volume, versus a 14% share in the overall soft drink aisle). These growth initiatives, which dovetail well with Coke’s strategic priorities of tapping consumption upgrade tailwinds in these regions, should drive another leg of volume growth for Monster, supporting our mid-single-digit volume projection for the firm (ahead of the low-single-digit rate we forecast for the overall nonalcoholic beverages). 

As energy drinks remain a niche in the broader soft drink space (low-single-digit volume share), we don’t think Monster benefits from a cost advantage given its negligible scale relative to beverage behemoths such as wide-moats Coke and PepsiCo. Monster has little bargaining power in sourcing ingredients (sweeteners, vitamins, and flavors) or packaging materials (aluminum, PET, and paper cartons) given the substantial overlap with the purchasing baskets of much larger beverage peers. Also, with packaging and distribution outsourced to third-party copackers, bottlers, and distributors, Monster has limited wiggle room in negotiating reduced per unit costs. Moreover, its advertising and marketing budget of approximately $550 million in 2023 (8% of sales) is a fraction of the $5.0 billion at Coke (11%) and $5.7 billion at PepsiCo (6%), putting the firm at a disadvantage in bidding for sports and music event sponsorships or securing a popular time slot in broadcast media campaigns. 

While we see strong evidence of brand intangibles and extensive distribution via the Coke partnership that underpin a durable competitive position, our confidence in Monster’s ability to deliver excess investment returns for over 20 years is constrained by the firm’s narrow focus on the energy drink category, ongoing regulatory scrutiny, and potential restrictive measures for energy drink makers (such as reduced caffeine content, marketing venue restrictions, or even minimum age requirements for purchase). Furthermore, the Coke distribution agreement is up for renewal in 11 years (2035), which introduces further uncertainties around the continuity of the partnership and the economic terms. As such, we view a narrow economic moat as appropriate for Monster.

Narrow

Economic Moat

Monster Beverage

Monster Beverage Corporation is an American beverage company that manufactures energy drinks including Monster Energy, Relentless and Burn.

Monster

NOS is an energy drink sold in 16 and 24oz cans. The drink was also once distributed in a bottle designed to look like a NOS (Nitrous Oxide Systems) cartridge. This was discontinued in 2015. Formerly a property of The Coca-Cola Company, it is currently produced by Monster Beverage and licensed by Holley Performance, which owns the trademark.

Monster Beverage Corp. is a holding company, which engages in the development, marketing, sale, and distribution of energy drink beverages and concentrates. It operates through the following segments: Monster Energy Drinks, Strategic Brands, and Other. The Monster Energy Drinks segment sells ready-to-drink packaged energy drinks to bottlers and full-service beverage distributors. The Strategic Brands segment sells concentrates and beverage bases to authorized bottling and canning operations. The Other segment consists of certain products sold by its subsidiary, American Fruits and Flavors LLC to independent third-party customers. The company was founded on April 25, 1990, and is headquartered in Corona, CA.

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