Beverage Troubles

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Although not terribly surprising, it looks like there is increasing reason for the Federal Government to look into the safety of so-called “energy drinks.” This is most obviously an issue for Monster Beverage Corp. (NASDAQ: MNST), but it has broader implications for the entire industry, at least with regard to developed markets. Thus, the industry's big players, Coca-Cola (NYSE: KO) and PepsiCo (NYSE: PEP), will also be paying close attention to the political calls for Federal Drug Administration action.

A Mature Industry
While consumption of soda and other beverages in less developed markets remains on the rise, soda is a mature market in the United States and virtually every other developed market around the world. Trying to find the next growth vehicle in these markets has been a perennial problem for the industry. Indeed, the big players have jumped on just about every drink fad as soon as possible to make up for limp carbonated beverage growth. The list has included such “hot” concepts as water (yes that was a big deal a few years back), tea, coffee, sports drinks (think PepsiCo's Gatorade, not energy drinks), and now the amped up versions of yesterday's Jolt and Red Bull.

In markets like Europe and North America, Coca-Cola and PepsiCo have really had to act more like a toothpaste company, continually reinventing and repackaging the same old thing to draw customers. Special “limited edition” cans and bottles, such as holiday designs, and reformulations of a soda with less sugar, using the newest sweeteners, easily call to mind the vast array of toothpaste options seen on store shelves. This is how mature, consumer oriented business work.

Taking Advantage of the Fads
However, when a hot new trend pops up, the big players are usually quick to join the bandwagon. They don't want to lose market share to a more agile competitor or appear to be missing key industry changes. While in-house product development often plays a role, acquisitions are a time honored way to gain access to these developing market niches. Most new drink products, however, don't come with the kind of baggage now trailing behind energy drinks.

Indeed, these drinks are infused with substances that increase the speed at which the body works by using high levels of caffeine and other ingredients. While this is probably harmless for most people, some are have difficulty handling the stress such a short-term burst of “energy” can have on one's body. Heart palpitations and anxiety aren't uncommon side effects. Normally, however, these body responses just lead customers to go back to their regular Coke and Pepsi options, maybe sticking to Mountain Dew as their over-the-top caffeine fix.

Getting Into Trouble
One interesting aspect of the current crop of high energy drinks, however, is the penchant that consumers have for mixing these beverages with alcohol. This isn't a new fad, as anyone who has had a Red Bull and vodka (you can substitute just about any alcohol in for vodka) can attest. The difference is that Red Bull isn't as potent as the current crop of energy drinks, like the privately held 5-Hour Energy brand. So, as the rare cases of death associated with these energy drinks mount, the call for increasing scrutiny also grows.

This is particularly bad news for Monster, which is almost completely reliant on this product category. The company's shares have fallen from nearly $80 earlier in the year to below $50 of late. While some of this may be due to the realization that this product category will mature just like every other one has, something investors sometimes take a long time to figure out, the health risks and very public cries for regulation have likely added to the drop.

MNST data by YCharts

Diversity is a Good Thing
While neither Coca-Cola or PepsiCo face the same risks as Monster, since both are larger and more diverse, oversight would likely dampen the prospects of what many viewed as a growth category. The end result would be less growth in mature markets, which while it isn't a good thing is not the end of the world. One outcome to watch for with Monster is the potential for that company to become an acquisition target. That's unlikely at current prices, but should things get worse before they get better, it isn't a far fetched possibility.

At the end of the day, this is more soap opera drama than material issue for the soda industry as a whole. However, it does point out the troubles this mature product has in developed markets. That said, investors would probably be better off sticking to Coca-Cola and PepsiCo, rather than sticking it out with Monster.


ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services recommend The Coca-Cola Company, Monster Beverage, and PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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