Will an Energy Drink Ban Impact the Soda Market?
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Editor's Note: The original article stated the AMA would get behind a ban on energy drinks; this is incorrect. This article has been amended and Motley Fool apologizes for the error.
Shares of Monster Beverages (NASDAQ: MNST) fell recently as energy drinks continue to undergo scrutiny by government officials. The American Medical Association announced a discussion of a resolution to ban energy drinks for those under 18, leading many to wonder what would happen to these companies if the resolution was adopted.
Until recently, Monster was a great stock for investors, reporting a 6.5% increase in net profits for its first quarter. At that time, Monster held a 32.7% share of the market, beaten only slightly by Red Bull, which held 35% of the market.
Soda market down
The news was dismal for the soda industry earlier this year as energy drinks continued to push them to second place. When PepsiCo (NYSE: PEP) announced its quarterly earnings, sales were down for the third year in a row. Net income for the company was down $1.08 billion from $1.13 billion the previous year.
At the same time, sales of energy drinks have risen, jumping 14.3% in 2012. Including more caffeine than coffee, the drinks are especially popular with young people, leading to the health concerns making headlines today.
The concerns have become so prevalent that medical professionals and health organizations are now asking the U.S. Food and Drug Administration to regulate energy drinks. This comes on the heels of an increase in emergency room visits due to the drinks, says the Associated Press. For energy drink specialists like Red Bull, tight regulation or a full-out ban could spell the end. But for companies like PepsiCo, it might just be the push that consumers need to return to regular carbonated beverages.
Coca-Cola: Still on top
Not one to be outdone, Coca-Cola (NYSE: KO) released its Full Throttle energy drink in 2004. But the drink has never quite caught on like its competitors, holding only 1.28% of the energy drink market despite aggressive advertising.
The shift toward energy drinks doesn't seem to have phased Coca-Cola, however. Consistently one of the best-performing brands in the world, Coca-Cola sales have grown 10% over the past five years. Coca-Cola builds its brand by never relaxing its marketing strategy. The company continues to bombard the public with advertisements, with its ads becoming a part of American culture. As a result, Interbrand named it the world's most valuable brand in 2011.
Will energy drinks fail?
If a ban on energy drinks goes through, stores will be unable to sell energy drinks to consumers under the age of 18. Will this impact stock valuation? Earnings could decrease, since many energy drink consumers are under the age of 18; those consumers also are rarely the ones to do the household grocery shopping, however. It would not impact the college-age and twenty-something demographic of energy drink consumers.
Gas stations and vending machines may be the biggest change for energy drinks if a ban goes in place. With teens no longer able to purchase Monster, Red Bull, or Full Throttle while out on the town with friends, sales may be impacted.
In the meantime, Coca-Cola and Pepsi will still hold the market, as they have for more than a century. The beverage market may change over time, but these two companies always hold strong.
The stakes are high for Monster Beverage these days. The stock had been nothing short of a rocket, but recent developments have sent shares spiraling downward. Health scares sparked a number of investigations at the state and federal level into the energy drink’s role in several fatalities. With the company’s value slashed in half, investors are wondering whether Monster Beverage is a value or a bust in the fast-growing energy drink category. Find out now in The Fool's premium research report, which details all you need to know about Monster Beverage. Click here now to claim your copy and start reading today.
Stephanie Faris has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Monster Beverage, and PepsiCo. The Motley Fool owns shares of 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!