David Rolfe of Wedgewood Partners Comments on Monster Beverage Corp
Branding and innovation are both extremely important elements to Monster's consistently superior ROIC generation, relative to a competitive field that includes offerings from such branding masters as Coca-Cola and PepsiCo. Monster's early entrance into the US energy drink market in the mid 1990's coincided with its rival Red Bull's entrance. The latter was the first energy drink to reach critical mass on an international scale but, importantly, implanted the idea of beverage functionality into the minds of consumers around the world. This functionality continues to be a defining element for this category and typically includes twice as much caffeine per ounce relative to conventional carbonated soft drinks (CSDs), in addition to supplements such as taurine and B-group vitamins. This energy boost continues to command a handsome premium on a per-ounce basis, relative to CSDs, as an 8.3 ounce can of Red Bull retails for around the equivalent of 35 cents per ounce, while Monster Energy is about half of that and CSDs closer to about 5 cents per ounce.
Now, we recognize that competing on pricing alone is a very poor long-term strategy, however, Monster Energy's large discount to Red Bull dates back, effectively, to the Brand's inception, circa 1997, when Monster's management recognized the enormous pricing power that Red Bull exhibited relative to CSDs. However, instead of offering a similar tall and slim 8.3 ounce form factor, Monster chose to offer a much larger and more ostentatious 16 ounce can, but for the same price as an 8.3 ounce Red Bull - effectively 50% cheaper. Monster Energy's new form-factor and discount was instrumental for driving visibility as the Brand quickly gained critical mass at the expense of (and passive abetment from) a more established rival. Over the past 10 years, Monster Beverage has sold more than 8 billion cans of Monster Energy, at the same time, several rivals, that include PepsiCo and Coca-Cola, have mimicked Monster's larger form factor and pricing strategy, but with unit sale results that are a small fraction.
Monster's form-factor and pricing strategy were pioneering elements to the energy drink category, however, the Company continues to meticulously curate the Monster Energy brand by exclusively focusing on unconventional marketing mediums and innovative offerings. For instance, through the first 11 months of 2012, new products drove almost one-third of Monster's US unit growth. The Company recently launched a noncarbonated, low-carb, energy drink line, Monster Rehab, that includes tea-based and noncitrus flavors, and has quickly become one of the Company's most successful products, we estimate generating almost 10% of US gross revenues during 2011, after launching in February of the same year. Further, Monster's brand awareness is cultivated through non-traditional mediums, with, we estimate, less that 10% of the Company's marketing budget dedicated to conventional mediums such as radio, television, newspaper and online. Most of the Company's marketing focus is on audiences of unconventional and emerging sports such as motocross, BMX racing, snowboarding, skiing, Formula 1 and Professional Bull Riders. This is in contrast to many of Monster's rivals that typically apply more conventional methods to their marketing efforts.
We think that there is ample room for growth as the Company's sales represent less than 25% of the US energy drink market, yet Monster recently became the market share leader in the US, in terms of units sold. Outside of the US, there is a very large, untapped market where in many countries. Currently, about 20% of Monster's gross sales are generated outside of the US. Despite having populated international countries for an average of about 3 years, Monster has already generated unit sales that are a quarter of Red Bull's, while Red Bull has over 20 years experience in international markets. We think Monster's rapid market share take is a testament to the international portability of the Brand and the market's ability and willingness to support two large players, many years into the future.
From Wedgewood Partners' fourth quarter letter.