Power to the People: Energy Drinks Reach Out to Low-Income Consumers

March 1st, 2017

Removing the effects of inflation and exchange rates, soft drinks unit prices fell globally in most categories during the review period. One category saw its unit prices fall much more dramatically than the rest though – energy drinks, the price of which fell by USD0.41 a litre between 2011 and 2016. The main reason is that energy drinks, long one of the most expensive soft drinks categories, began to filter down the income spectrum to reach a new class of consumers who have the same needs for on-the-go energy to power them through the day as wealthier consumers, but have previously been underserved by the major brands in the category.

The increasingly hectic pace of modern life affects all income segments, but in many places energy drinks are still priced too high to be a realistic option for working-class consumers. Yet some companies are noticing the opportunity and are creating new, value-oriented energy drinks to appeal to these previously neglected consumers. Some, including Peru’s Aje Group and Colombia’s Quala, have been rewarded quite handsomely for it.

Many large brands are unaffordable for low-income consumers

More than any other brand, the modern energy drinks category has been shaped by global market leader Red Bull. Red Bull is headquartered in Austria, which is also the country with the highest level of consumption globally. Austria, however, is a very wealthy market where the high price of Red Bull is not a major issue for most consumers. A litre of energy drinks will cost the average Austrian 1% of their yearly soft drinks budget of USD260. This is typical for a developed market, where it is unusual to see the price of a litre of energy drinks rise much above 3% of total annual soft drinks expenditure.

However, in many developing markets, that number spikes much higher. This is particularly acute where imported brands like Red Bull dominate. In markets where this happens, the working class is usually priced out and consumption is restricted to groups like wealthy partiers, students at elite schools, and tourists. While there are exceptions, like Thailand, overall the category remains very expensive for the average consumer in much of the developing world.

Regular energy drinks consumption is still largely unaffordable in much of the developing world

Source: Euromonitor International

The Aje Group turns up the voltage in Peru

Nowhere in the world did the price of energy drinks fall more during the review period than in Peru, where the Aje Group rolled out the low-cost Volt to challenge international companies like Red Bull for control of their home market. It was a smash success, not because most Red Bull drinkers defected to Volt, but because Aje largely created a segment that previously did not exist in Peru: value-oriented energy drink consumers. While Red Bull’s volume share tumbled from 80% in 2011 to just 16% in 2016, volume sales were actually fairly stable, falling only once in that period and ending up higher than they began in 2011. Volt’s astounding growth came nearly entirely from consumerswho were not previously buying energy drinks.

Energy drinks sales in Peru 2011-2016

Source: Euromonitor International

Volt was especially embraced by the working class. It has become an iconic beverage for taxi drivers looking for a way to power through a long shift of searching for fares (street vendors who sell Volt are well aware of this, and often frequent intersections to sell to drivers stopped at stoplights).

Although Peru is the most dramatic example of this occurring, it is not the only country to see a considerable decline in unit price caused by skyrocketing sales in the economy segment. In nearby Colombia, Quala SA’s Vive 100 was introduced in 2012 and was marketed at Colombia’s growing low-to-middle income segment. It now holds 67% of the market by volume thanks to this strategy. Like in Peru, previous market leader Red Bull saw only a slight dip in volume sales despite considerable share loss.

What other countries might be on the verge of a breakout?

The underlying demand drivers of energy drinks exist virtually everywhere around the world. There are few countries worldwide where the pace of life is not speeding up under the pressure of such forces as urbanisation, industrialisation, and digitalisation. While that suggests that a value-oriented energy drinks segment has potential in most markets, some have more potential than others. The ripest markets for disruption are those which currently combine a limited brand selection (meaning that the brands that do exist enjoy a great deal of pricing power) with a narrow, wealthy consumer base. Such markets contain large amounts of people who could benefit from energy drinks, but are unaware of them or view them as irrelevant to people of their social class.

In 2011, that is what Peru looked like. The immature energy drinks market had a unit price of USD9.29 in constant terms, equivalent to 25% of the average Peruvian’s soft drinks spending in a year. What consumption was occurring largely consisted of wealthy consumers purchasing expensive imported brands. Now the situation is very different. The unit price of a litre of energy drinks is now just USD3.35. That represents only 8% of annual Peruvian soft drinks spending, much closer to what is seen in developed markets with mature energy drinks categories. At those prices, the consumption base has been able to expand considerably. Wealthy Peruvians are still drinking imported energy drink brands at roughly the same rate as before, but they no longer represent the totality of consumption. Something similar occurred in Colombia, where prices fell from USD6.64 to 3.10 in the last five years.

What other countries might be ready to follow in Peru’s footsteps?

The next great breakout market, then, will probably look much like Peru or Colombia once did, with high unit prices, low per capita consumption, and limited brand options. Developing markets that currently have all of these attributes include Iran, Brazil, and Croatia.

Developing markets with high unit prices for energy drinks

Source: Euromonitor International

Note: Excluding Venezuela

One interesting possibility is Egypt, which actually saw a substantial increase in energy drink prices in recent years because of the impact of currency devaluations. Per capita consumption is very low (holding steady at about .02 litres per capita) and Red Bull dominates the immature market. The young and wealthy represent virtually the totality of current consumption. The income structure of Egypt, however, is relatively similar to that of Colombia, suggesting that Egypt may also have a large number of potential energy drink consumers who simply do not view the category as relevant to them at the moment. The Aje Group, purveyor of Volt, recently began operations in Egypt and although it is only involved in carbonates at the moment, it could attempt to replicate its successful Peruvian experiment here as well.

Income structures of Colombia and Egypt

Source: Euromonitor International

The important thing to keep in mind is that the transformation of the energy drinks market is not a preordained thing, whether in Egypt or anywhere else. It will require a brand (or multiple brands) to make a concerted effort to introduce a low-cost energy drink brand with distribution that reaches low-income consumers where they are (like Aje’s street vendors) and marketing that convinces them that this is a category that is relevant to them.

That tremendous potential exists is not in question. Energy drinks began as beverages for the working class in Southeast Asia and it is only after an Austrian named Dietrich Mateschitz visited Thailand and got the idea to sell an upscale energy drink brand in the West that it started to become the high-end category it is today. Thailand still boasts the developing world’s most advanced energydrinks market, with per capita consumption of 5.8 litres a year, comparable to that of Ireland, despite having only one-ninth of Ireland’s average income. Thailand may be a global outlier, but it is suggestive of the potential that exists in developing markets in this category.

Government intervention could present a major stumbling block

One major note of caution is a rise of developing world sugar taxes, which could hit this highly-sugared category hard. While a surcharge might not do much to change the purchase habits of the higher-income developing world consumers who are responsible for most of the category at the moment, it would pose a huge problem for brands targeting low-income consumers for whom even a small price hike would make a big difference. Regulation is also tightening in some places; several brands were pulled from the market in India after new government regulations regarding ginseng, and Saudi Arabia banned all advertising for the category in 2014.

Have a question or a thought to add? Leave us a comment below.

Matthew Barry

Matthew Barry is a Beverages Analyst with Euromonitor International specializing in global trends in non-alcoholic beverages. He is particularly interested in how economic growth and changing demographics are affecting the global beverage industry. His insights have appeared in such publications as The Wall Street Journal, Market Watch, and Beverage Daily, and he is a regular contributor to trade and industry publications. Matthew holds a degree in International Relations from Knox College and has been with Euromonitor International since 2015.

Popular Posts