Energy drinks entering a new phase of growth

Based on information collected by Euromonitor International, energy drinks is unlikely to return to growth levels of the past in their core markets of the US, UK, and Australia. Expansion to new markets, especially in Latin America and Asia Pacific, will need to become more of a focus for international brands.

As the major global brands seek geographic expansion to maintain their growth curves, they will necessarily raise the profile of energy drinks in different countries. This may in turn create opportunities for local manufacturers. The future for energy drinks may look different from what it is today but it is no less bright. However, getting there may not be an easy ride.

How We Got to Today

Energy drinks sales are highly concentrated in developed markets in North America, Australasia, and Western Europe. These areas are indicating a level of saturation and this is contributing to an overall slowdown in energy drinks sales growth. Momentum for the category here has probably peaked and year-on-year double-digit growth is unlikely to be repeated during the forecast period. Global energy drinks popularity is driven by the US, UK and Australia. Collectively these markets account for almost half the global volume of energy drinks, based on Euromonitor International data. In 2010, on a per capita basis, people in these core markets consume more than 10 times the amount of energy drinks than the rest of the world.

Energy Drinks Total Volume Consumption 2010

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Source: Euromonitor International 

While consumers in each of the core markets are heavy consumers of energy drinks, each market appears to be maturing at a different pace. Of the three core markets, consumers in the UK quaff the most energy drinks, on average. However, the UK appears to be settling into steady, though unspectacular growth. Over the past four years, the UK has experienced total volume growth of about 6% per year, on average.

The story in Australia is a bit different than in the UK. In Australia, consumers thirst for energy drinks shows no sign of abating. Total volume growth trends have actually increased for each of the past three years and 2010 total volume increased more than 20% vs. 2009. Clearly, the energy drinks category continues to excite the Australian consumer.

In terms of volume growth the UK may be steady, if unspectacular, Australia continues to demonstrate a dynamic category but the world’s largest market based on both revenue and volume, the US, is clearly slowing down from its torrid volume growth. Prior to the recession, energy drinks experienced phenomenal growth in the US, experiencing over a 34% compound annual volume growth rate from 2003-2008. Volume growth began to slow in 2008 and by 2010 grew by only 4% vs. 2009. Arguably, the recession may have impacted the volume of these relatively expensive products, but the old growth rates appear to be a distant memory. After the US recovers from the recession, perhaps we could see volume growth rates in the high single digit range. But it does not look like consumer in the US will again be increasing their thirst for energy drinks at a 34% rate.

From humble beginnings, when ten years ago the US ranked 19 in per capita volume and third in total volume (behind Japan and Thailand), energy drink have grown based on the distinctive positioning of the category with consumers. Unlike other soft drinks categories, controversy has benefited energy drinks in its single most important market. The category, spearheaded by Red Bull, the first major international brand, has received much publicity on its potential negative health effects. Contrary to having a negative effect, over the years, this controversy has undoubtedly contributed to energy drinks healthy growth. Brands with names as openly provocative as Monster, Full Throttle and Rockstar, are not out to attract consumers for their health or nutrition credentials. Since many of the people who purchase energy drinks do so for their controversial image, it will be hard to move away from this perception. So the core US market is likely wedded to the current edgy positioning to maintain its high level of volume and minor changes around the edges can be used for incremental growth. But double high digit growth does not appear to be in the cards for the future.

Total Volume Percent Growth

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Source: Euromonitor International 

Where do we go from here?

Energy drinks manufacturers in the US attempted to broaden the appeal of their brands. The current slate of brands has generated a loyal, youthful following but tends to be polarizing, alienating an older, more conservative consumer group. The trick is to broaden the appeal of the category but not lose the current following. Manufacturers attempted to do this by making a bet that by introducing a new product form they could overcome a particular brand image. Thus we saw the introduction last year of energy shots.

These products are miniature servings of between 1 and 2 ounces of the main brand. These servings are concentrated so they contain the same amount of stimulant as the drink. Thus we saw Monster Hitman and Red Bull Energy Shots. These energy shots were intended to be a quick-fix pick-me-up for a more conservative consumer; for example bankers or office workers. The idea was to shed the bad-boy image and appeal to more of a daytime usage.

The manufacturers found that the brand image stuck more with consumers than the new product form. While the idea of expanding the number of people who would purchase the category is a solid goal, these line extensions of edgy brands did not appeal to the new crowd and are now largely absent from store shelves.

So it looks like in the short term the current offerings of energy drinks manufacturers can expect growth rates in the high single digits going forward. This is solid growth, but not the spectacular 17% total volume compound annual growth rate in the five years prior to the global recession (from 2003-2008). In the medium term developing markets, with their increasing affluence and urbanization, may re-invigorate sales so they can again achieve 20% global volume growth rates. The edgy positioning that the current offering of energy drinks is known for may play very well as the populations of these developing markets become more urban.

But until we reach the medium term, the category players will need to search for another formula to expand the user base, and thus volume, of the category. Since brand image appears to be the dominant factor, as opposed to a more concentrated shot for, it looks like some brands that have more of a mainstream image may be in the offing.

Opportunity for Lucozade?

Lucozade Energy is an energy drink that is popular in the UK. It has a long history there, first introduced in the 1920’s. Its sources of energy are glucose and caffeine and it does not appeal to the same consumer as a Red Bull or a Relentless. While glucose and caffeine may not have enough credentials to attract the office and banker crowd in new markets, an easy fix might be to provide some functional additives to the current formula. Perhaps, B vitamins for extended alertness, in addition to the quick energy from glucose and caffeine could be attractive to a more conservative crowd.

If Lucozade Energy is successful at entering new, developed energy drink markets and expanding category penetration, the current crop of manufacturers are sure to respond with new competitive products. This may also help to open the door for a new set of energy drink brands in developed markets. The current slowdown in energy drink category growth may spur a whole new round of innovation to get the category back onto a double digit growth trajectory.