Monster’s profit hit by huge termination fees
It’s mad. Just because Monster, an energy drink, shifted its distribution to the Coca-Cola system, the company had to pay a total of USD 206 million in termination fees to its previous distributors. This again proves to show how powerful U.S. distributors are and to what extent the U.S. Three Tier System works in their favour.
The man behind Monster Beverage, formerly known as Hansen Natural Corporation, which is a stock market-listed company with a market capitalisation of USD 23 billion and a turnover of USD 2.4 billion, is the South African-born Rodney Sacks. He took the company over in 1990 and serves as its CEO and Chairman.
Last August, Monster announced that it had entered into a long-term strategic partnership with the Coca-Cola Company, under the terms of which Coke acquired a 17 percent ownership interest in Monster. Coke was to pay Monster USD 2.15 billion in cash and transfer its worldwide energy business to Monster. In exchange, Monster was to transfer its non-energy business to Coke. The deal is to close in the second quarter this year.
At the Beverage Forum 2015 in Chicago in April, Mr Sacks said that he was persuaded to tie up with Coke because of distribution advantages, even though it meant exiting the Anheuser-Busch system. Hence the termination payments. He also expressed the hope that Coke’s bottlers around the world will help Monster in its expansion. He nevertheless also admitted that these bottlers “need to be persuaded to bottle Monster energy drinks”.
The good thing about energy drinks, according to Mr Sacks, is that they do not depend on volume sales as much as soft drinks do. Describing his brand as a “blue-collar brand”, compared with Red Bull, which he called an “exclusive, upper market brand”, he said that he saw big opportunities for Monster bringing up sales by entering into non-traditional venues like vending machines in DIY stores. Traditionally, energy drinks have fared very well in convenience stores.
Moreover, energy drinks are not driven by flavour varieties. This raised the question as to how Monster plans to bring more people to the brand. Mr Sacks told delegates that Monster is seeking additional consumption occasions like breakfast. I wonder: who would want an energy drink first thing in the morning unless it comes with coffee? He also said that there is a market out there for protein energy drinks.
But Monster’s more immediate concern are those costly changes. On 7 May 2015 Monster reported that net income in the three months ending 31 March fell to USD 4.4 million from USD 95.3 million a year earlier. First quarter revenue rose 17 percent to USD 626.8 million from USD 536.1 million.
