Coca-Cola (KO) has gulped a $2.15 billion slug of Monster Beverage (MNST) in a move to hedge a decline in soft-drink sales. These days, caffeine doesn’t carry as much health stigma as the corn syrup that makes up most of Coke’s core products.
Coke, which is buying 17 percent of Monster, has long been savvy about liquid hedges. The company was an early mover on bottled water, with Dasani, and its Minute Maid is dominant in juice. It bought the Vitaminwater brand in 2007 and Honest Tea in 2011. Since January, Coke has amassed a 16 percent stake in Keurig Green Mountain (GMCR), giving it a healthy dose of coffee and coffee-making technology.
But until now, Coke has been a laggard in energy drinks. It has a bevy of brands, including NOS, Full Throttle, and Burn, but none has siphoned off much share in a market dominated by Red Bull.
“We look at deploying capital in an intelligent and efficient manner to get us a very important footprint in growth categories,” Chief Executive Muhtar Kent said on a conference call explaining the deal.
Red Bull, a private company with a burgeoning media and event unit, probably wasn’t keen on handing over part of that eclectic business to a fairly staid, old-fashioned drinkmaker.
Coke, meanwhile, needs all the diversity it can get. In 1998, Americans downed 56 gallons of soft drinks apiece, on average. Today, that annual intake has dropped to about 42 gallons, according to Beverage Digest. Meanwhile, since 1999 the U.S. energy drink market has grown 50-fold, according to Euromonitor.
“We actually believe that if you let this go too long, another three or five years, the consumer will walk away from carbonated soft drinks,” Indra Nooyi, the CEO of PepsiCo (PEP) (PEP), told investors last year.
Nooyi can be more frank on the subject than Kent at Coke, because her company has a huge hedge in its snack portfolio. Quitting Doritos is arguably tougher than kicking a Coke habit. And Pepsi’s Quaker Oats and Sabra hummus don’t raise many health flags.
As part of the deal, Coke also gets Monster’s nonenergy brands, including Hansen’s Natural Sodas and Hubert’s Lemonade. In Monster Energy, meanwhile, it’s getting access to a marketing department squarely focused on winning young consumers—largely male—with concerts and extreme-sports sponsorships.
Its Web manifesto promises a “lifestyle in a can” that is a far cry from those hokey commercials with animated polar bears sipping soda: ”At Monster, all our guys walk the walk in action sports, punk rock music, partying, hangin’ with the girls, and living life on the edge.”
In turn, Monster gets access to Coke’s massive distribution network, which doesn’t live on the edge but makes a lot of money.
Investors, meanwhile, seem keen on the corporate cocktail Coke has mixed up. While shares of Monster shot up almost one-third on the news, Coke stock is fizzy too, rising almost 3 percent.