Energy Sales Soaring

While there may have been some concerns about the growth of shots and full-size cans, analysts report the category has never been stronger.

By Joe Bush, Contributing Editor.

Brent Howard isn’t just a retailer of energy drinks and shots. He’s a user.

Division manager for Sun Pacific Energy in Kennewick, Wash., Howard has seen the energy drink category take flight then watched as energy shots surged to prominence over the past two years. He said he has learned two things about effectively marketing the category: it’s not just for young whippersnappers and the drinks work.

“I’m 61 years old and I do a Red Bull every afternoon,” said Howard, from Sun Pacific’s 30 Sun Mart stores. “The appeal is a little broader than we think.”

Howard reports 10% growth in unit volume of full-size energy drinks in his stores in the past year. Just as the national numbers show, full-size drinks outsell shots at Sun Mart, but shots’ growth is much stronger—70% in unit growth in the past year, said Howard.

“I’m still shocked at the growth rate (of shots),” Howard said of full-sized energy drinks. “I thought they’d peak.”

Beverage Marketing Corp.’s Gary Hemphill said reports of energy’s plateau are greatly exaggerated. Numbers from Symphony/IRI Group, a Chicago-based market research firm, agree. For the 52 weeks ended May 15, 2011, in all channels except Wal-Mart, full-sized energy drinks accounted for over $2.2 billion in sales, a 13.4% rise over the same period in 2010. Unit sales rose more than 15%. Shots rang up more than $400 million in sales, a 27% boost; unit growth was 25%.

“We don’t think it’s peaked,” said Hemphill, senior vice president in charge of Beverage Marketing’s Information Services Division. “It slowed in 2009 to some extent because of the economy, but all refreshment beverages slowed in 2008 and 2009 and there was somewhat of a rebound in 2010. Our basic belief is that energy is a huge need and there’s considerable room for growth for the category.”

Filling a Void
But products coming into the market now need to serve a purpose. Growth is likely going to come from established brands.
“It’s the existing brands that have the potential to increase their volume and increase their sales because the brands in the market today already satisfy today’s consumers,” Hemphill said. “Anybody else thinking about coming into the marketplace by introducing a me-too product that offers no differentiation, is pointless.”

Beverage Marketing Corp. doesn’t expect to see the rapid product introduction the energy category experienced from 2008-1010.
“The category really isn’t that new anymore. It’s a decade or so old, and so while we see growth in the category, our expectation is that you’re not likely to see many successful new product launches,” Hemphill said. “The core consumer for energy drinks has been younger males. That’s how the category began, that’s how the category grew. We see energy now as a very broad need state that could be applicable to any consumer demographic. We think there’s a potential that the demographics of the category will broaden and that there’s an opportunity to grow sales of existing brands by extending it to new consumers.”

Price Sensitivity
Some of those new consumers might be existing c-store customers that may not have wanted to spend $2.50 to $3.30 for an energy boost. Private label makes sense for larger chains, especially in the c-store space, which accounts for the bulk of energy drink and shot sales. Circle K has an energy brand, as does BP’s ampm, 7-Eleven and, for the past three years, Kwik Trip and Family Express. Neither was large enough to order the volume needed for private label energy drinks, so they partnered to market the Buzzed line of energy drinks and shots.

John McHugh, spokesman for Kwik Trip, said adding energy drinks four years ago was a logical progression. The LaCrosse, Wis.-based chain already operates its own commissary, bakery, ice cream plant, dairy and a distribution division so it is comfortable with vertical operations. And once Kwik Trip invests in a store brand, it gives the product every opportunity to succeed. As a result, Buzzed sales have grown steadily for the past three years.

“We allocate more space to private label than national brands,” McHugh said. “For example, one cooler door set is energy drinks, but whereas a national brand might get one or two facings, we dedicate an entire shelf with multiple facings for Buzzed. We don’t do much with promotions either.”

Hemphill said the private label segment of energy drinks is significantly underdeveloped compared to other beverage categories. “This is primarily due to two factors: the category is comparatively small compared to mainstream beverage categories, and retailers generally focus on larger categories where the volume opportunity is greater,” he said. “Secondly, the leading brands in the category have high brand equity, which means private label brands may have a more challenging time developing in the energy drink segment. Having said that, the convenience store channel may be the best channel opportunity for private label energy drinks because it is the largest channel for the category.”

Sun Mart’s Howard said while the skirmishes for full-sized energy drink share has mandated for the past three years a dedicated cooler door for the major players (Red Bull, Monster and Rockstar are Kwik Trip’s top three brands), the aggression comes at a price. “We’re seeing a deterioration in margins as they battle,” Howard said. “Two for three bucks is almost standard.”

Marketing Matters
Sun Marts range from 1,200 square feet to 4,000 square feet. In stores with space for open-air coolers, Howard uses them effectively for secondary placement of cans. The shots need only one placement, Howard said, and that’s on the counter by the register. Sun Mart has a contract with shots leader 5-Hour Energy, and in the three tier display rack provided by 5 Hour Energy, the top two tiers have 5-Hour products, while Red Bull shots get the bottom tier.

“Fortunately, we’re still getting full margin on shots,” said Howard. “We’ve had no need to promote them on price right now.”
Stripes, the c-store brand of Susser Petroleum in Corpus Christie, Texas, also has proprietary energy drinks and shots, but not for long. Director of Category Management Wendell Funk said that while its proprietary Quake full-size energy drink, launched in 2007, has done well enough to keep its place alongside the national brands in the cold vault, Quake shots have struggled mightily against 5-Hour Energy. Symphony/IRI Group shows 5-Hour with $361 million of the nearly $410 million in energy shot sales for the 52 week period ended May 15, 2011. The next closest competitor is Stacker, at $11 million.

“5-Hour owns the category,” Funk said of the shots business. “They were first-in and they must spend a ton on advertising.”
Funk said he will not reorder the Quake shots going forward. He will continue to market 5-Hour shots on the counter by the register in a customized display rack that blends with its other store fixtures. For the bigger energy drinks, Stripes markets products based on location. Stores closer to the Mexican border get a half door of energy products. West Texas sites get a full door.

“That’s a cultural difference,” Funk said. “Hispanic consumers prefer carbonated soft drinks.”

Both areas include the secondary placement of a smaller fridge near the door. Quake gets a half shelf or a shelf to itself, in a four-shelf set-up.
Funk said in the past year he has thinned the SKUs, though because Stripes’ 535 stores do their own planograms, different SKUs have been pared based on local preferences.

Above all, Funk wants to have store managers focus on the top sellers, rather than try to carry all flavors and line extensions.

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