Celsius. The New Disruptor! Equity Research! Part 2/3.

Distribution and Competition

Welcome to Part 2 of this Celsius Deep Dive!

Celsius is the fast-growing energy drink upstart that’s seemingly on a path of taking over the fitness community. In Part 1 of this Deep Dive, I explored the story of Celsius and its marketing strategy! If you haven’t read Part 1, I recommend you read it before continuing with Part 2.

Today we are looking at Celsius distribution strategy and how the company differs from its main competitors Red Bull and Monster!

1. Distribution

2. Competition

3. Brand Risk

4. Execution Risk

5. Part 3

1. Distribution

For all beverage companies creating a great product is only a small part of the equation. It doesn’t matter how many vitamins or enzymes are in your drink, or how delicious it might be, ultimately it won’t sell if it’s not in front of customers. A great marketing campaign might create interest in the brand, but if a customer can’t buy one when they are thirsty, what is the point? Thus, distribution is the most important aspect of any beverage company.

When Celsius started, the main strategy was to use various local distributors as middlemen. The company was too small to have direct manufacturer-to-retailer relationships. Celsius drinks were popular with gyms and fitness stores. Furthermore, they were available at select national and regional chains, but the sales were insignificant.

Since then, the company has developed a large and sophisticated distribution network.

Amazon

As the leading e-commerce marketplace, Amazon has been very important to Celsius story. With fast shipping and a vast selection, the platform has become a favorite of consumers. Celsius has utilized Amazon to build its brand and reach lots of customers.

Online direct-to-consumer sales allow flexibility that traditional retail outlets do not. A company can test new product designs and flavors on a limited scale, whilst retail sales often require huge orders. Once new products have success on Amazon, Celsius can ramp up production and turbocharge sales using traditional channels.   

Selling on Amazon also removes friction!

People are more willing to try a new product if it’s sold on Amazon, compared to some random website. It is an especially important aspect for a new upstart beverage company as people often lack trust trust for new products. Amazon adds a layer of trust, particularly if it is sold as a prime product.

Moreover, when selling on Amazon direct advertising can be quite easily measured. Often, it’s hard to tell if a marketing campaign is bearing fruits. Digital campaigns can be quickly adjusted or canceled if sales don’t meet the desired objectives.

In the graph above, we see the explosion of Celsius sales on Amazon.

In the last 4 years, sales have increased 11 times, from $9M to $100M. That’s a CAGR of 82.6%!

This massive growth clearly illustrates how Amazon is one of the best distribution channels for scaling brands. Not only Amazon enabled Celsius to create a direct relationship with its most frequent customers, but it also functions as a marketing vehicle. People who see or buy Celsius on Amazon are more likely to purchase a can in 7/11 when they are on the go or pick a 6-pack when grocery shopping.

However, with 15.1% of total revenue, Amazon’s share peaked in 2020. While the absolute sales are likely to continue growing, as Celsius continues to scale the importance of this distribution channel will decrease. Last year 7.6% of Celsius sales came from Amazon, 50% lower than the peak.

Stores

While Amazon and other online marketplaces are great, the bulk of beverage sales still happen at brick-and-mortar stores. It is estimated that in the US around 50% of soft drink sales happen in supermarkets, 12% at convenience stores, and another 10% at vending machines!

The above chart tells us that convenience stores are quite an important avenue for energy drink distribution, 31% of convenience store beverage sales are energy drinks. This is understandable as people who are on the go want something quick, refreshing and caffeinated. These spots are highly coveted, and an energy drink company must have strong partnerships with large convenience chains and mom-and-pop stores alike.

One might think that getting distribution to a large chain means guaranteed success, well hold your horses!

Location, Location, and Location!

This might be the motto of the real estate industry, but it perfectly applies to beverages. As mentioned in Part 1, FMCG are very similar, and people easily switch between products depending on price and messaging, another reason is the store placement. Retailers don’t care which products are sold, they want to maximize sales! Thus, grocery and convenience stores are precisely designed and continuously adjusted to meet this objective. Sections close to the checkout, bright colors, posters, and other means are used to push customers to buy more.

Celsius in a Kroger supermarket.

End caps are displays of products at the end of aisles. Similarly, to positions close to checkout, end cap sections generate more sales as it is easier for a customer to grab the product while walking by, without needing to go inside the aisle. They provide extra visibility for a brand and are highly strategic positions in a store.

Energy drink section in a German supermarket.

Once in the store, the position on the shelf matters greatly. Data tells us that products that are at eye level tend to sell better. The picture above clearly illustrates that by having the two energy drink power brands Red Bull and Monster right at eye level. At the bottom of the shelf, you usually find cheaper less-known brands and private-label store brands.

Celsius in a fridge.

Fridge is the most important piece of real estate. A customer looking through the cold drink section is likely planning to consume said drink soon. A thirsty customer still has their brand preferences, however, if a particular product is not available, they are likely to choose an alternative.

To have continued success a beverage must move up the value chain, from the bottom of the shelves to eye level, to check out and end cap sections, and to cold fridges!

Retailers understand these dynamics and often request concessions from the manufacturer for a premium positioning. Concessions can include sales guarantees, discounts, commitments for marketing, or an outright payment. This makes it difficult for small brands to gain a footing and creates the chicken or the egg problem. A company must have the scale and capital to manufacture the product, fund marketing campaigns, and pay slotting fees. So, they must have sales and capital to get sales and capital. The inability to solve this problem is what often stops upstart brands from developing.

To solve this problem Celsius realized they must find a large well-capitalized partner, and they sure did!

Pepsi

On 1. August 2022 Celsius entered into a game-changing partnership with Pepsi. With brands such as Pepsi, Gatorade, Mountain Dew, and Tropicana in its portfolio, Pepsi is one of the world’s largest beverage conglomerates. As part of the deal, Pepsi took an 8.5% stake in Celsius for a reported $550M. Pepsi will use its existing logistics and distribution networks to deliver Celsius drinks to some of Canada’s and USA’s largest retailers.

To say that this agreement has been revolutionary would be an understatement!

During 2022 the company sold $145M or 22.2% of total revenue through this partnership. Last year, Celsius Pepsi sales grew by 440%, reaching $783M.

This means that in 2023 Celsius sold more through its Pepsi partnership than their entire 2022 revenue!

This Pepsi partnership is instrumental for Celsius to get those highly coveted premium spaces such as fridges and end caps, as Pepsi has relationships with all of the big retailers and distributors.

International

Internationally Celsius follows the same distribution strategy as it does in the US. The company partners with various local co-packers that manufacture Celsius drinks for a fee. Once the drinks are manufactured, they are shipped to various distribution partners who deliver the product to the stores. Celsius creates marketing campaigns to drive interest in the brand and generate sales. As mentioned in the marketing section, the company has become a sponsor of the Ferrari F1 team. Partnerships like these are instrumental in generating brand buzz in Europe, as the Celsius brand is not well known.

95% of Celsius revenue is generated in the US, so the international segment is small, but promising. As part of the Pepsi deal, Pepsi will become the primary distributor of Celsius beverages in Canada, with sales beginning in December of 2023. Furthermore, Celsius has signed an agreement with another company that will be the exclusive distributor of their beverages in the UK and Ireland, with the goal to start sales in late 2024. Similar distribution agreements have been reached to expand to France, Australia, and New Zealand.

2. Competition

In Part 1 we already glanced at the main competitors of Celsius, Red Bull and Monster. Let’s look at them in more detail!

Red Bull

With a 39.5% market share in the US, Red Bull is the original pioneer, the 800-pound gorilla of the energy drink industry. As mentioned in Part 1, Red Bull is famous for its sponsorships of extreme sporting events and its slogan “Red Bull Gives You Wings”. The company was founded in 1987 in Austria and has since become a massive multi-billion-dollar global corporation.

Its classic 250ml can has become iconic and is synonymous with the brand. Compared to Monster and other brands Red Bull offers fewer flavors and the cans are relatively small and expensive. This is on purpose as the main target customer is different.

Red Bull targets the more affluent white-collar customers, whilst Monster targets the blue-collar and value-seeking customers!

The company has sophisticated media and sports operations that are designed to generate a constant stream of promotional content. The strategy has proven remarkably successful, many of Red Bull’s sporting efforts have led to trophies and accolades. Furthermore, these successes have generated significant brand exposure at a cost far below what inorganic marketing could achieve. For instance, a 2010 estimate suggested it would cost Red Bull GBP 220M to get the same exposure as the company got from its F1 team. It is especially impressive because the F1 team made a profit that year.

Currently, Red Bull is not specifically targeting the same consumer as Celsius. However, it would be foolish to ignore Red Bull. The company has the resources to come to the market with a fitness-oriented product and Red Bull has shown resiliency and ability to adapt its strategy. The company saw the rise of Monster and adapted by starting to offer more flavors and larger packaging. If Red Bull would use its media and sports operations to launch a product that targets Celsius customers then Celsius growth could be negatively affected.

Celsius must create a strong brand so that if Red Bull decides to go after the same audience, it won’t be easy for the giant to steal it!

Monster

Monster is the US's second-largest energy drink company, with a 29.7% market share. Monster energy drinks were created in 2002 by a California juice company Hansen. These energy drinks became so successful that ultimately the name of the entire company was changed to Monster Beverage Corporation.

Monster’s strategy is quite different from Red Bull. Monster is known for its flagship 500ml can that is sold in dozens of different flavors. The company targets blue-collar and value-seeking customers. For the same price as a 250ml Red Bull, a customer can purchase Monster that’s twice the size. No surprise that Monster is popular with gamers and young people as they like the flavors and the value. Monster is also heavily involved in sports sponsorships. However, its operations are nowhere near the size and sophistication of Red Bull.

I believe that because of Monster’s multi-brand strategy, they are a more dangerous competitor than Red Bull!

Monster has various brands in its portfolio, each is designed for a specific target audience. A clear distinction from Red Bull, which follows a single-brand strategy. The strengths of Celsius lie in its unique value proposition. For Red Bull, it would be more difficult to emulate Celsius, as its brand comes with a certain aura and message. However, Monster as an energy drink portfolio company could modify an existing brand or acquire or create a new one that would specifically target Celsius customer base. The company is well-capitalized and has a massive distribution network.

One of their brands, Reign Storm has a similar design to Celsius and it’s the fastest-growing brand in Monster's portfolio, with sales increasing 27.6% Y/Y in 2023. It’s a smaller brand than Celsius and growing slower, but if Monster puts significant resources into growing this brand, it might provide serious competition for Celsius.

In 2015 Monster started disclosing sales for its “Strategic Brands” segment. In the graph above we see that this segment has grown with a CAGR of 13.2%, slightly above the Monster brand of 12.6%. However, in Q1 of 2024, the growth of the “Strategic Brands” segment accelerated to 25.6% Y/Y, indicating that their smaller brands are gaining traction.

A strong brand is the best defense, so Celsius must continue its brand build-out!

3. Brand Risk

We discussed how a strong brand is crucial in this industry. Red Bull and Monster have spent $Billions on brand building and have created some of the most well-known brands in the world! Celsius as the new player is eyeing a seat at the global energy drink table.

Failure to build a strong brand would stop growth!

The growth of Celsius has surprised many, especially other energy drink CEOs. Now that Celsius has proven there is a demand for a different kind of energy drink, others will copy this strategy. In the future, we can expect new well-capitalized energy drink competitors to target the better-for-you sub-niche of energy drinks. Moreover, there likely will be more efforts by brands to specifically target women. As the competition intensifies, clear brand identity and messaging becomes imperative.

4. Execution Risk

As Celsius grows from a small niche player to one of the biggest players in the industry, it must adapt. The skills needed to grow a small upstart are different than those at a large global multi-billion-dollar enterprise. Wrong management decisions can lead to slower growth, product recalls, and damaged brand.

As Celsius grows internationally hiring good local teams will be essential for continued growth!

Celsius doesn’t manufacture the beverages, their manufacturing partners do. The company claims to follow strict guidelines in selecting partners, however, fast growth can cause the management to fail to keep the standards. Especially, as the company expands globally, it might become difficult to find the right manufacturing partners.

Moreover, as the company enters new regions, different market dynamics will come into play. Local competitors, different customer preferences, and distribution difficulties all can drastically slow down growth and even lead to losses.

Bad decisions accelerate decline, great decisions lead to excellent execution!

5. Part 3

Thank you for reading Part 2.

I will conclude this Celsius Deep Dive with Part 3, a look at Celsius opportunities, is there still growth left in the tank? Furthermore, an analysis of its financials and valuation will be conducted!

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