While PepsiCo's acquisition of an energy drink brand aligns with current trends, it does not guarantee that Rockstar will inject new momentum into PepsiCo's future growth.

-01- # Doubling Down on Energy Drinks # PepsiCo Acquires Rockstar for $26.8 Billion

On the evening of March 11, PepsiCo announced in a statement that it had reached an agreement to acquire Rockstar Energy Beverages (hereinafter "Rockstar"), a functional beverage producer, for a staggering $3.85 billion (approximately RMB 26.8 billion). PepsiCo also expects the acquisition will not have a material impact on its 2020 revenue or earnings per share. If regulators approve the deal, it is expected to close in the first half of 2020.

PepsiCo and its rival Coca-Cola are both striving to move away from traditional sugary carbonated drinks, launching more low-calorie beverages and water. This is the first major acquisition under PepsiCo's CEO Ramon Laguarta, who took office in 2018.

PepsiCo Chairman and CEO Ramon Laguarta stated that as PepsiCo continues to focus on consumers and invest resources in the growing demand for functional beverages, this acquisition is highly strategic. The acquisition will fully leverage PepsiCo's capabilities to accelerate Rockstar's performance growth while unlocking the potential of PepsiCo's existing category products, such as Mountain Dew.

It is worth noting that since 2009, PepsiCo has had a distribution agreement with Rockstar in North America. PepsiCo CFO Hugh Johnston said the distribution contract with Rockstar limited its ability to innovate in energy drinks or partner with other companies. If the deal is completed, PepsiCo will be able to establish partnerships with other energy drink manufacturers.

Rockstar was founded in 2001, and its beverages are designed for people who "live active lifestyles," from athletes to rock stars. The brand emphasizes low-calorie, sugar-free, and organic concepts, and also produces products containing fruit juice. Currently, Rockstar offers more than 30 flavors in convenience stores and shops across more than 30 countries and regions.

-02- # Giants Intensify Efforts in the Energy Drink Market, Competition Heats Up

With global consumption upgrading, consumers have increasingly high demands for beverages, and traditional carbonated drinks can no longer meet their daily needs. According to relevant data, the global energy drink market was approximately $53 billion in 2018, and it is expected to reach $86 billion by 2026.

Driven by consumer demand, the two traditional carbonated beverage giants, PepsiCo and Coca-Cola, have been committed to shifting beverage sales from sugary sodas to low-calorie products, including purified water, tea drinks, and coffee drinks. Before PepsiCo, Coca-Cola had already actively developed its functional beverage business.

In 2014, Coca-Cola announced it would invest $2.15 billion in Monster Beverage, the parent company of Monster, acquiring a 16.7% stake. Additionally, in 2019, Monster increased its presence in China by introducing two new SKUs and producing and selling through two bottling systems in China, COFCO and Swire, aiming to replicate its U.S. sales model to gain more market share in China. However, so far, results have not been evident.

Rockstar Energy, the energy drink manufacturer PepsiCo is acquiring, is one of the few major energy drink brands. Rockstar Energy was founded by entrepreneur Russell Weiner in 2001, when the company first introduced 16-ounce cans of energy drinks to the market. Since then, the number of energy drink products has surged, and they have begun to crowd out carbonated drinks and occupy refrigerated shelf space in retail stores.

Currently, the global energy drink market share is mainly held by Austria-based Red Bull Group and Monster Beverage, two giants, as well as Rockstar and another company, Bang. Coca-Cola currently holds a stake in Monster Beverage and distributes its energy drinks as a distributor.

In this acquisition, PepsiCo is acquiring the Rockstar Energy brand, for which it was previously a distributor. PepsiCo has been distributing Rockstar Energy drinks in North America since 2009. Due to the existing agreement, PepsiCo's brand Mountain Dew was restricted from partnering with other external brands.

Sources say that by acquiring Rockstar Energy, PepsiCo can do more with the Mountain Dew brand and may distribute other brands' energy drinks, increasing product diversity in its energy drink portfolio. Moreover, PepsiCo can also expand distribution channels and product quantities under the Rockstar brand.

On the other hand, this acquisition can also help PepsiCo avoid more legal disputes in the energy drink sector, eliminating future worries. Previously, Coca-Cola had legal disputes with Monster Beverage over expanding sales of its own cola brand energy drinks. Although Coca-Cola ultimately won the arbitration, it was a costly endeavor.

-03- # Can Domestic Energy Drinks Rise with the Tide?

With international beverage giants increasing their efforts, changes in the energy drink market are inevitable. As first-tier giants join, more capital will be directed toward the existing energy drink market, and a period of turbulence may begin. The domestic energy drink market landscape may also change as a result.

Red Bull officially entered the Chinese market in 1995, filling the gap for energy drinks in the domestic beverage market. As consumer awareness of the brand increased, Red Bull gradually became the leader in the domestic energy drink market. Although there has been a brand dispute between China's Huabin Red Bull and Thailand's TCP Red Bull since 2017, it has not affected its position as the top energy drink in consumers' minds.

According to statistics, relying on Red Bull products, Huabin currently accounts for about 60% of China's total functional beverage market share, and over the past 25 years, it has formed a business scale with cumulative sales exceeding RMB 180 billion.

Data shows that in 2019, the food and beverage industry remained a standout sector in the consumer market, with both production and sales booming. From January to October 2019, China's beverage market output reached 152.312 million tons, a year-on-year increase of 6.6%, and retail sales of beverages exceeded RMB 172.3 billion, a year-on-year increase of 9.8%. Among them, functional beverages saw a compound annual growth rate of 17.1% in retail sales from 2011 to 2017. At this growth rate, it is expected that by 2020, China's functional beverage market retail sales will reach RMB 163.528 billion.

Although the functional beverage market has huge potential, competition is also extremely fierce. In April 2018, Yili Group launched Huanxingyuan energy drink; in July 2018, By-Health Co., Ltd. launched F6 energy drink; in March 2019, Panpan Group launched Baofali energy drink;

In April of the same year, Jinmailang released two energy drinks: Tianbao Taurine Energy Drink and Shenma Huoma Energy Drink; at the end of April 2019, Thailand's TCP launched Red Bull Anji in China and gradually listed it; at the end of 2019, TCP Group officially launched original imported Red Bull Vitamin Flavored Drink in China.

In addition to Red Bull, domestic energy drink brands such as Dongshen Te Yin and Lehu have also emerged. According to Nielsen retail data, Red Bull accounts for 59% of the domestic functional beverage market, followed by Lehu at 11%, and Dongshen Te Yin at 9%.

However, for domestic energy drink brands, although many brands continue to emerge, most start by imitating Red Bull's taste and packaging. While they gradually develop their own differentiated paths, most still cannot escape the category of homogenized products, making it difficult to form product and brand advantages. At the same time, price and promotion "battles" will turn the once promising energy drink market into a red ocean.

Under such circumstances, China's energy drink market needs capital intervention more than ever, with comprehensive adjustments and upgrades in product R&D, packaging upgrades, and brand promotion. PepsiCo's acquisition of a first-tier energy drink brand is undoubtedly an injection of excitement into the energy drink market, setting an example for hesitant capital parties, and also signaling that the energy drink market will see a bigger explosion.

Zhu Danpeng, a Chinese food industry analyst, said in an interview that PepsiCo's acquisition is to fill its own business gaps. With people's increasing health awareness, functional beverages show a certain rigidity in demand. Although PepsiCo's acquisition of functional beverages aligns with current trends, it does not mean that Rockstar can inject new momentum into PepsiCo's future development.

Source: Beijing Business Today, All Food Expo Online