Monster: How did the 'Monster' achieve a 100-fold increase in 20 years by taking on Red Bull?

$Monster Beverage(MNST.US) Monster: How did the 'Monster' achieve a 100-fold increase in 20 years by taking on Red Bull?

In the U.S. stock market, if investors were to choose the best-performing company over the past 30 years, many would likely first think of one of the Mag 7 (Meta, Amazon, Apple, Google, MSFT, Nvidia, Tesla).

However, from a yield perspective, the crown actually goes to an energy drink company—Monster Beverage, whose stock price has increased 100-fold in 20 years, with an compound annual return of 25%. It's worth noting that during the same period, Buffett's Berkshire Hathaway had an annualized return of only about 10%.

So the question arises, why has Monster achieved such astonishing investment returns? Dolphin Research will take you through a review and study of the growth secrets of the energy drink brand Monster, its investment value judgment, and facilitate a cross-market comparative analysis with its Chinese counterpart, Dongpeng Beverage, which is about to be listed on the Hong Kong stock market.

Our analysis of Monster will be based on the following three questions:

1. What is Monster's business model?

2. How did Monster manage to 'tear apart' the Red Bull empire when Red Bull dominated the U.S. energy drink market?

3. From the current standpoint, how should we view Monster's investment value?

I. What kind of company is Monster?

1. From near bankruptcy to the 'second brother' of energy drinks

Many people are familiar with Red Bull, but the second in this category, Monster, may not be as well-known. Dolphin Research will first provide a brief introduction to Monster to facilitate a deeper analysis later:

Monster's predecessor was a near-bankrupt soft drink company—Hansen Natural, which was acquired by Monster's CEO Rodney in 1992. In the first 10 years, Rodney mainly did two things: 1. Cut off loss-making businesses (traditional juices) and focused on high-margin health drinks; 2. Reduced debt and optimized cash flow.

Subsequently, in 1997, the energy drink Red Bull entered the U.S., pioneering the energy drink market from scratch and completing the first step of consumer education. Monster finally saw its opportunity with two key points:

1) Choosing the right track: In 2002, it fully entered the energy drink track, finding the key to profitability. As energy drinks accelerated their penetration in the U.S., Monster also enjoyed the high growth dividends of the industry, with performance rapidly improving.

2) Partnering with the right giant: In 2015, Monster reached a strategic cooperation with Coca-Cola, leveraging Coca-Cola's global distribution channels to start global expansion. Partnering with the right channel giant allowed Monster to easily usher in its second growth curve—internationalization.

As of now, in terms of market share, Monster holds nearly 40% of the global energy drink market, second only to Red Bull, making it the world's second-largest energy drink brand.

From a business perspective, unlike comprehensive soft drink giants like Coca-Cola, Monster focuses on energy drinks. From the 2024 annual report, it can be seen that Monster's revenue is divided into three segments, with Monster Beverage being the company's own energy drink brand, accounting for over 90% of revenue, forming the company's revenue base.

In addition, the strategic brand business mainly consists of energy drink brands acquired from Coca-Cola (NOS, Burn, Relentless, etc.), accounting for about 5% of revenue; the alcoholic beverage business includes craft beer and alcoholic soda brands under CANarchy, acquired in 2022, currently accounting for less than 3%.

Regionally, leveraging Coca-Cola's global distribution network, Monster's business spans the globe. With the company's global strategy advancing in recent years, the proportion of overseas business is gradually increasing, contributing nearly 40% of revenue.

2. Extreme asset-light: Low Capex, high FCF

In terms of business model, unlike the heavy asset consumer goods model that Dolphin Research observes, where product development, production, brand operation, sales, and transportation are all handled in-house, Monster has taken the asset-light approach to the extreme.

Firstly, Monster outsources all the 'dirty work' of production & distribution, focusing on brand management and product development, which are high value-added segments.

From the chart below, it can be seen that Monster's fixed assets account for less than 10% of total assets (in recent years, the company has made some investments in warehousing and production equipment to cope with global supply chain disruptions), far lower than traditional beverage giants (where fixed assets account for over 30%).

The asset-light model results in low capital expenditure for Monster, avoiding large expenses for the purchase & maintenance of fixed assets like plants and production equipment. From the chart below, it can be seen that Monster's capital expenditure as a proportion of free cash flow is generally below 20%, and it has ample and stable free cash flow.

On the liability side, Monster's asset-liability ratio is only 23%, far below the industry average (industry average asset-liability ratio is 60%-70%). Additionally, structurally, the liability side is mainly composed of short-term operating liabilities such as accounts payable, and before 2023, Monster had zero long-term interest-bearing debt, with all business relying on the company's endogenous cash flow.

In 2024, to maximize shareholder returns through buybacks, the company borrowed an interest-bearing debt of $370 million for the first time, but it only accounts for 20% of the company's total liabilities, indicating the company's high risk resistance during economic downturns.

3. High gross margin, strong brand premium capability

In terms of profitability, under normal circumstances, Monster's gross margin is close to 60% (in recent years, due to supply chain impacts, raw material and transportation costs have risen significantly, causing a decline in gross margin), which is at the top level in the soft drink industry, second only to Coca-Cola and Nongfu Spring.

On one hand, as a leading brand in energy drinks, Monster has a strong industry pricing power and does not need to compete for market share through low prices.

Additionally, from a horizontal comparison of various categories in the soft drink industry, energy drinks, due to their functional attributes, are priced higher and inherently belong to a high-margin category.

From the chart below, it can be seen that Monster's gross margin has two significant increases, the first being the shift from juice to the energy drink track, and the second being the business swap with Coca-Cola, exchanging its non-energy drink business for Coca-Cola's energy drink business, both times driven by the increase in the proportion of energy drinks, leading to an overall increase in gross margin.

4. Continuous performance growth, high shareholder returns

In terms of revenue, since the company entered the energy drink track in 2002, Monster has maintained positive growth for over 20 consecutive years, which is rare among all U.S.-listed consumer goods companies.

Even Coca-Cola, a strong brand with high consumer loyalty, experienced negative revenue growth during the financial crisis and the pandemic.

This rare anti-cyclicality indicates that Monster's energy drink business not only has high consumer stickiness but also has multiple growth engines driving the company's continuous growth.

Finally, in terms of shareholder returns, although Monster does not pay dividends, it continuously repurchases with its own cash. Since 2019, repurchases have reduced the number of outstanding shares by 10%, passively increasing earnings per share (EPS), which is one of the reasons for Monster's high valuation.

From the most important indicator reflecting shareholder returns—ROE, it can be seen from the chart below that except for a few years, Monster's ROE is generally above 20%.

From the above financial perspective, we can preliminarily determine that Monster is an extremely high-quality company. The question is how did Monster achieve this? Why was it successful? We will conduct an in-depth analysis in the following text:

II. How did Monster, a latecomer, achieve success?

1. The first step—Differentiated products stem from deep consumer insights

To analyze how Monster developed from an unknown in the energy drink sector to the second-largest brand globally, we first need to understand the context of the time:

As mentioned in our article "Coca-Cola: Why is the 'Happy Fat House Water' a favorite of the 'Stock God'?", since the 21st century, with the rise in consumer spending power and health awareness, American consumers have gradually reduced their consumption of carbonated drinks, turning instead to bottled water, functional drinks, and ready-to-drink coffee, among other healthy categories.

At that time, the 'king of energy drinks'—Red Bull, after achieving great success in Europe, ventured into the U.S. market. Consistent with its strategy in Europe, Red Bull positioned itself in the high-end market, focusing on nightlife enthusiasts, business elites & creative workers, and extreme sports enthusiasts, emphasizing a small volume, high premium (8.4oz, with a unit price 4-5 times that of Coca-Cola).

In its advertising, whether it was the packaging itself mimicking a medicine bottle or the classic TV ad "Red Bull Gives You Wings", Red Bull emphasized its functional benefits of boosting energy.

Red Bull quickly gained acceptance and popularity among Americans who valued sports health and had a caffeine habit. Coupled with the fact that the energy drink market in the U.S. was virtually untapped, Red Bull's market share in energy drinks once reached as high as 90%.

In such a scenario where Red Bull had a dominant position, if Monster wanted to confront it head-on, it would be like hitting a stone with an egg. Monster's CEO Rodney, after extensive research, targeted a younger demographic of 18-25-year-olds (Red Bull's target group had a broader age range).

From the Mintel research information below, it can be seen that this age group of young people is the main consumer group for energy drinks:

For 18-25-year-olds, the consumer profile is very clear: mainly college students, with limited budgets, high-intensity, fast-paced lives, seeking to express individuality and pursue identity recognition.

Therefore, in terms of product design, Monster first adopted a 16 oz large package. Although the package was large, the pricing was the same as Red Bull, emphasizing more quantity for the same price.

On the other hand, to achieve a more energizing effect, Monster's unit caffeine content was double that of Red Bull, forming a stark contrast with Red Bull's "small can, high price". This approach is akin to the familiar cost-effective strategy in China.

Additionally, in terms of logo design, the claw marks of a beast combined with the fluorescent green and black background create a strong visual impact and recognition, symbolizing power and mystery, full of individuality.

In summary, whether it's large quantity, strong effect, affordability, or individuality, it can be seen that every feature of Monster's product is designed around the core consumer group of 18-25-year-olds, and it forms a good differentiated competition with Red Bull's product.

However, if we only consider the product itself, unlike Coca-Cola's secret formula for concentrate, the barriers to entry for energy drinks are not high, consisting mainly of taurine, caffeine, and other nutritional ingredients and flavors.

From the chart below, it can be seen that many energy drink entrants emerged at the same time. In a situation where the product itself has few barriers, why did Monster ultimately stand out? We continue to analyze:

2. The second step—Precise community marketing, binding subculture circles

For consumer goods companies, especially followers, finding a differentiated positioning and continuously strengthening consumer brand awareness is key. Dolphin Research believes that a crucial step for Monster was identifying a differentiated audience and conducting a series of precise marketing efforts targeting its audience.

When Monster was first launched, the company did not invest heavily in TV advertising, nor did it sponsor large extreme sports events like Red Bull. Instead, it adopted a community marketing approach similar to Lululemon, engaging in deep but more direct interactions with consumers.

Firstly, for the core college student group, Monster recruited campus ambassadors at universities with over 10,000 students in the U.S., distributing Monster energy drinks for free in various energy-demanding scenarios such as student clubs, sports competitions, and final exams, directly increasing brand awareness.

Additionally, the most crucial step was that Monster deeply bound itself to a group of 'subculture groups' through community marketing, including young extreme sports enthusiasts, punk rock fans, esports players, skateboarders, and car modification enthusiasts.

Monster targeted individuals in these fields who were somewhat famous in their regions. These individuals often had a group of loyal fans in their local communities and were considered trendsetters, also known as key opinion leaders (KOLs).

Monster heavily sponsored the competitions and events these KOLs participated in, had them use equipment with the Monster logo during events, and provided unlimited free Monster energy drinks. After the events, KOLs would post pictures on their social media, further expanding Monster's reach.

This combination of strategies quickly spread Monster within subculture circles, achieving a marketing effect similar to that of missionaries—drinking Monster became synonymous with an 'entry ticket to subculture'.

Additionally, in 2004, Monster established the Monster Army platform for extreme sports, recruiting extreme sports athletes aged 13-25 nationwide. Selected athletes could receive cash rewards for participating in various events and gain more exposure to enhance their own fame.

As Army members, in addition to regularly posting content about drinking Monster during training/competitions/performances on major social media platforms, they could also create Monster-related secondary content (such as adapting lyrics with Monster, designing claw mark graffiti, etc.) and participate in brand challenges to gain more resources and support.

It can be seen that the Monster Army platform essentially served as Monster's private traffic pool++subculture KOL incubator. These Army members could not only become Monster's spokespersons but also serve as important brand assets for Monster.

Compared to Red Bull's strategy of hiring already famous extreme sports athletes at high costs, Monster's approach was more like a 'seed project', cultivating not-yet-famous extreme sports athletes to achieve low-cost, high-return long-term brand building, similar to the role played by Lululemon brand ambassadors.

Overall, the essence of community marketing lies in deeply binding to the values and interests of specific groups, ultimately allowing consumers to form identity recognition and spontaneously spread the brand. Monster cleverly bound itself to subculture groups represented by extreme sports, gaining a group of highly sticky users and paving the way for later mass dissemination.

If Red Bull represents the 'elite group wanting to push limits', Monster represents a 'rebellious, wild, and unruly' young crowd, forming a good competitive differentiation with Red Bull in terms of positioning.

Additionally, compared to Red Bull's extensive advertising, Monster's deep community marketing is more efficient. From the chart below, it can be seen that Monster's advertising expenses as a proportion of revenue are between 7%-9%, while Red Bull and Coca-Cola, which engage in extensive, indiscriminate advertising, have expense ratios generally in the double digits.

3. The third step—Benefiting from giants, leveraging giants for channel expansion

Through the above two steps, Monster completed the launch of differentiated products and cultivated a group of highly sticky users by deeply binding to subculture circles. The final step was to achieve rapid expansion through channel distribution.

For soft drinks, which are low-priced and have high immediate consumption, the value of channel density lies in reducing consumer decision-making costs. When consumption demand arises, product availability directly determines purchasing behavior.

Energy drinks are no exception. Due to the strong immediacy of functional needs such as energy replenishment and alertness, convenience stores are the main sales channel for energy drinks in the U.S.

However, since most convenience stores in the U.S. are not chain stores, building channels requires significant human and material resources. According to Nielsen data, the distribution channels for non-alcoholic beverages in the U.S. are mainly occupied by three giant beverage companies: Coca-Cola, PepsiCo, and KDP (accounting for nearly 80%).

When Monster's new product was launched in 2002, the company mainly utilized the distributor resources of its predecessor, Hansen, to achieve distribution through third-party distributors and agents, but the coverage area was relatively small.

To cover more potential user groups, in 2006, Monster signed a distribution agreement with Anheuser-Busch, the largest beer company in the U.S., quickly accessing Anheuser-Busch's on-premise channels such as bars, nightclubs, and restaurants.

From the chart below, it can be seen that starting in 2006, Monster's market share in the U.S. energy drink market began to rise rapidly:

Additionally, a more critical turning point was in 2008, when Monster signed a global distribution agreement with Coca-Cola, with Coca-Cola bottlers responsible for distributing Monster products in North America and major overseas markets.

Since then, Monster successfully entered non-on-premise channels such as convenience stores, supermarkets, and gas stations. That year, Monster's coverage rate in U.S. convenience stores increased from less than 40% to over 90%, achieving a leap from relatively niche on-premise channels to mainstream retail channels, officially completing its breakthrough.

Thanks to the support of Coca-Cola's channel resources, from the chart below, it can be seen that between 2010 and 2018, Monster's growth rate in all channels, especially convenience stores, consistently exceeded the industry average.

In contrast, Red Bull chose to build its own channels, establishing Red Bull North America Distribution Company to handle Red Bull's distribution in the U.S. and Canada. Although having control over its own channels allows for better maintenance of the brand's high-end image, the expansion speed is clearly not as fast as Monster's approach of 'standing on the shoulders of giants'.

On the other hand, the most straightforward and simple principle of channel distribution is—'everyone makes money together', and channel profits largely determine the push from distributors and terminals, especially for followers like Monster.

In fact, Monster is well aware of this. According to channel research information, Monster's distributor and terminal profit margins are generally between 15%-25%, 5%-10% higher than Red Bull. Additionally, if quarterly sales targets are met, there are additional rebates of 3%-5% (Red Bull usually offers only 1%-2%).

From the results, thanks to Monster's differentiated product positioning, precise community marketing, and leveraging third-party giants for rapid channel distribution, Monster's market share in 2013 officially surpassed Red Bull, increasing its market share in the U.S. energy drink market from less than 2% to over 40%, while Red Bull's market share fell from a peak of 91% to 35%.

In the next article, we will focus on Monster's current investment value, so stay tuned!