How Monster Maintains Its Buzz

It's thriving in the exploding energy-drink market, thanks to smart marketing from owner Hansen Natural, whose stock has had plenty of pop

How's this for juiced-up stock? In the midst of a mediocre year for the major U.S. stock indexes, beverage outfit Hansen Natural (HANS ) had a monster 2005. The explosive growth of its Monster Energy drink propelled Hansen to the top-performing slot in the Standard & Poor's Composite 1500 index. The stock climbed 333% from a split-adjusted $18.2 per share to end the year at $78.81.

The lesson of Hansen's success? When it comes to performance beverages, image is everything. One readily identifiable brand with "buzz" can boost a company's fortunes at a time when a typical convenience-store customer has hundreds of drinks to choose from.

According to a November Securities & Exchange Commission filing, Hansen's sales climbed to more than $250 million in the first nine months of 2005, up from $130 million during the same period in 2004. In the same period, gross profit climbed from $58.5 million to $130.4 million.

CROWDED FIELD. Though Hansen's product lines include juices and natural sodas, Longbow Research Senior Analyst Alton Stump attributes the overwhelming majority of the growth to Monster. (Stump doesn't own shares in Hansen, which couldn't be reached for comment for this story).

Stump says through the end of November, sales in the wildly profitable energy-drink sector had increased about 80% on the year. Monster almost doubled that growth rate, as its availability expanded from approximately 25% to more than 50% of the U.S. market.

Several factors make Monster's growth appear even more impressive. First, the U.S. market alone has more than 1,000 brands, Stump says. Of these, he says Monster and the Rock Star Energy Drink brand each command about 17% of the market. Red Bull, which like Rock Star is privately held, is the market leader with about a 50% share, he says.

FUNCTION-DRIVEN . Energy drinks are typically highly caffeinated, carbonated drinks with a syrupy texture. Frequently produced in unnatural colors, they can contain other ingredients designed to help consumers to focus or stay awake. Monster contains extracts of ginseng and guarana.

Like medicines, these potions are valued more for what they do than for their flavor. "These products are sold on function more than taste," says John Sicher, editor of the trade publication Beverage Digest. And given their sales patterns, they seem to be valued even more for the images on their cans.

So how did Hansen build the brand? Monster's claw-shaped M logo is planted on a variety of "action sports" athletes like surfers and motorcycle racers, effectively targeting energy drinks' prime demographic, the sort of sports-obsessed young men long courted by PepsiCo's (PEP ) Mountain Dew soft drink. Mountain Dew markets its own energy drink, called Amp. Coca-Cola (KO ) markets a similar offering called Full Throttle.

SPREADING WAVE? Through this sort of targeted advertising, Monster has become something like a top-shelf liquor for the under-21 set. As with Red Bull, Stump says Monster's bona fides with the extreme-sports crowd enable it to charge about $2 per can. And the company is "still not seeing any pricing pressure" while an army of competitors must sell for less. Customers think of competitors, which often sell for half the price, as "value brands," Stump says.

Sicher says Monster, like the rest of the business, has grown on the strength of "granular" marketing that has included word-of-mouth and point-of-sale campaigns. He predicts energy drinks will maintain their breakneck growth for another year or two, as they ooze out from bars and nightclubs until they become a more common coffee substitute. "There are probably a lot of consumers who have just discovered energy drinks," he says, forecasting that Monster will keep pace with the sector.

Stump is less optimistic about Hansen. "Of course you're dealing with the law of higher numbers," so it will be harder for it to keep up 2005's torrid pace of growth. Still, he estimates that the energy-beverage segment will grow about 30% in 2006, which should keep Hansen buzzing.

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Halperin is a reporter for BusinessWeek Online in New York

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