Mitigation: However, based on the management’s previous experiences, lack of factors beyond functionality associated with the consumption of energy drinks, and lack of differentiation compared to competitor products, there remains a high possibility that management will fail to meet targets per the street’s estimates.
International Expansion Risks: Management could potentially find success in capturing market share in the overseas market having outlined Canada as their next expansion target for FY 2024, with further exploration of markets like the UK, Germany, and Japan. In moving to overseas market, they still maintain access to Pepsi Co.’s network as their primary distributor reducing the selling expenses as they do not require as many new distributors onboarded. Additionally, the new markets present new opportunities both in the energy drink space and as a beverage away from the saturated United States energy drink market.
Mitigation: Nevertheless, expansion into overseas market poses a high chance of failure as management has not had experience operating outside of Americas and North America market, with previous track record being unimpressive post-acquisition of Func Foods. The reliance on local distributors in Hong Kong and Asia who have the right to market and distribute the product also indicates that management lacks expertise in managing expansion into these markets. The expansion overseas would also require a higher marketing expense to support brand awareness as energy drinks consumption is low overseas and competition in the health drink segments is tight due to saturation.
Distribution Network Risks: Management seeks to reduce the amount of billback allowances and trim down marketing and sales expenditure despite focusing on growth. Driven by the access to Pepsi’s distribution network and dedicated shelves in convenience stores, management aims to close out their net loss from FY2022 whilst still maintaining growth through reduction of discounts and incentives given to stores to hold their products as well as trim back on marketing.
Mitigation: While management remains optimistic that trimming the amount of discounts and incentives will be feasible in the United States due to the distribution network they have, the plan to move towards a healthy drink brands added with increasing their SKU portfolio implies that the billback allowance and marketing amount will increase relative to revenue levels if they wish to maintain high growth rates given the nature of the energy drink market dynamics.
ESG assessment
CELH had previously published its first and only sustainability report in August 2021. The company follows the MSCI ESG Rating benchmark and UN SDGs to facilitate the disclosures applied.
Environmental Coverage and Mitigation Strategies
CELH manages its environmental footprint through the packaging utilised, with 90% of products sold in 12oz aluminium can which are 100% recyclable. The company has also aimed to reduce the transportation miles between co-packers and distribution points in a bid to reduce carbon footprint.
It should be noted that the company did not disclose the targets and current carbon footprint emitted nor the amount of packaging waste produced in its operations. The company has also not mentioned any efforts to reduce the external packaging required, which are often made from non-recyclable material like cardboard and plastic. CELH also has limited direct control over the manufacturing of their products due to the reliance on third party co-packers who source part of the materials used.
Social Coverage and Mitigation Strategies
CELH beverages advertise themselves as nutritional as has conducted several studies to showcase the benefits of consuming CELH. Since 2005, the company has worked with universities to publish 6 different studies covering the benefits of consuming CELH. The studies have supported several claims that it aims to utilise as part of their health branding, including thermogenic properties which has proven properties to increase metabolism and make the nervous system more active. In addition, studies have shown that Celsius products can help reduce body fat, increase endurance and provide greater resistance to fatigue.
CELH has not disclosed any conditions in relation to the labour, nor health and safety protocols utilised. While a portion of labour is outsourced to co-packers, CELH should consider disclosing existing data regarding the employees training and number of incidents given that it is still in the manufacturing industry which involves risk.
Governance Coverage and Mitigation Strategies
CELH has a fully independent board except for John Fieldly who is the Chair of the Board and CEO. The Board and Management also has a total stake of <1% of total ownership. The Board also has an Audit Committee, Compensation Committee and Governance Committee, which are all headed and constituted by independent directors ensuring sufficient independence and lack of influence for the President. CELH board also a gender mix of 37.5%, with the same amount of members from different ethnicities. Management only has 10% of its member from a different gender, indicating a lack of diversity within management.
CELH has employed standard practices in ensuring sufficient independence between the Board and management, along with the relevant committees to ensure that the Board acts in the interest of shareholders. However, it should be noted that the average age of the Board is 57.5 years old and consists of members who are largely inexperienced.
ESG Remarks
Overall, CELH performs adequately in relation to governance practices, but lacks diversity in its management and has a relatively old Board, relative to the target audience of CELH, being those between 18-35. The lack of diversity may pose a challenge in understanding consumer trends and needs given the nature of CELH’s beverage and segway into consumption as a healthy beverage beyond functionality. The company also could improve on the level of disclosures and metrics used to assess its environmental and social performance, along with the requisite targets it aims to achieve. Frequency of sustainability reporting is also needed for greater assessment of performance in these two matters.
Conclusion
This coverage recommends a strong “SELL” position on CELH. While CELH has demonstrated high growth in the energy drink market previously, the company is likely to plateau in its growth having transitioned into a heavy reliance on Pepsi Co.’s distribution network which had previously failed to push Rockstar’s market share beyond 5%. Moreover, CELH’s attempt to brand themselves as a healthy drink poses additional challenges as they would have to overcome the stigma associated with energy drinks and develop new lifestyle trends that integrate energy drinks into everyday consumption. Additionally, the expansion into overseas market may prove futile without significant marketing spending and a lack of expertise within the current management team.
References
1) Celsius Holdings, Inc. to Present at Upcoming Investor Conferences - Celsius Holdings Inc. %
2) Annual Reports - Celsius Holdings Inc.
3) US: Liquid I.V. to focus on reaching young adults - Are these generations big on energy drinks? (yougov.com)
4) Energy Drink Trends | Glanbia Nutritionals
5) Energy drink consumers discuss performance and variety – Echoes (alechoes.com)
6) Red Bull Or Monster? Health Digest Survey Reveals The Most Preferred Energy Drink
7) Survey of energy drink consumption and adverse health effects in Lebanon - PMC (nih.gov)
8) US consumer spending: 2022 survey results | McKinsey
9) Price discounting as a hidden risk factor of energy drink consumption - PMC (nih.gov)
10) Buy Monster Energy Drink, Green, Original, 16 Fl Oz (Pack of 24) Online at desertcart SINGAPORE
11) Buy Monster Energy Sampler Pack, Super Energy Drink, 9 Flavor Variety Pack, 16 Ounce (9 Pack) Online at desertcart SINGAPORE
12) Monster Beverage Corp. (MNST) Nielsen data thru 911 - Energy drink categoryMNST sales modestly decelerate (amazonaws.com)
13) Monster Beverage Completes Acquisition of Bang Energy | Monster Energy Company (monsterbevcorp.com)
14) U.S. energy drink market share 2023 | Statista (ntu.edu.sg)
15) Undergraduate enrollment in U.S. universities 2023 | Statista
16) A survey of energy drink consumption patterns among college students - PMC (nih.gov)
17) Consumers of energy drinks in 2023, by age | Statista (ntu.edu.sg)
18) Global: energy & sports drinks revenue 2014-2027 | Statista (ntu.edu.sg)
19) https://www.statista.com/outlook/cmo/non-alcoholic-drinks/soft-drinks/energy-sports-drinks/canada
20) Energy & Sports Drinks - US | Statista Market Forecast
21) https://www.wsj.com/articles/mcdonalds-testing-sales-of-monsters-energy-drinks-1445369289?alg=y
22) Consumer Choices and Habits Related to Coffee Consumption by Poles
23) Coffee Statistics: Consumption, Preferences, & Spending
24) New study claims coffee is more popular than water in the US – but what about specialty coffee?
25) Use of the Term Healthy on Food Labeling | FDA
*Do note that all of this is for information only and should not be taken as investment advice. If you should choose to invest in any of the stocks, you do so at your own risk.
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