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PepsiCo (PEP) recently launched a new ad campaign with "That's What I Like" as the tagline. It seems energy drinks are what Pepsi likes today as it announces it will acquire Rockstar Energy Beverages for $3.85 bln.
As we mentioned in a profile on Monday, PEP has been hurt by a shift in consumer preference away from carbonated soda, toward less-sugary non-carbonated soda drinks. PepsiCo has been tackling this problem by focusing on innovation and by using brand extensions within its non-carbonated beverages segment. On the innovation side, its Gatorade unit recently launched Bolt24, a low-calorie electrolyte beverage. G organic and Gatorade Zero are other examples of innovative Gatorade product launches in recent years, with an eye toward healthier drinks.
PEP has been pretty aggressive with acquisitions in recent years, including the acquisition of SodaStream sparkling water and, the December 2019 announcement to acquire BFY Brands, the maker of PopCorners, Flex Protein Crisps, and Flourish Veggie Crisps. This was clearly an effort toward healthier snacks, another key initiative in the works since new CEO Ramon Laguarta took over as CEO in late 2018.
Pepsi has already dabbled in energy drinks, mostly via brand extensions within its Mountain Dew segment, including Mountain Dew's Kickstart, GameFuel, and AMP. However, Pepsi's energy segment has had limited success. We find the Mountain Dew line extensions a bit confusing because it makes us wonder if it tastes sort of like Mountain Dew but not really. We also think consumers may start to confuse regular Mountain Dew as an energy drink, which it its not. We think a brand separation makes more sense.
Buying Rockstar gives its energy segment a big boost. Rockstar is a well-known brand in the energy drink space and PEP's strong marketing and distribution muscle should significantly propel sales for this small drink company.
It will be interesting to see if this deal sparks Coca-Cola (KO) into finally acquiring Monster Beverage (MNST), which dwarfs Rockstar with a market cap nearly 10x the size of this Rockstar deal. KO already owns a stake in MNST, so it would not be a stretch to see a deal materialize here.
Overall, beverage companies are having to change with the times as sugary carbonated sodas lose their appeal. We think the Rockstar deal is just the latest smart deal for PepsiCo as it clearly wants to diversify away from soda and add healthier options. PepsiCo's new CEO has done a great job in terms of reacting to changing consumer tastes for healthier food/beverages in recent years.
