Executive summary
1) Limited upside potential given the saturation within the United States market
2) Lack of purpose beyond functionality
3) International expansion poised with headwinds
Company overview
Celsius Holdings (NASDAQ: CELH) is a functional energy drink and liquid supplement company that engages in development, processing, marketing, sale and distribution of its product line. CELH does not manufacture their own products but instead develops the formula (“recipes”) for their product line and engages 13 different co-packers to manufacture their product lines. CELH currently have 5 product lines and differentiates itself by branding as a healthy energy drink brand with health benefits such as weight-loss and muscle recovery. CELH’s customers include distributors, retailers and convenience stores. [Source: 2022 10K] CELH is currently the fastest growing energy drink company with a market share of 5.9%% behind Redbull (33.8%) and Monster Energy (37.5%).
Business segments
CELH’s has a single business segment, that being the sale of energy drinks, with the bulk of revenue generated from distribution in North America (94.47%), followed by Europe (4.75%), Asia (0.56%) and others (0.22%).
a) Geographical Distribution
Under the distribution channel in the United States, CELH runs 4 types of distribution channels namely, i) distribution via Pepsi Co., ii) direct store deliveries, iii) direct to retailers and iv) e-commerce platforms; Amazon, Walmart and Instacart.
Pepsi Co. accounts for 95% of distribution, following a partnership agreement in 1 August 2022, where Pepsi Co. would become the preferred distribution partner globally for CELH, in exchange, Pepsi Co. will make a net cash investment of USD 550 mn to CELH in exchange for convertible preferred stock. Following the agreement, CELH has terminated over 250 independent distributors which it had previously worked with. The partnership opens up Pepsi’s network and access to food service outlets, independent convenience store, vending machines, and college campuses. Most notably, Pepsi caters to 60% of the college and university population in the United States and military. The remaining distribution channels are agreements with other retailers; Publix and Costco, and stores, including gyms and convenience chains, as well as online channels. As of FY 2022, CELH had 210,000 distribution points and estimates an additional 150,000 distribution points with Pepsi Co. partnership.
In Europe, distribution is done under Func Foods, a subsidiary which it acquired in 2019 consisting of a portfolio covering energy drinks, workout snacks and supplements. In Asia, distribution is done through local distributors in Hong Kong and in China, QiFeng Food Technology (Beijing) Co. handles local production and distribution. QiFeng holds the exclusive license to manufacture, market and commercialize Celsius brand products in China, and in return pays a volume-based royalty fee.
Abstract taken from Quarterly Results Presentation outlining CELH’s business model.
Notably, CELH does not handle the production or manufacturing of their own drinks but instead engages several co-packers to produce their product in batches for a given period. The goods are then sold to the following distribution channels mentioned above. Products are then sold to the end consumer through the various distribution location points. While CELH has relationship with 13 co-packers, it currently engages 6-7 of them annually.
Under this arrangement, raw materials are purchased either by CELH directly or the co-packers, with all production costs directly incurred by the co-packers before charging a final price to CELH. This arrangement reduces direct production overheads and allows CELH to product at multiple locations across geography optimisjng their supply chain.
b) Revenue by Distribution Channel
While not disclosed in full, as of Q3 2023, CELH announced that 58% of sales revenue from convenience stores, which it aims to increase further to 70% to be compatible with the likes of Monster Energy and Redbull.
In 2023, CELH focused on increasing its footprint within the United States through two prongs, namely increasing their expansion of CELH into food service stores and increasing the number of products and distribution points in retails stores. Under the former, CELH is leveraging the partnership agreement with Pepsi Co. to enter into 2,000 Jersey Mike and 3,000 Dunkin Donut locations. For the latter, the company is replicating their existing success strategy within the United States aiming to increase their market share in South Florida to 24% up from the current 17.4% through the following initiatives like increasing the number of dedicated CELH shelves, increasing the number of products held, and having sales representatives on the ground. In addition, CELH has entered into partnership agreements with stores like 7-Eleven to launch exclusive flavours, like Green Apple Cherry, that is available all-year round only at partnered outlets.
c) Revenue by Customers
As of Q3 2023, the companies revenue mix was as follows; Pepsi (60.8%), Costco (11.4%) and others (27.8%), with management forecasting a further increase in concentration with Pepsi moving forward.
Abstract taken from CELH’s quarterly results announcement
Key Drivers
1. Revenue drivers
Revenue from CELH can be categorised by geographical footprint, with the key driver being the number of distribution outlets it has as well as the number of stock-keeping unit per outlet.
2. Cost drivers
Cost of goods
Includes cost such as liquid, sugar and packaging content like aluminium and cardboard. CELH does not always directly make the purchase of these materials and pays a total fee to the co-packer who handles the purchase of raw materials.
Sales & Marketing Expense
This cost fell as a % of revenue following the consolidation of distribution channels as part of sales expenses was generated from the cost of onboarding new distributors.
ESG Considerations
President & CEO
Mr John Fieldly was originally the Chief Financial Officer of CELH in 2012 when CELH had to be delisted but managed to turn around the company by the late 2015 when it was re-listed. He then took over the role of CEO in 2018. Prior to joining the company, he had over 20 years of experience in financial and operations management, having managed 5 business units at a B2B leading media and marketing company servicing the retail industry, food services, healthcare and targeted consumer markets.
Other Members of Management
The management team has an average tenure of 2.7 years, with most of the management having 1 year of experience. Despite being new to CELH, all members have had extensive experience in similar roles at other beverage companies, most notably Hiball Energy and Rockstar. Specifically the Marketing and Sales were onboarded to aid the CEO in his expansion plans.
Board of Directors
The Board of Directors has an average tenure of 2.8 years, with the lead independent director having prior experience as the Chief Risk Officer of Coca Cola Enterprises and previously being on the board of Rocky Mountains (an alcohol focused beverage company). While Mr John Fieldly, the CEO, is also the President, the rest of the Board members are independent members ensuring sufficient counters to the lack of independence by the President.
While several members of the Board hold concurrent roles in other Boards, none hold more than two roles in total, ensuring sufficient time is dedicated to carrying out their duties for the shareholders of CELH. Each member of the Board also has relevant experience, having been a Director at other food and beverage companies or involved in analysis and asset management covering sectors related to the food and beverage industry prior to their role in CELH.
Internal Ownership
Management cumulatively holds less than 1% of total ownership of the firm. While there were
Name
Industry Analysis
CELH mainly operates in the United States, with only a small portion of revenue derived from Europe.
United States Market Size & Market Dynamics
The energy drink market is an extension of sugared drinks having existed for decades. However, energy drinks was first popularised in the 1965 by Pepsi Co. and subsequently Red Bull. The US market is estimated to be worth USD 107.7 billion and is expected to have an CAGR of 5.18%. Energy drinks are helmed for the improved functionality that they provide post consumption often touting revitalisation and energised as the key reason to consume the drink. Outside of functionality, energy drinks are closely associated to the motor racing industry, extreme sports and gaming events primarily driven from marketing associated with the two biggest players, Redbull and Monster Energy. It was also estimated that 3.4 billion litres was sold in 2023, with 55% coming from sale of ordinary sugared energy drinks and the remainder from reduced sugar energy drinks indicating a trend towards healthier alternatives. The former has grow at an annual rate of 0.7%, while lower sugared drinks grew at an annual CAGR of 4.6%.
It should also be noted that it is not uncommon for smaller players in the industry to be acquired or merged with larger players. In July 2023, Bang Energy, a player who held roughly 8% of the market was acquired by Monster Energy following the parent groups insolvency. Smaller players may also opt to work with larger players, with one player being Rockstar Energy, where since 2012, entered into an exclusive distribution network agreement to be the only energy drink distributed from the Pepsi Network. It follows that the industry favours those with the largest scale in operations and distributions which creates a level of barrier to entry for new players even though the formulation mix can be easily copied.
Competitor Analysis
The United States energy drink market is dominated by several large players with a few smaller players. The market is in a relatively mature state with an estimated yearly growth in the low single digit range. There are several listed and private players, most notably, Red Bull, Monster Energy, Bang, Rockstar Energy, and Alani Nu. The chart below illustrates the key players in the industry;
Red Bull: Headquartered in Austria and founded in 1987, Red Bud Bull expanded into the United States in 1996. While privately listed, Red Bull reported the sale of 11,582 billion cans in 2022, Red Bull is estimated to hold roughly 39% of the market, making it the largest player in the energy drink market. Red Bull is known for their unique marketing strategy and association with events full of high adrenaline and high-risk such as Formula 1, cliff diving and sports events including football, auto racing, ice hockey amongst others. Their key message of “Red Bull gives you wings” also represents a strong tie with the functionality of energy drinks as a booster.
Monster Energy: Operating under the current company name since 2012 and headquartered in California, Monster Energy currently holds the second largest market share, just trailing behind Red Bull. Monster Energy s traded under the NASDAQ with the ticker MNST and reported USD 6.3 billion in sales for FY2022. Monster Energy focuses on having a diverse range of SKUs, ranging from different flavours to low sugar options, and has branded itself closely with extreme sports. It similarly focuses on events that are associated with the key themes of energy, intensity, and excitement namely extreme sports and competitive gaming.
Bang: Founded in 1993 and formerly operated under the Vital Pharmaceuticals parent company, Bang Energy was acquired by Monster Energy in September 2023 following the parents company file for bankruptcy. Bang Energy has 12 SKUS and two multipack SKUs which was manufactured by Coca-Cola bottlers. Bang Energy focused on branding itself through influencers and create long-lasting relationships with the influencers and their followers by extension. Bang Energy employed a selective approach to scouting for brand ambassadors, namely being young, athletics and having a lively and dynamic way of living. Notably, Bang Energy has previously signed an exclusive distribution deal with Pepsi in March 2020, but later terminated the contract following alleged claims that Pepsi Co has used intimidation tactics against independent distributors and major retailers to threaten anyone who failed to purchase Bang Energy exclusively from Pepsi. Prior to filing for bankruptcy, the deal has been reignited in June 2023.
Rockstar Energy: Rockstar Energy was formerly founded in 1998 and was produced by Coca-Cola until February 2009, when Pepsi Co. took over.
While each competitor employs different marketing strategies, their target audience remains those between the ages of 18-35, namely those in the Gen Z age group and have some degree of participation in active sports.
Investment Thesis
The street’s estimates are that CELH will achieve 40% revenue growth for the financial year 2023 and an estimated 20% for the following year. The main premise for the debate centres around the distribution partnership agreement with Pepsi, which will provide it an additional 150,000 distribution points located across the United States, providing it a total of 360,000 distribution points across convenience stores, food outlets and retail stores. Moreover, the street remains optimistic that Celsius’s shift in branding to act as both a health drink and substitute to coffee, as well as expansion overseas will help it achieve these targets. Despite the expansion, Celsius’s management cites that it aims to maintain the current sales, general and administrative spend relative to revenue. However, I remain pessimistic for the following reasons;
Thesis 1: Underperformance within the United States Market as competition intensifies
A large driver for CELH’s street estimates is contingent on the success of capturing a greater market share >10% within the United States markets. However, the energy drink market is one that is mature and is expected to have a moderate compounded annual growth rate of 4.45% from 2023-2027.
Global market size of energy drink market.
The trend is unlikely to buck as most consumers are concentrated within those aged 49 and below, with an average consumption of 2 cans per day with these numbers decreasing in older age groups.
Even with the Pepsi partnership and their access to roughly 60% of the college and university population in the United States, of which the total population accounts for 20.3 million, the students will not drive sufficient growth as consumption remains fixed to account for the 40% expected revenue growth. Assuming a market share of 18% in line with the total expected market growth rate for the year of 2023, the total revenue derived is expected to only hit $35.78 million or 5% of revenue derived from Financial Year 2022. This is a vast shortfall to the expected 40% of revenue growth for the FY2023, with a 35% revenue shortfall. Moreover, this is unlikely to grow past the existing 10% of revenue derived from Food Services as the energy drinks lack a reason for drinking beyond functionality as they do not have any social and casual situations in which the drink can be consumed.
Moreover, the Pepsi partnership network may have waning growth opportunities. From a previous partnership with Rockstar Energy, the distribution network never allowed the competitor to exceed 5% of the total market share. It should be noted that under the distribution network up till 2019, Rockstar prevented Pepsi from distributing any other energy drink before the acquisition. Nevertheless, while the terms for Celsius are favourable, the maximisation of distribution points within Amercia will be complete as of 2023. Additionally, while the distribution network serves as a boon for Celsius, the partnership merely acts as a form of diversification for Pepsi to have some exposure to the energy drink market. A similar scenario could emerge where Celsius is unable to exceed the current 10% of market share it holds once the distribution network from Pepsi has been exhausted.
With waning, organic growth from new customers, growth will have to come from challenging existing players within the market instead. However, the market structure is one which heavily favours bulk purchases, leading to a “winner-takes-all” situation, where most consumers will opt to shop with only one single brand.
For example, products are typically sold in packets of 4, 6, 9 and even 12, and are usually accompanied with discounts. Celsius’s management has also cited that their strategy is the follow price hikes and decreases of Red Bull and Monster Energy, with similar discounts offered. Often, bulk purchases are accompanied by such discounts, running an average of 25 weeks out of 52 weeks in a year. This has been accompanied by the increased preference for purchasing bulk within the American consumer due to convenience, with a reported increase in pure spending at wholesale clubs, grocery stores and discount stores, which are the distribution points that Celsius currently has access to.
Chart detailing increased spending within American consumers