Coca-Cola has endured pressures over high sugar content

Coca-Cola has endured pressures over high sugar content

Two years ago, when serious speculation emerged over a plan by Coca-Cola Co to buy Monster Beverage Corporation, the energy drinks maker had only recently changed its name from Hansen Natural Corp.

The company was still in the early stages of a transition to a pure-play energy drinks firm that should culminate at the turn of the year when, under the terms of a US$2.15bn deal announced yesterday, it hands its non-energy brands to Coca-Cola along with a 16.7% stake. However, despite its relatively short history, Monster was that year already involved in a fist of lawsuits and regulatory battles that have plagued it ever since.

Indeed, in September 2012, an analyst wrote that legal pressure on the energy drinks market because of health and wellness concerns in the US may have dissuaded Coca-Cola from a move on Monster.

So have those concerns lessened, leading to yesterday's swoop from Coca-Cola? Analysts I spoke to today intimated that fears over Monster's troubles may have been overstated in the media, and from a business viewpoint, the gains from a partnership with Monster, and its potential in the global market, outweigh domestic regulatory wrangling.

However, there are other issues at play.

During the release of Monster's first-half results last week, CEO Rodney Sacks said the company was now focussing efforts on products that are “more drinkable... lighter in calories and lighter in taste”. Products such as the no-calorie Zero Ultra and its soon-to-be-launched extension Ultra Sunrise.

Ultra Zero has been very successful for Monster, so it's no surprise the company is keen to replicate it. But the product also addresses consumer fears over sugar that Sacks said are beginning to creep into the energy drinks category.

This, of course, is something Coca-Cola knows all about. It has had to deal with a declining CSD category in the US because of consumer concerns over sugar intake. Even diet sodas have seen volumes drop in the country as consumers turn away from artificial sweeteners such as the sucrlose and acesulfame potassium that are used to sweeten Zero Ultra.

So is Coca-Cola, which is joining up with Monster to expand away from its core CSD business, merely jumping from the frying pan into the fire?

If anything, energy drinks contain more sugar than CSDs - according to the website a 16-ounce can of Monster's namesake product contains 3.38 grams-per-ounce while Coca-Cola's has 3.25.

This could be one of the reasons why Coca-Cola is only taking a minority share in Monster. Nomura analysts pointed out today that past Coca-Cola conquests that have involved a 100% stake, such as the Vitaminwater takeover in 2007, have “not always been successful”.

The reduced stake lessens the health and wellness risks Coca-Cola is exposed to while at the same time allowing it to put the full weight of its global distribution network behind Monster's fast-growing brands.

It's a sweet deal for both companies. Now they must hope that sugar doesn't turn it sour.