In October 2008, Hansen Natural Corporation, now Monster Beverage, signed a 20-year agreement with Coca-Cola for the distribution of Monster’s energy products across EMEA and certain US territories. This deal complemented the company’s existing distribution agreement with Anheuser-Busch. Since the deal was signed, Monster’s sales have increased by 5x, gross margin has expanded from ~52% to over 60% and the EBIT margin has increased ~600bps to ~35%.

What's even more impressive is that over the last 20 years, FCF per share has compounded at 33% per year.

We interviewed an executive with experience distributing Monster Energy and Fever Tree in Europe to better understand the distribution strategies of these two businesses and Fever Tree’s growth opportunity in Europe.

The Coca-Cola distribution deal catapulted Monster globally. This was Rodney Sacks, Monster’s CEO, in the earnings call after the deal in 2008:

"We believe that on an overall basis CCE has a very extensive network of salesmen, merchandisers, trucks and a very professional selling organization behind them. They have got very deep reach; they reach a large number of additional accounts that have not really been available to us through an alcoholic system, because in many cases they just do not go to the same universe of accounts. There are many areas in the US where there are dry areas or the alcoholic and non-alcoholic systems do not line up." - Rodney Sacks, Monster Beverage CEO, 2008,

The distribution networks of alcoholic and non-alcoholic drinks is different given not all retail points of sale own liquor licenses. Monster was injected into Coca-Cola’s non-alcoholic distribution system which expanded the reach of the brand into areas that Anheuser-Busch didn’t cover.

This fundamentally changed Monster’s growth trajectory and built a distribution moat that smaller energy brands couldn’t compete with.

Once defined as a fad, the energy category consistently grows at high-single digits per year and is estimated to reach over $85bn in 2026. Market share is also relatively stable with Red Bull having ~41% share, Monster ~39%, and Rockstar (recently acquired by Pepsi) ~10%.

It is interesting that Coca-Cola failed to crack the energy category.

Coke launched Burn Energy in 2001, Full Throttle in 2004, and Relentless in 2006. By Coca-Cola’s standards, each product failed and the portfolio was sold to Monster in 2014. Coke owns 20% of Monster so it certainly softens the blow of failing to enter organically.

It’s hard to say exactly why Coca-Cola struggled in energy. Maybe it was too difficult for distributors to carry Coke energy alongside such a strong brand like Monster. The advertising techniques are also very different between soda and energy; Red Bull and Monster shun TV advertising to focus on sports, extreme games, and other sponsorship and events.

Could it be just as hard for competitors to break into the premium mixer category against Fever Tree?

It seems Fever Tree is more similar to Red Bull than Monster: category leader, with products at a higher price point, and a go-to-market strategy of distributing the product to every bar, club, and hotel:

“I was also one of the first customers of Fever-Tree, when they launched, here in Austria, in 2008, 2009. More or less, they did the Red Bull strategy. They really went to on-trade only. They picked one, two or three bigger distributors, which were on-trade specialists, who had their own one, two, three guys, going out and trying to sell it into the gastronomy. It was very similar to Red Bull, to be honest. There were no premium mixers; they called it premium mixer. It was two or three times the price of Schweppes, so they really had a completely different approach, compared to Monster, but very similar to Red Bull”

Red Bull and Fever Tree’s advertising strategies are also similar: if Red Bull sponsors Formula 1 and German football clubs, Fever Tree has Queen’s Tennis and Royal Ascot. As we’ve previously discussed, Fever Tree has also spent the last 10 years partnering with leading spirit companies to be co-marketed in the on-premise distribution. This was from our analysis last year:

"Fever Tree was built with bartenders in the on-premise channel. The company has a national agreement with Southern Glazers, the largest spirits distributor in the US, and partners with large spirit companies such as Diageo and Pernod Ricard. Fever Tree has focused on winning the hearts of mixologists to provide the best drinking experience in clubs and bars globally. The difference in the go-to-market strategies defines the brand DNA of each company; Q-Mixers is a retail-driven beverage brand optimised to stick out on the shelf and Fever Tree was built in partnership with spirits companies to create the ‘perfect gin and tonic’."

To draw an analogy, if Fever Tree is similar to Red Bull, Q-Mixers is Monster Beverage: off-premise focused, larger sizes, and cheaper pricing. Luckily for Fever Tree, Q-Mixers doesn’t have a Coca-Cola-like distribution agreement.

One big difference between premium mixers and the energy category is the presence of a huge incumbent: Schweppes.

Prior to Fever Tree’s growth, Schweppes had near-100% market share in tonic water:

"Schweppes has this heritage; it’s old and it has been there all the time. 10 years back, nobody had ever asked about it; if you drank a tonic, it was Schweppes. They had about 100% market share. Basically, every wholesaler was distributing Schweppes; it was like water. You have Coke, you have Schweppes, you have water. It was everywhere in the off-trade. Even the smallest local drinks distributor had Schweppes."

Until last week, Schweppes was the leading Tonic brand in the US. Over the last decade, Fever Tree has slowly been gaining market share and is now the largest tonic brand in the US and the UK. There seems to be a similar trend in Europe where Schweppes has been delisted by the second largest grocer in Austria:

"Nothing much has changed in Schweppes’ distribution. They are still going for everything, everywhere. As far as I know, Spar, the second biggest or the biggest supermarket chain in Austria, delisted it; they threw it out. They lost 50% of their off-trade distribution, overnight. It is the biggest or second biggest chain, depending on how you look at it and if you go to Spar, you won’t find Schweppes, because they have an own brand and they have Fever-Tree."

Unlike Coke in energy, Schweppes already had an identity in the tonic category. The problem seems to be a lack of accountability due to a complicated ownership structure. Schweppes is owned by Keurig Dr Pepper in the US, Swire Coca Cola in Asia, and is split between Suntory and Coca Cola throughout Europe.

No wonder it has taken Schweppes 10 years to launch a premium line in a glass bottle. And even then it’s supposedly the same liquid.

We could see the off-premise bifurcate further where grocer’s offer a large, 1-2 litre PET bottle of private label tonic and then a premium mixer brand occupies the high end. In the long run, maybe there is little need for Schweppes in between?

From our research, over 50% of US tonic volume is sold in 1L PET bottles. This is also the format for the majority of Schweppes’ volume. Fever Tree, on the other hand, is mainly sold in 200ml cans. The smaller format keeps the product fresher and bubbly throughout. Halfway through a 1L PET Schweppes bottle and the tonic is flat. Such a simple difference can provide a far superior drinking experience with premium mixers.

Red Bull had the advantage of creating a whole new category whereas Fever Tree created a sub-category. Fever still needs to win consumer mindshare from Schweppes whereas Red Bull was occupying free mindshare.

The presence of Schweppes still poses a risk to Fever’s growth but the strength of the brand equity and durability of the distribution network will also be tested by new mixer entrants."

"The problem with this market is that it’s very young. It is a product that has been here for a couple of years; it seems to be established, but it’s not. If Fever-Tree didn’t exist tomorrow, I don’t think there would be so many people who would say, the love of my life has gone. You really need to be aware of someone like Thomas Henry, or any other competitor, not taking over. "

Every month we come across another premium mixer brand: Thomas Henry, Fentimans, Q-Mixers, Franklin & Sons, Lixir, DA-SH, Double Dutch, we could keep on going. In Europe, the grocers group these drinks together in a category called ‘urban drinks’:

"There is a trend, on the off-trade, which is urban drinks; I don’t know if you use this term. Everything that is new, stylish and interesting, in terms of drinks, are put into the category of urban drinks. Here in Austria, and I think even in Germany and Switzerland – so in Central Europe – the supermarket chains give urban drinks their own shelf space. They have extended their shelves for a new category. There you will find Thomas Henry, the funny new Cola variations, a lot of iced tea things, such as ice tea energy drinks. That is growing and it is probably the fastest-growing drinks category."

Therefore, an important longer term question is how Fever Tree’s brand equity and distribution network can prevent the growth of new entrants?

One answer is that Fever Tree’s Southern Glazer’s US distribution deal is its own Monster-Coca-Cola agreement. Southern’s gives Fever Tree distribution in on-premise accounts that effectively shuts out access for new premium mixers. We are reminded of this comment from an interview with a Fever Tree competitor last year:

F​​"One of our biggest challenges was probably being late to market. Fever-Tree was already there, entrenched. A perfect example would be someone like an MGM Grand that owns all the casinos in Vegas. They get cocktails, they get service, they get premium; Fever-Tree was already there and their route to market was very strong." - Former VP of Sales at Q-mixers

But what could be the equivalent for distribution in EMEA and the rest of the world? It’s difficult for Fever to partner exclusively with Diageo or Pernod because the company is brand agnostic and co-markets with every spirit brand.

But maybe a distribution agreement with a beer company would work? Or Nestle and Unilever? A company with beer or water distribution seem to be the options:

“You have the breweries; Austria and Germany are big distributors of breweries, because everybody drinks beer in the on-trade. A lot of these companies do have something to do with beer or water. Usually, from the heritage, they come from the water or beer side. They either bring water to the on-trade, because you need to have sparkling water there, or you have to have beer; another kind of sparkling water.”

Today, Fever Tree is closely aligned with spirits drinking occasions, but as the portfolio widens further to lemonade, ginger ale, and other non-alcoholic mixers, the strategic value of a Monster-Coke-like deal increases.

Last month, Fever Tree guided to ~15% revenue growth and stable margins for the next fiscal year. The stock declined over 20%. EBITDA margins are down from ~30% in 2017 to ~20% today and the market is questioning whether the company will reach the magical 50% / 30% gross and EBITDA margin combination again.

As local bottling scales in the US and post-covid supply chain costs subside, management expects ~150 bps of gross margin expansion which drives the EBITDA margin to 23%.

This is still a way off the historical 30% EBITDA margin. Maybe the US price decline last year is really taking its toll?