Back to top

Image: Bigstock

Brand Strength Aids Monster Beverage (MNST) Amid Supply Woes

Read MoreHide Full Article

Monster Beverage Corporation (MNST - Free Report) has been resilient in a tough market, owing to strength in its energy drinks business. The company’s sales in second-quarter 2021 benefited from continued strength in its energy drink category, particularly the Monster Energy brand. Product innovations play a significant role in the company’s success. It remains committed to product launches and innovation to boost growth.

However, we cannot ignore the headwinds arising from supply-chain disruptions, which have been plaguing the industry. Logistics issues, including shortages of shipping containers and global port congestions, higher input costs and freight inefficiencies have been a threat to margins. These are likely to keep affecting the company in the near term.

Factors Aiding Growth

Monster Beverage has been experiencing continued strength in its energy drinks category, which is driving its performance. We note that the company offers a wide range of energy drink brands such as Monster Energy, Java Monster, Cafe Monster, Espresso Monster, Monster Energy Mule, Juice Monster Pipeline Punch, Juice Monster Pacific Punch, Juice Monster Mango Loco, Monster Ultra Paradise, and Monster Hydra Sport.

In second-quarter 2021, the Monster Energy Drinks segment’s net sales advanced 33% year over year. The segment’s sales included a positive impact of $35.5 million from favorable currency rates. According to Nielsen, sales for the energy drinks category, including energy shots, increased 14.2% year over year for the 13-weeks ended Jul 24, 2021. Sales for the company’s energy brands, including Reign, rose 8.6% in the same 13-week period.

Management is optimistic about strength in the energy drinks category with the Monster Energy brand growing significantly. Product launches across the Monster family will likely drive the company’s overall top and bottom lines.

The company’s product launches in the United States in the first half of 2021 mainly occurred in the first quarter. In the second quarter, it refreshed the can graphics for its Rehab Monster brand family and the Full Throttle line. It also updated the name of Blue Agave to TrueBlue. In Canada, it launched two products — Monster Punch Papillon and Monster Punch Khaotic — in the second quarter.

Other launches included Reign Orange Dreamsicle in Puerto Rico; a second SKU in Bolivia with Monster Energy Zero Ultra; Fury Mean Green in El Salvador; Juice Monster Pacific Punch and Monarch in many EMEA countries; Monster Energy Super Cola in Japan; Pipeline Punch in Taiwan, Hong Kong and Macau; and Ultra Paradise and Ultra Fiesta in many countries.

Management remains on track to launch a number of additional products and product lines in domestic and international markets later this year. The company is on track to launch a line of non-alcoholic energy sale under the True North brand in 12-ounce sleek cans. It plans to complete the full launch of True North in the mainstream channels in 2022.

Near-Term Challenges

Like others in the industry, Monster Beverage has been facing hardships related to logistics and supply-chain challenges, which weighed on margins in the second quarter. In second-quarter 2021, the company continued to witness shortages in its aluminum can requirements in North America and Europe, owing to its higher volume growth and the ongoing supply constraints in the aluminum can industry.

The company has also been witnessing delays in the procurement of certain ingredients, both domestically and internationally. This has led to heightened challenges in meeting the increased consumer demand in North America and EMEA in the second quarter.

The company has also been facing freight inefficiencies as well as significant increases in domestic and international freight costs. It is experiencing higher input costs, particularly for aluminum, and other costs in the current environment. These headwinds have resulted in higher cost of sales as well as increased operating expenses in the second quarter, impacting both gross and operating margins.

Other companies, which recently highlighted the significant impacts of the supply-chain challenges on its results, include PepsiCo (PEP - Free Report) , Coca-Cola (KO - Free Report) and Keurig Dr Pepper (KDP - Free Report) .

Coming back to Monster Beverage, management expects logistical issues, including shortages of shipping containers and global port of entry congestion to delay the arrival of imported cans, with deliveries likely to increase sequentially in the second half of 2021. It expects challenges related to the supply constraints in the aluminum can industry, shortages of shipping containers, global port congestions, and higher freight and input costs to continue for the next few months. This will continue to adversely impact gross margin rates.

To meet the demand shortages witnessed in second-quarter 2021, Monster Beverage has taken steps to source additional quantities of aluminum cans in excess of its contracted volumes from the United States, South America and Asia. It has also entered agreements with two suppliers of aluminum can in the United States, which are anticipated to be operational in the fourth quarter of 2021. However, the effects of these actions remain to be seen.