Monster spends to defend safety of its products

by Jeff Gelski
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CORONA, CALIF. – Monster Beverage Corp. will continue to invest in defending the safety of its products. The company incurred increased professional services costs of $5 million in the second quarter ended June 30, net of insurance reimbursements, of which $4.2 million related to regulatory matters and litigation concerning the advertising, marketing, promotion, ingredients, usage, safety and sale of the company’s Monster Energy brand drinks.

Click the infographic to view Monster Beverage’s financial results for the quarter.

Different litigation may come in different forms, said Rodney Sacks, chairman and chief executive officer of Corona-based Monster Beverage Corp., in an Aug. 8 earnings conference call.

“It all depends on at what level they reach, and also the timing of the litigation,” he said. “Because if you get into discovery periods, you then will start to have a ramp. If there is no discovery at that point in time, then there aren’t a lot of costs. So it’s difficult to say what the costs will be. I think we will see a reasonable level of costs being incurred in the foreseeable future until these matters settle down.”

In May the Food and Drug Administration said it would look at potential health hazards associated with the consumption of caffeine in food and dietary supplements. On July 31 the U.S. Senate held a hearing on the marketing of energy drinks to youth. Another matter involving the city attorney of San Francisco may be argued in the near future, Mr. Sacks said.

Mr. Sacks said negative publicity has hurt the energy drink category overall.

“The reduction in the growth rate of the energy drink market in the U.S. that I alluded to in my previous conference call on May 8, 2013, continued through the second quarter of 2013, we believe in part due to the ongoing negative publicity that continues to question the safety of energy drinks and/or their ingredients and/or suggest limitations on their ingredients, including caffeine and/or levels thereof, and the minimum age restrictions for consumers,” he said.

Mr. Sacks cited Nielsen Co. U.S. retail statistics for the 13 weeks ended July 27. For all outlets combined, sales in the energy drink category, including energy shots, increased by 2.7% versus the same 13-week period a year ago. Monster Energy sales grew 10.1% in the 13 weeks ended July 27.

“U.S. Nielsen market statistics show that Monster Energy’s growth is still outpacing the growth of the category as a whole on an increasing basis, particularly over the last four weeks,” he said.

He said the company has sold more than 9 billion energy drinks over the past 11 years. In 2012 the company sold about 2 billion cans of Monster Energy drinks in about 90 countries.

“Put another way, more than 5 million cans of Monster Energy drinks are sold and safely consumed around the world each day,” Mr. Sacks said.

A Starbucks 16-oz brewed coffee contains about 330 mg of caffeine, which compares to about 160 mg of caffeine in the same size Monster Energy drink, Mr. Sacks said. A 16-oz Caribou Coffee brewed coffee contains between 305 mg and 370 mg of caffeine.

“Unfortunately, inaccurate, speculative and biased articles continue to be published regarding energy drinks and, in particular, the caffeine levels therein,” he said. “The simplest and most effective way of addressing these comments is to compare the caffeine levels in Monster Energy drinks from all sources to the caffeine levels in coffeehouse coffee such as, for example, Starbucks or Caribou, as this comparison is easily understood by and is meaningful to consumers.”

In the second quarter Monster Beverage Corp. had net sales of $630,934,000, a 6.5% increase from $592,640,000 in the previous year’s second quarter. Net income was $106,873,000, equal to 64c per share on the common stock, which compared with 109,795,000, or 62c per share, in the previous year’s second quarter. Legal and other costs related to regulatory matters and other costs had a negative impact, as did foreign currency transaction costs, which accounted for losses of $3.6 million.

“We are pleased to report another quarter of solid sales growth, in both our domestic and international markets, but note that there were certain exceptional costs that affected profitability during the quarter,” Mr. Sacks said. “Despite the single-digit category growth rates we are seeing in our major markets, the Monster Energy brand continues to grow in excess of such category growth. Monster Energy Zero Ultra, launched in the third quarter of 2012, has become one of our best-selling products. Following on this success, we launched Monster Energy Ultra Blue in March 2013.”

Sales of Monster Energy Zero Ultra, although accretive, resulted in some cannibalization generally across existing stock-keeping units, Mr. Sacks said in the conference call.

Sales of the Monster Energy brand internationally, including in Japan, continue to meet expectations, the company said. Second-quarter net sales in 2013 by the Japanese distributor were significantly lower than net sales in the previous year’s second quarter, which saw the launch of the Monster Energy brand in Japan.

The company plans to launch Monster Energy in additional countries in Asia later this year or early in 2014, Mr. Sacks said in the conference call. He added Monster Beverage Corp. has incurred delays in obtaining regulatory approval for the sale of Monster Energy drinks in India.

“We view India as an exciting future growth opportunity for Monster,” Mr. Sacks said.
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