Why Coca-Cola may launch Coke-branded energy drinks

Coca-Cola wants to be a “total beverage company.” It’s hoping a new energy drink will help it get there.

The company recently said it is considering adding a new drink, Coca-Cola Energy, to its roster of Coke products. The drink would use guarana extract and other naturally-derived ingredients for more caffeine and would also come in a sugar-free variety.

Monster, Coca-Cola’s energy drink partner, isn’t thrilled with the plan. Coca-Cola has filed for arbitration with Monster to see whether the new product would breach the agreement they entered when Coca-Cola took a stake in Monster and the two swapped products. Both companies have said that they value the relationship.

But Coca-Cola (KO) CEO James Quincey is pushing for aggressive growth, and he’s not afraid to ruffle some feathers.

“Coke wants to play everywhere it can,” said Duane Stanford, executive editor of Beverage Digest. “When you do that, sometimes you will bump against contractual barriers.”

Now, Coca-Cola appears to be turning its attention to energy — with good reason.

The energy sector is one of the fastest-growing segments of the beverage industry, said Laurent Grandet, a consumer analyst with Guggenheim Securities. And it’s highly profitable because consumers are used to paying more for energy drinks than soft drinks, he noted.

Plus, some people already drink Coke for a caffeine jolt. “It’s a natural brand extension,” he said.

Coke recognized the importance of energy drinks when it struck a deal with Monster in 2014. Once the deal closed, Coca-Cola transferred to Monster its energy brands, like Full Throttle, Burn and Mother. It also took over Monster’s non-energy beverage brands, including Hansen’s Natural Sodas and Hubert’s Lemonade. Coca-Cola also became Monster’s preferred distribution partner globally. Coca-Cola now owns nearly 18.5% of the company.

But since then, the energy drink sector has evolved.

“Pretty much every beverage category is experimenting with making full use of energy components,” Stanford said. We’re “seeing lines blur.”

Recently, consumers have been looking for functional ingredients — like caffeine for energy or turmeric for health — in everything from sparkling water to juice. That means that energy drinks compete with other types of beverages, and that people who may not seek out an energy drink may still be looking for an energy boost.

By using natural ingredients and leveraging its recognizable brand, Coke may be going after consumers who wouldn’t reach for a Red Bull or Monster drink. In that way, the new drink could serve as complement, rather than competitor, to Monster.

Coca-Cola has said it “will abide by our contractual obligations” to Monster once the issue has been resolved, and a Monster executive told analysts last week that the relationship between Coke and Monster is “good,” adding that he “doesn’t see any changes” stemming from the disagreement.

With more energy drinks, Coca-Cola is starting to fill out its total beverage mandate. Earlier this year, Coca-Cola focused on coffee and sports drinks. The company announced in August that it agreed to buy UK coffee chain Costa Coffee for $5.1 billion, part of what Quincey called a “coffee strategy.”

Quincey said that the acquisition is about gaining access to Costa’s many products, like its coffee vending machines, on-the-go outlets, ready-to-drink iced coffee and beans from its roastery.

A few weeks before, Coca-Cola announced plans to take a big stake in sports drink maker BodyArmor to become the company’s second-largest shareholder. The move helps Coca-Cola compete against PepsiCo’s Gatorade, which has performed extremely well.

Coca-Cola has also been investing in its flagship brand.

Early this year, the company unveiled a new look and new flavors of Diet Coke that were painstakingly designed to lure in Millennials. Coca-Cola spent two years on the relaunch, and says it asked more than 10,000 people for their thoughts.

Stanford sees interest in an energy line as a sign that Coca-Cola thinks Coke still has room to grow. “Coca-Cola is once again looking for ways to experiment with its flagship brand,” he noted.

Coca-Cola is still avoiding entering some markets. Quincey said last month that the company “doesn’t have any plans at this stage” to enter the CBD market. CBD is a non-psychoactive component of marijuana.