BodyArmor Analysis: Coke Deal Locks Down Sports Drink Share

The Coca-Cola Company confirmed Friday that it has notified U.S. antitrust regulators that it has begun the process of acquiring a controlling stake in sports drink brand BodyArmor. If the deal goes through, it could give Coke a commanding presence in the sports drink category with a serious competitor to PepsiCo’s Gatorade.

Coke purchased a minority stake in BodyArmor in August 2018. In early 2019 — about six months after the switch to the Coke distribution network — BodyArmor reported roughly $500 million in annual dollar sales, according to Nielsen data for the 52-week period ending February 23. As of February 6, 2021, however, Nielsen reported that the brand was up 43.4% in the 52-week period to $1.01 billion, making it a close third in the category behind Coke’s own Powerade, which reported $1.14 billion in dollar sales, up just 0.9% for the full year.

According to market research firm Euromonitor International, BodyArmor’s market share of the sports drink category has increased more than tenfold in the past five years; in 2015 the brand reported a 0.5% market share, compared to Gatorade with 76.6% and Powerade with 18.2%. In 2020, BodyArmor’s market share grew to 9.3%, while Gatorade’s fell to 67.7% and Powerade dropped to 13.7%. In that same period, the sports drink category grew dollar sales 25.2% to over $9.2 billion.

Though Coke’s plans, first reported by Beverage Digest, came as a surprise to some on Friday, some in the beverage industry saw the announcement as a matter of when, not if.

Arif Fazal, founder and managing director of Blueberry Ventures, said he saw the decision as a natural extension of Coke’s minority stake in 2018, which took BodyArmor out of the Keurig Dr Pepper (KDP) distribution system and disrupted industry expectations that the brand would be KDP’s long term stake in the sports drink space.

“When Coke came in in 2018, that was sort of the ‘Wow, okay, what’s going on and what could go on’ moment,” Fazal said. “But I think that was the beginning of Coca-Cola really taking a step up to saying this could be the legitimate number two player in this category that, frankly, Pepsi has really owned and controlled.”

Though KDP still owns a 12.5% stake in BodyArmor (and it is unclear whether Coke would be buying out their position), Fazal said the deal will clarify the two-company dominance in the category: The two beverage giants would control roughly 99% of the sports drink sector.

“They’re [Coke] looking through the lens of market segmentation,” Fazal said. “They’re looking through the lens of the differentiation between BodyArmor and both Gatorade and Powerade.”

A Real Competitor

An analysis of the potential deal by Goldman Sachs Equity Research said BodyArmor would premiumize Coke’s product mix while giving it control over two of the top three brands in the sports drink category. As well, the $7.5 billion sports drink category is growing double digits year-over-year, the report said, comparable to growth in the energy drink space.

BodyArmor co-founder and chairman Mike Repole told BevNET in an email on Friday that the acquisition was not yet a done deal and that his company is keeping its options open. However, during the Consumer Analyst Group of New York (CAGNY) virtual conference last week, Coke CFO John Murphy noted that the company’s option to increase its stake in BodyArmor will come due later this year.

“Although Coca-Cola buying a controlling interest in BODYARMOR is a distinct possibility, reports that Coca-Cola is purchasing a controlling interest in BODYARMOR are premature,” Repole said. “While this is one scenario for BODYARMOR, there are other potential options for the future of the business.”

He added that the company’s goal is to ultimately become “the #1 brand in active hydration” and that it will continue to work within the Coca-Cola bottling system “for future years to come.”

If BodyArmor surpasses Powerade as the number two sports drink, assuming its current trajectory holds, some industry experts have been left to wonder whether Coke may be looking to trade up within the category. Repole himself predicted at BevNET Live in 2019 that the brand would surpass Gatorade as the number one sports drink by 2025.

“Brands that stay the same over years eventually get stuck, and honestly I think that’s Gatorade’s biggest issue right now,” Repole said during the event. “The same formula that was in the bottle in 1965 is the same formula that’s in the bottle today in 2019, and because they had no competition it was fun for them — like ‘Oh, we have no competition.’ Just so you know Powerade is not their competition, let’s just be honest.”

Ken Sadowsky, senior beverage advisor at Verlinvest, noted that Powerade has often struggled to make a cultural impact with consumers, despite having the full force of the Coca-Cola brand building system behind it to drive sales. Frequently, Powerade could undercut Gatorade on price, but it has traditionally lacked the innovation and brand ubiquity that PepsiCo’s behemoth wields.

“It seems like [with BodyArmor] there’s finally a competitor for Gatorade,” Sadowsky said. “As much as Coke spent money on Powerade, the consumer, I don’t think, ever really liked it enough to have it be a viable competitor. And that’s why Coke went out to get something that was more relevant to a younger audience who consumes more of this category than the older audience.”

In recent years, Gatorade has stepped up its innovation towards better-for-you and premium product lines, including zero sugar and organic variations as well as the functional Bolt24 sub brand. Sadowsky noted that much of this emphasis on better-for-you sports drinks was started by BodyArmor and it is possible that Gatorade’s most recent moves could be, in part at least, a response to differentiated products such as BodyArmor Lyte.

Last year, Gatorade launched a consumer-facing ad campaign for Bolt24 aimed at taking BodyArmor down a notch by releasing in-store, point-of-sale signs that call out its competitor by name and highlights Bolt24’s low sugar count. Repole told BevNET at the time that he was “flattered that Gatorade is worried and concerned about us” and the company responded with its own series of competing ads.

According to Sadowsky, BodyArmor’s business strategy largely follows the “Vitaminwater Playbook,” with many of its moves mirroring the decisions that the enhanced water brand (in which Repole was also a key player) made ahead of its 2007 acquisition by Coke. Of note is BodyArmor’s recently announced partnership with singer Carrie Underwood, the brand’s first non-athlete celebrity ambassador, a decision he said will help move BodyArmor from only being a high-intensity performance beverage to an anytime lifestyle product. While Glaceau products like Vitaminwater and Smartwater have given Coke traction in the broader better-for-you beverage space, the brand’s attempts at a sports drink — the most recent, Vitaminwater Active, launched in late 2017 — has been discontinued.

“That’s [BodyArmor] stepping outside of the box and making this more of a lifestyle brand or an every person’s drink rather than a straight out sports drink,” Sadowsky said. “The primary audience was definitely the athlete and the weekend warrior, but if the only people that drink Gatorade were world class athletes that actually needed it, it wouldn’t be a multi-billion dollar brand. But that’s where brands get the credibility to move from their early adopters to a wider audience.”

Inside Coke’s M&A

If completed, the move to buy a controlling stake in BodyArmor will mark Coke’s first major acquisition since it began a project to eliminate over 200 underperforming ‘zombie brands’ from its global product portfolio in order to focus on scaling recent acquisitions such as sparkling water Topo Chico. During the company’s Q2 2020 earnings call last July, Coke CEO James Quincey said the discontinued brands — including Odwalla, Zico (later sold to PowerPlant Ventures) and TAB — accounted for roughly 2% of total global revenue.

The conglomerate has also in the past year faced significant headwinds against the COVID-19 pandemic; in its most recent Q4 and 2020 full year earnings report this month, Coke’s net revenues fell 5% to $8.6 billion during the quarter and organic revenues fell 3%. However, Quincey expressed optimism that the business remained healthy and said among its best performing products was Powerade Zero.

Jim Watson, senior beverage analyst at Rabobank, said that the interest in BodyArmor so close to its zombie brand purge reveals some of Coke’s calculus in its assessment of industry trends, particularly as the juice and coconut water categories have declined and plateaued in recent years.

“It tells you what they think about sports drinks in general,” Watson said. “So, juices and coconut waters, you may say these are tougher categories without as much running room and the brands they have in them may have peaked already. But sports drinks is a huge category that is actually growing and has grown more as BodyArmor has become a better competitor. This reinvigorated the category.”

Watson compared the prospective deal to PepsiCo’s recent focus on the energy drink category — acquiring Rockstar and striking a (now embattled) distribution partnership with Bang — as buying a “rare ticket” into a category it has long struggled to compete in.

The potential deal (alongside the Pepsi/Rockstar purchase) also reflects a shift in how conglomerates are approaching mergers and acquisitions in general, Watson said. For years, much of the beverage industry’s M&A activity has focused around acquiring small startups in emerging categories as a form of innovation — bringing in new products that could then be nurtured and scaled. However, recent strategic shifts have seen conglomerates take innovation in-house, either through their own R&D teams or through incubation programs that work with early stage startups. M&A activity, in turn, has become more focused on proven brands in large, high growth categories.

“It’s a question of what areas are big enough and are really important and that they don’t feel that they can roll out a brand themselves to compete,” Watson said. “And those have been energy and sports drinks, right?”

Should the acquisition go through, Watson said there’s not likely to be a notable difference in how BodyArmor is positioned in the market and its current expansion will likely continue on pace. However, there could be a long term impact as Coke probes the brand’s broader portfolio. He pointed to Smartwater, which at the time of Vitaminwater’s sale to Coke was a “little addition” in its infancy, but which the company has since invested in heavily. BodyArmor, comparatively, recently launched its caffeinated Edge line, as well as a smaller sports water line (which competes with PepsiCo-owned brand Propel), which could be ripe for Coke to build and scale.

“There are more bets than one being placed with this acquisition,” Watson said.