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By Barbara Grondin Francella
NEW YORK -- Energy shots have given the folks at ConocoPhillips Co. a real jolt.
After reviewing sales trends for the fast-growing product segment, the Houston-based operator of 300-plus c-stores has rolled out a new merchandising program that puts more energy shot SKUs on every sales counter, presented in a more cohesive way.
"We expect sales to grow and grow this year," said Rick Reddick, national category manager of packaged beverages and beer, who took over management of the segment after energy shots were moved from the health and beauty category to beverages a few months ago. "Last year, sales went crazy. We needed to figure out a way to merchandise these products consistently. They are an impulse item for many people now, but they are becoming more of a destination item for these consumers."
Through October 2008, energy shots approached $1 million in sales at ConocoPhillips' stores. "I expect our sales will double [this year] because we are just now getting our program together," Riddick said. In October, energy shots made up 4.5 percent of SKUs in the chain's energy category, 5 percent of the category's unit sales, 5.5 percent of dollar sales and 6.5 percent of gross profit margin.
For the past few months, Reddick has worked with suppliers and ConocoPhillips' field merchandisers to remove “changemakers” and "hodgepodge" from the sales counter to make room for 10 to 12 energy shot SKUs, positioned on two or three countertop racks near the registers. (Keeping them near the cashier also helps reduce theft, which some industry watchers said is increasingly becoming a concern.)
Reddick's challenge now is picking the right SKUs from the selection offered by ConocoPhillips' wholesale distributor and local novelty suppliers. "I get calls every day. They all say, 'I have the best new energy shot,'" he said. "But [suppliers] come and go."
Through August 2008, more than 20 new energy shot products were introduced, compared to nine for all of 2007, according to Mintel Research Consulting, based in Chicago.
"These are well-suited to the c-store industry, rather than supermarkets, since they are almost an immediate consumable," said Krista Faron, senior analyst for Mintel.
In a sign of the segment's health, market leader 5-Hour Energy saw sales of its brand hit nearly $122 million for the 52 weeks ending Oct. 4 2008, tripling in the last year, according to Nielsen Co. data provided by Living Essentials, the four-year-old, Novi, Mich.-based marketer of the brand. Unit sales were up 292 percent during that time.
The 5-Hour Energy brands accounted for $14 million in c-store sales during those 52 weeks, or 77 percent of the channel's s energy shot sales, according to Carl Sperber, the company's communications director.
Reddick predicts sales of energy shots to grow 30-, 40- or even 50-percent annually for the next few years. "With today's lifestyle of the younger generation and demanding jobs of older consumers, I think energy shots will be around awhile. Will they level off? Sure. But many people will keep using them. I think the top five manufacturers will end up with 80 or 90 percent of the market, just like in energy drinks."
After witnessing the dramatic growth and potential of energy shots, which originated as pharmaceutical products, the soda and energy drink giants are getting into the game. Coca-Cola's Nos Powershot was an early entry and the recently unveiled a second flavor. In November, the company introduced Full Throttle Quick Shot in two flavors.
"I was surprised and impressed with Coca-Cola," said Gerry Khermouch, editor of Beverage Business Insights. "That company is usually extremely conservative. But it is amazing, given the footprint of these energy shots, how much money can be made from them."
Also on shelves or near delivery is Monster's Hitman, two Rockstar flavors and Pepsi's Amp energy shot. Red Bull, the daddy of all energy drink marketers, also is coming out with a shot. "One concern I have, though," Khermouch said, "is the proliferation of products will put pressure on margins."
With retails typically at $2.99—5-Hour Energy's new extra strength carries a suggested retail price of $3.49—the energy shot category carries a healthy margin of 50 percent, give or take a few points. (Energy drinks are typically priced at a margin near 40 percent.)
Reddick plans to offer 5-Hour, which accounts for 82 percent of the chain's energy shot sales; 6-Hour brand products; and a combination of other major energy drink brands' SKUs. "I have to give the big names a shot," he said. "Of course people will buy a Red Bull energy shot. We have to be on the cutting edge when new flavors and brands come out." He added: "Those with strong name recognition will jump ahead of the other smaller, less known brands out there."
The shots will be displayed in manufacturer-supplied racks at the checkout. Reddick may also try to merchandise a few SKUs in the cooler.
Currently, the category manager is putting together a promotion of 5-Hour items to boost consumer awareness of the segment and boost the brand. "My biggest concern is if we promote 5-Hour, many other energy shot makers will want me to promote their product too," Reddick said.
To protect the drinks' profits, the promotion would offer one energy shot at the regular price, and two for $5. "People are coming in every day for an energy shot, so why trade someone down when they are spending $2.99 each now," he said. "They haven't flinched at that price point yet."
Considering the manufacturer's promotional discount and assuming 60 percent of the purchases will be at the two-for-$5 price point, the promotion's blended margin will be 47 percent.
"Using the 60/40 assumption, we will need a 14-percent increase in units to break even," Reddick said. "Anything over that will be incremental sales and margin dollars, which is what I'm after. We will evaluate the promotion weekly and if the [sales] uplift is not there, we will pull the promotion. If sales margins are significantly improved, we will consider promoting other brands [this] year."
Whether energy drink users and energy shot consumers are one in the same is unclear. "It's a relatively new category and the [pharmaceutical channel] is not measured in conventional ways," Kermouch said. "It could be the same user at different consumption occasions, who don't want to drink a lot of liquid, but want to get the jolt without drinking 16, 20 or even 32 ounces."
Mintel's Foran said energy shot consumers probably skew a bit older than energy drink buyers. "They are more likely people who are working a long shift or need a pick me up at work, rather than 20-year-olds looking for a drink before they go out for the night," she said.
The marketing and positioning of energy shots—and their effect on the energy category, has yet to be figured out, noted Phil Smallwood, category manager for BP’s ampm stores.
"The ads for energy shots seem to be directly targeted at the energy drink consumer," he said, adding he expects them to remain outside the cooler, because their size would create visibility issues. "As the big players like Red Bull join the wave, will they have an impact on sales of energy drinks? Yes."