Red Bull SWOT Company Analysis Report

 

Red Bull SWOT Company Analysis Report

 

Red Bull GmbH

Strategic Evaluation

Swot analysis

Strengths

·         World-leading brand – Red Bull is the leading brand in the expanding energy drinks category, benefiting from first-mover advantage which has made it synonymous with energy drinks in many markets.

·         Strong focus – the company’s narrow product portfolio allows it to focus strongly on the development of its eponymous brand.

·         Benefits of private ownership – Red Bull’s private ownership means that it is able to make strategic decisions without the constraint of obligations to investors.

·         Broad geographic presence – the company has established a broad international presence, selling its core product in more than 130 countries, which insulates it against downturns in the fortunes of specific markets.

·         Extensive subsidiary distribution network – Red Bull operates a well-developed network of international subsidiaries which help to distribute the brand around the world.

Weaknesses

·         Reliance on a single category – Red Bull’s reliance on energy drinks makes it vulnerable to potential shifts in consumer preferences.

·         Lack of variety – the company’s limited portfolio - with just two product variants - is a key disadvantage in a category in which competitors are offering a larger range of variants and flavours, including crossover products such as RTD tea and energy drinks using water and juice as their base.

·         Single production location – the company’s use of a single production location exposes it to exchange rate fluctuations and the cost of distributing the product to subsidiaries around the world.

·         Raising capital – private ownership means that Red Bull’s capacity to raise capital for investment in international expansion is significantly more limited than rivals that are publicly owned.

·         On-trade constraints – Red Bull’s reluctance to form alliances with alcoholic beverage manufacturers and to develop alternative packaging is impeding its development in on-trade channels.

·         Heavy investment in marketing – the investment of up to 40% of company sales in marketing and promotion limits the funds available for the company to invest in acquisition, expansion and new product and packaging development.

Opportunities

·         Expansion in emerging markets – Red Bull has the opportunity to develop its presence in fast-growing emerging markets such as India and Mexico, which are seeing demand for energy drinks grow strongly in urban areas thanks to rising purchasing power, accelerated lifestyles and improving distribution.

·         Healthier variants – rising consumer health-consciousness is creating opportunities to develop energy drinks with healthier ingredients and more specific functional properties.

·         Hybrid products – as busy consumers look for quick energy boosts, there are growing opportunities to develop hybrid products which combine energy-giving properties with other drinks categories, such as RTD tea, fruit/vegetable juice and bottled water.

·         Complementary brands – Red Bull might consider the development of a complementary functional drink, along the lines of its Carpe Diem botanical bottled water drink, which was extended from the UK to North America in early 2007.

·         Strategic alliances – the company may consider engaging in more agreements with major multinational partners, as with Cadbury Schweppes in Australia, which would allow it to exploit established distribution networks and accelerate its penetration of new markets.

·         International production – expanding its production infrastructure internationally would help the company to diminish the negative impact of exchange rate fluctuations and provide greater flexibility on price in the context of growing competition and efforts to penetrate emerging markets characterised by low levels of purchasing power.

Threats

·         Increasing competition – the growth of energy drinks is stimulating the introduction of a growing range of rival products, both from innovative smaller players and major multinational beverage producers, which threaten to undermine Red Bull’s strong position in the category.

·         Shifts in consumer preferences – the company’s reliance on energy drinks means that it is sensitive to shifts in consumer preferences towards other categories and the emergence of products which incorporate elements of energy drinks in other categories, both in soft drinks, such as RTD tea, and alcoholic drinks, such as beer.

·         Regulatory constraints – a high caffeine content and the inclusion of the stimulant taurine mean that Red Bull is subject to regulations such as warning labels on cans, and is prohibited from sale in some countries, notably Denmark, France and Norway. It has also had to reduce its level of caffeine to remain on sale in Turkey.

·         Unhealthy image – rising consumer health-consciousness stands to undermine demand for energy drinks, which are increasingly perceived as unhealthy because of their caffeine and sugar content.

Growth Strategies and Future Prospects

Core Businesses

Innovation to drive growth

·         Red Bull remains solely focused on energy drinks. Euromonitor International forecasts that global sales of functional drinks will grow at  a CAGR of 5% in off-trade constant value terms and 3% off-trade volume terms over the 2007-2012 period, with energy drinks showing notably strong growth spurred by manufacturer innovation, which will create an increasingly crowded and competitive environment for Red Bull. Thus, while Red Bull has maintained a strong lead in energy drinks, it is seeing its share eroded by the emergence of new brands offering innovative variations on the core energy drinks theme in many markets.

Growing competition in key markets

·         The US is Red Bull’s core national market, accounting for 40% of the company’s global value sales in 2007. Euromonitor International forecasts that functional drinks in the US will grow at a CAGR of 5% in off-trade constant value terms over the 2007-2012 period. Energy drinks will play a significant role in this growth, helping to boost value growth beyond the 2% CAGR predicted in volume terms, as energy drinks continue to grow in popularity amongst Generation Y consumers.

·         US growth will, however, be driven by new flavours, brands and formats, representing an important challenge to Red Bull’s dominance in the category. Notably, while Red Bull’s 16oz (473ml) cans have become an industry standard in the US, as in other markets, several rival brands introduced 24oz (710ml) cans in 2006, reflecting the shift away from Red Bull’s definitive influence on the category.

·         Western Europe is Red Bull’s second most valuable regional market after North America, representing 32% of the company’s value sales in 2007. Euromonitor International predicts that functional drinks in Western Europe will grow at a CAGR of 6% in both off-trade value and volume terms over the 2007-2012 period. As in the US, the company is set to see its position in Western Europe challenged by the development of rival products offering new flavours and formulations.

Growth Opportunities

Diversification of the offer

·         There remains significant growth potential in energy drinks in Red Bull’s core geographic markets, though the fact that the category’s growth increasingly relies on innovation in flavours, formulations and packaging suggests that Red Bull may have to diversify its product offer. Potential areas for innovation include the development of products with a healthier image, including natural ingredients, such as ginseng and guarana, for example. Another related area is the development of hybrid products, which would incorporate other soft drink categories, such as fruit/vegetable juice and RTD tea. Such products could also open the way for Red Bull to extend into other sectors.

·         While the diversification of the product offer would raise the potential problem of blurring Red Bull’s image, which is particularly important amongst its highly brand-conscious core consumer base, the company has the option of introducing limited edition variants of its core brand. This strategy has been successfully employed in areas such as confectionery to maintain interest in established brands without diluting their core offer. Introducing products with new flavours, for example, for limited periods could appeal, particularly, to Red Bull’s fashion-conscious young consumer base.

Developing the consumer base

·         Red Bull also has the opportunity to extend sales beyond its relatively narrow core consumer base by, for example, promoting energy drinks as useful for consumers over the age of 30 looking to maintain energy levels in the course of busy lifestyles. This could also potentially serve to increase the range of the product’s consumption occasions. Moreover, the company could target consumer groups more specifically, mirroring the trend towards new products aimed at groups such as women, Hispanic consumers, sports fans, overseas military, golfers and collegiate sports teams being witnessed in the US. However, such activity carries the risk of alienating the company’s established consumer base.

Geographic expansion

·         With intense competition in its core markets, Red Bull is under increasing pressure to develop its geographic coverage. The company has significant opportunities to build on the foothold it has established in emerging markets such as India, Russia and Mexico, where off-trade value sales of functional drinks are predicted to grow at a CAGR of  36%, 17% and 16%, respectively, over the forecast period. Emerging markets are seeing rising disposable incomes, accelerating lifestyles and developing distribution infrastructures driving growth in categories such as energy drinks, though sales remain strongly concentrated amongst the expanding urban middle class.

·         Amongst developed markets, Australia shows particularly strong growth potential, with a predicted CAGR of 12% in off-trade value terms. Moreover, Red Bull’s experience in the Australian market suggests a way forward as the company looks to penetrate new markets quickly and faces growing competition from major multinational players looking to exploit energy drinks’ growth potential.

·         In Australia, Red Bull is sold through an agreement with Cadbury Schweppes, allowing the brand to exploit the multinational player’s established and extensive distribution network. This strategy has enabled Red Bull to take advantage of the strong rise in demand for energy drinks in the country, helping the company to increase its share of Australian soft drinks off-trade volume sales by 0.1 percentage points in both 2006 and 2007 to reach 0.4%. The company has the opportunity to pursue a similar strategy in other markets as it looks to expand its geographic coverage, though multinationals may become less willing to engage in such deals as they commit themselves more heavily to energy drinks.

Limited Potential

Intensification of competition

·         Having established a dominant position in energy drinks through its pioneering role in the category, Red Bull is increasingly seeing its growth potential constrained by the emergence of a wide range of new competitors looking to exploit consumers’ growing demand for energy drink products. Indeed, growth in energy drinks is increasingly being driven by products adapting the energy drink concept to new trends and consumer niches and offering new flavours, formulations and packaging. In the US, Red Bull’s largest market, smaller players have been particularly active and successful in this regard, introducing products such as Elite FX’s Celsius, a ginger flavoured energy drink which claims to accelerate metabolism and burn more calories than it contains.

·         The growth potential of energy drinks is also stimulating increasing investment from major multinational beverage players, including The Coca-Cola Company, which added the Von Dutch and Tab Energy brands to its energy drinks portfolio in 2006. While smaller players have proved the most innovative, the production, distribution and marketing resources of the major multinationals represent a considerable threat to Red Bull.

·         Another potentially negative effect of the success of energy drinks for Red Bull is the development of drinks incorporating energy-providing qualities. These include new soft drinks in categories such as RTD tea and fruit/vegetable juice with energy-boosting ingredients, as well as alcoholic beverages. The US, for example, is seeing the emergence of malt-based RTD alcohol brands with already added energy components. Anheuser-Busch launched B to the E, a beer with added ginseng and guarana, in 2005 and, in 2006, Miller Brewing purchased Sparks, a malt beverage with added caffeine, ginseng and taurine. Such drinks pose a particular threat to Red Bull’s position as a mixer for alcoholic beverages in on-trade establishments.

An unhealthy image

·         An increasing consumer perception of energy drinks as unhealthy, bolstered by calls for bans and the introduction of prohibitive legislation in some markets, also represent a significant potential limitation on Red Bull’s future growth. The company has already had to reformulate its product in order to side-step legislation in Turkey. In order to counter the constraints of perception and legislation, the company may consider the further development of products with a healthier image, by using alternative ingredients like guarana, or offering functional health properties, such as the calorie burning qualities ascribed to the Celsius and Enviga brands. While remaining strongly focused on its core product, Red Bull proved its willingness to extend its offer with the development of a sugar-free variant, which now accounts for 15% of the brand’s UK sales. The drive to develop a healthier image for energy drinks is also likely to spur the hybridisation of energy drinks and other soft drink categories, such as fruit/vegetable juice, RTD tea and bottled water.

Onus on marketing

·         Red Bull’s focus on a narrow and highly fashion-conscious consumer base also presents the company with significant challenges. It has to invest strongly in marketing activity to replace consumers who grow out of its target demographic and to maintain a fashionable image. Indeed, the development of smaller brands which make a virtue of necessity by generating their identities on a small scale, targeting cutting edge locations and consumers, is increasing the pressure on Red Bull to pull off the difficult balance of extensive yet innovative marketing activity. The significant resources required by the company’s marketing strategy limit Red Bull’s potential to invest in product innovation and international expansion.

Constraints on growth in Asia-Pacific

·         While energy drinks continue to grow strongly in many markets and Red Bull remains committed to expanding its geographic presence, certain markets, notably developed Asian ones, are expected to register sluggish growth over the forecast period. In Japan, South Korea and Taiwan, sales of functional drinks, including energy drinks, are suffering from competition from drinks with a healthier image, such as sugar-free RTD tea and bottled water. As far as consumers are concerned, products such as functional bottled water and other health drinks have outstripped energy drinks in the variety and quality of their offer. Again, Red Bull may be forced to consider varying its offer in order to respond to changing market conditions.