Will PepsiCo Acquisition of Muscle Milk Help Them Beat Coca-Cola?
On February 20, 2019, PepsiCo bought Cytosport, the maker of the popular ready-to-drink (RTD) protein beverage Muscle Milk for $465 million. The move should help Cytosport because PepsiCo has deep expertise and experience in the sports nutrition category and has been a long-standing distribution partner for the Muscle Milk brand. That puts PepsiCo in a strong position to grow the sports nutrition brand that had a total net sales of approximately $300 million in fiscal year 2018.
This is Pepsi’s first acquisition under new CEO Ramon Laguarta. It gives the soda and snack giant another legacy brand that will allow it to further expand its product offerings, as this is a bolt on acquisition for their healthier for you segment.
So, what does this do for the red hot protein war that is happening with PepsiCo and The Coca-Cola Company?
On the PepsiCo side, you now have…
- Gatorade — which started to diversify out of isotonic sports drinks to sell protein beverages and bars in 2015.
- Cytosport — which makes Muscle Milk RTDs and several powder and bar product variations. It also owns a sub-brand called Evolve that is focused on plant-based protein products.
- Health Warrior — this is another newly acquired brand that focuses on bars, powders, and other functional food offers that surround superfoods and seeds for protein.
They are trying to compete against The Coca-Cola Company’s protein focused brands of…
- Core Power/Fairlife — The Coca-Cola Company combined these two brands recently but left Core Power as the high-protein beverage brand name. They also recently added a “Fairlife Smart Snack” beverage that is around 15g of protein but adds oat flour and honey for a mainstream meal replacement.
- OWYN — this brand resembles Cytosport’s Evolve in its offerings and proposition as being plant-based (bars, powders, and beverages)
Why is the Protein Beverage Category Important
According to a recent Nutrition Business Journal article, the RTD functional sports beverages are estimated to be growing at about 16 percent. This category consists primarily of protein-centric ready-to-drink (RTD) beverages like the ones discussed above. Many different factors are fueling this category’s double-digit growth, but at the top of the list is convenience. This is being driven by the elusive Millennial buying group that beverage companies have struggled to keep engaged with their legacy offerings. Another reason is that “protein” has never received a ton of bad press like carbohydrates and fats seem to get in rotating fashion every few years.
“Dark Horse” of the Transaction
For me, the “dark horse” in the PepsiCo purchase of Cytosport was was Evolve brand. Plant-based is hot and I think plant-based 2.0 could be even bigger. I believe Evolve could be one of the answers to answering the growing demand from the gut health movement for PepsiCo. They could easily add more plant-based protein shakes, powders and bars that have added benefits. The plant-based protein market is expected to continue to see growth (regardless of 1.0 or 2.0), so I believe regardless, this newer lineup could help boost PepsiCo’s portfolio for years to come.
What is Next for Muscle Milk?
Lets be clear, the Muscle Milk brand wasn’t growing fast (if at all) under Hormel’s control. During an earnings call in November 2018, Hormel stated that CytoSport had a “disappointing year” after declining sales in powders and RTDs. Because of that, Hormel recorded a non-cash impairment of $17 million in the fourth quarter that was “associated with the CytoSport business.”
PepsiCo doesn’t have a slam dunk here but they do have the knowledge and business operational/sales structure to make this grow. I would expect to see the following moves by PepsiCo in the next 12–18 months…
- They will 100% go “all-in” on the beverage and snacks side of Cytosport. I would expect to see Muscle Milk alongside Gatorade in Food/Mass retailers and I would expect to even see Evolve make more noise in those sales channels.
- I don’t think PepsiCo will cut the powders business but it will likely continue to take backseat to the functional beverage and foods product offerings.
- I would expect that PepsiCo will rebuild the Muscle Milk brand story with the synergies they have with sponsorship of athletes. They obviously do a superb job with Gatorade and they have no excuse now not to use some of those abilities on the Muscle Milk brand name.
- Maybe a bit counter-intuitive to #3, but I think PepsiCo will try to speed up the return on capital to get sales growth and margin expansion. Since this is the first acquisition by the new CEO, he needs this to be successful in the eyes of the investment community. You don’t want your legacy at one of the largest CPG companies in the world to be tainted right off the bat…would you?!?
The Age Old Question Continues…Coke or Pepsi?
Currently, the two CPG portfolios are playing different games. The Coca-Cola Company continues to focus on beverages, while PepsiCo is looking at snacks as the growth answer. Because of that, I think PepsiCo will be more diversified for the future as the snacking trend is not stopping anytime soon. I also have to consider the digital channel’s growth as something that fits well with PepsiCo, if they decide to use the SodaStream acquisition as something like a concentrate business that beverage has long used to be extremely popular, it could give a huge added advantage over its competitors.