General Analysis, Recommendation, and Implementation Industry: Energy Drinks Company: Red Bull By: Thomas Domenjoz Olivier Courtemanche Nouadir Yiteng Ma Jayme Donohoe Part I: External Analysis General Environment The Canadian population is virtually stagnant (0. 83% growth) and prospects from our key demographic [15 to 24 years] are even worse: their numbers are actually expected to decrease from 4,469,300 in 2007 to 44,653 in 2011. The legal environment is also expected to worsen as health concerns regarding energy drinks are likely to cause tougher regulations such as limits on caffeine and taurine per drink.

The economy is expected to suffer from the current troubles in the United States and other dependent and related nations, as the interdependent global marketplace enters into a recession. Because Canada is so dependent on trade from the US, the recession is sure to cause problems for the industry as consumers’ disposable income decreases over the coming years. The energy drink industry generated sales of $8 billion in Canada in 2006, with Red Bull controlling around 67% of the market. The industry is moderately attractive and there are many small players entering the market.

Other strong competitors include Monster, Rock Star, AMP and Guru; many of which are also international. Energy drink consumption grew by 20% this year and growth is expected to remain strong. Five Forces -Buyer Power: There are two kinds of retailers in the industry: proximity retailers and large supermarket chains. The former have little power because they are small and there are many of them. Supermarket chains, however, are more powerful as they represent large portions of our sales. Furthermore, switching costs are low and they might try to integrate backwards by selling their own brand of energy drinks.

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The fact that there are many competitors in our industry and limited shelf space increases buyer power, but we are somewhat strengthened by our product’s differentiated image. Buyer power is therefore weak for most accounts, but significantly stronger for critical accounts. -Supplier Power: There are many suppliers in the industry for both raw materials (water, sugar, etc. ) and unfinished products (cans), and supplies aren’t complex to manufacture. Industry players have therefore a lot of power over their potential suppliers.

Switching costs are limited but suppliers are strengthened by the fact that they aren’t dependent on the industry and can supply others, like the soft drinks industry. Hence, supplier power is weak. -Threat of new entrants: The energy drinks industry is growing very fast and maintains high margins, which makes it likely that players are going to attempt entrance into the market. Although products are quite differentiated (mostly through their image), it is possible to enter the market through a niche, build an image and then grow.

High margins also mean that new entrants can afford to be less efficient than competitors when they start. By using suppliers, new players can reduce their capital requirements. However, small entrants can have problems accessing distribution channels, while larger ones can expect strong retaliation. The threat of new entrants is very high. -Threat of substitutes: Although energy drinks are new products, there are some traditional substitutes such as coffee or tea that have similar features (caffeine drinks).

Yet these are not perfect substitutes: they are not as powerful and they do not replace the image that is very important to energy drinks. Therefore, the threat of substitutes is moderate. -Rivalry: Competition is fierce in this developing market and players are engaged in intense rivalry to grab and secure shares of an increasingly profitable industry. Established players retaliate against competitors owned by financially strong industry outsiders (from the soft drinks sector). In the meantime, start ups try to “out-niche” existing players.

Rivalry is fierce. -Conclusion: Due to moderately low buyer and supplier power as well as a low threat of substitute products, the energy drink industry appears to be very attractive, however due to low barriers to entry and fierce rivalry, it may be concluded that the industry is only moderately attractive. Part II: Internal Analysis Corporate Level Strategy Red Bull follows a dominant corporate level strategy, as the company is still heavily dependent on their main product, the Red Bull energy drink.

Other businesses that make up less than 25% of Red Bull’s revenues include Red Bull Cola, and several professional sports clubs, notably Major League Soccer’s MetroStars team which they renamed Red Bull New York. Because Red Bull’s marketing strength is a core competency, it has been effective in developing many products such as apparel, sports teams and extreme sports events that add to the overall brand image but are simply marketing tools and do not qualify as diversification. Even though

Red Bull is beginning to diversify, all of the new divisions use strategies similar to the company’s main business-level strategy of focused differentiation. Business Level Strategy Contrary to ordinary colas and soft drinks, which have been targeting the entire family since the 50s, energy drinks cannot be consumed like regular drinks. They contain chemicals which, as the name indicates, give energy to the consumer. Thus, in order to gain a competitive advantage, Red Bull had to exploit its core competencies in a specific market.

The uniqueness of the Red Bull product, which “vitalizes body and mind,” had to be targeted to a unique class of consumers: those who have a need for energy. Although initially targeted mostly to people who practice many sports, Red Bull is now famous for its sponsorship of extreme sports events, race car driving, and even night clubs. Efficiently targeting youth has allowed Red Bull to be “top dog” in the industry. The uniqueness of the product, which led Red Bull to target a very specific market, indicates its focus-differentiated business-level strategy.

But with the emerging competition in the energy drink industry, can Red Bull do more to stay on top, and continue to give its customers “wiiiings”? Value Chain Analysis – Primary Activities Inbounds Logistics – Red Bull does not manufacture its product from top to bottom. Although it does the filling of cans itself, it outsources the production of cans to Rexam, the leading can manufacturer in the world. Red Bull took advantage of its leverage over Rexam (which is becoming heavily dependent on Red Bull) to make it build a factory exclusively devoted to the production of Red Bull’s unique cans right next to its own factory in Ludesch, Austria.

This makes inbound logistics especially easy for Red Bull, since cans simply go “from one side of the parking lot to the other. ” Red Bull selects and purchases the ingredients that go into the drink itself. There are two kinds of ingredients: standard components, such as water and sugar, and more complex ones that are synthesized by pharmaceutical companies. Operations – Red Bull is not involved very heavily in the manufacture of its product, and only does the final step of filling the cans. This is an important step, because it involves the crucial step f dosing the ingredient mix. By keeping control of this very important step, Red Bull can make sure that its product meets quality standards. Outbound logistics – Outbound logistics are one of the key challenges faced by Red Bull. Indeed, Red Bull’s distribution systems have to be able to keep up with its stunning growth in volume as well as its entering of new markets. Speed of growth is key to Red Bull’s strategy and it cannot afford to compromise on this area. In 1994 Red Bull was unable to keep up with demand and became out of stock in Germany for close to a year.

Red Bull has never been able to fully recover in Germany to achieve the kind of dominance it enjoys in other markets. On the other hand, Red Bull makes high profit margins and so it is not as cost sensitive as other companies. As a result, it has decided to put an emphasis on “order filling” rather than “inventory reduction” when it comes to outbound logistics. Red Bull’s supply chain “is not meant to utilize every last nickel, it’s designed to be reliable and to minimize problems. ” Red Bull has done that by using a single warehouse management system and a single logistics provider: Ozburn-Hessey Logistics (OHL).

Red Bull chose OHL because of their flexible warehouse network. Through IT and internet based visibility, OHL lets Red Bull manage the complexity of a booming market. In addition Red Bull maintains high inventories (45 to 60 days worth) because it can’t afford to run out of stock. As the energy drinks industry matures and growth slows, Red Bull is expected to change its emphasis and go for cost minimization. Marketing and sales – Red Bull uses regional distributors for its different markets, for example it uses PowerBev in Ontario.

The company carefully selects its distributors, since they need to be able to project and build on the particular image of Red Bull. Red Bull’s primary activity and core competency is marketing. Red Bull’s image as a trendy, sports-related and with a touch of extreme is how it can sell its product with such high margins. Red Bull invests 30% of its revenues into their image through marketing (compared to 9% for Coca-Cola). Red Bull does not do marketing like other firms do: they do not concentrate on big celebrity endorsement, and barely ever use television ads.

What they do is “guerilla marketing,” they link their brand to trendy and extreme events to build their image. They sponsor over 500 athletes around the world (from jet-packers to bikers), they organize dozens of sporting and cultural events, they sponsor parties and they own a Formula One racing team. In addition they target bars to sell Red Bull as a mixer (Red Bull-vodka has become a popular drink). Marketing is Red Bull’s core competency and they use it to defend and extend their dominance in the face of numerous challengers.

Service – There is very little post-purchase service related to Red Bull’s products. Value Chain Analysis – Support Activities Infrastructure – Dietrich Mateschitz runs the company and owns 49% of the Red Bull GbmH stakes, while his Thai co-founder Chaleo Yoovidhya also owns 49%, and Yoovidhya’s son owns the other 2%. As a private company, Red Bull does not have pressure from shareholders to give dividends, which has enabled them right from the beginning to re-invest their profits into building their brand name and identity. What counts is what the consumer thinks about Red Bull when holding a can in their hands,” this shows that Red Bull does not worry about determining the monetary value of their company as much as building their brand from the inside, stressing the importance of their marketing division. Human Resource Management – Owner Dietrich Mateschitz is Red Bull’s CEO; top management below him include: Patrice Radden Director, corp. communications; Noel Patterson Director, personnel; Alexi Lalos General manager, Red Bull NY and Jim Bailey VP marketing Red Bull Canada.

In 2004, Red Bull employed over 1850 people, many of them part of the young and active target market. Technological Development – Red Bull has followed the same recipe since 1988, so very little research is needed in this area as consumers enjoy the classic product (yellow, comparable to liquid gummy bears). To get on board with the growing health-conscious trend, a sugar free alternative was introduced in 2003. Procurement – Red Bull selects their own ingredients and does the mixing themselves.

Their raw materials are relatively simple, as is their packaging (especially with their own Rexam can factory) so procurement is very important for the company, yet poses little difficulties because of the ease of inbound logistics. Part III: Alternatives, Recommendation, Implementation Alternatives – (refer to Appendix 1) The first alternative (A1) we suggest for Red Bull is to adopt is an aggressive strategy, through which the company would target and conquer new customers, in order to help expand the energy drink market. The rade-off to this strategy is that Red Bull would inevitably lose some of its dominant market share, as it will face forceful competition that will go after its existing customers. Initially, Red Bull would target new consumers through simple extensions of its product line, and a marketing strategy that would appeal more to Canadian consumers. This would help not only target a wider audience of energy drink consumers, but also help attract soft drink enthusiasts. In order to increase overall sales, Red Bull would adopt a diversification strategy.

Of particular interest is the confectionery industry, specifically chewing gum. We believe it is of great interest to Red Bull because firms in this industry, much like in the energy drinks market, “compete on the basis of brand name, product advertising and promotion, specialty products, quality and cost of production”. The product we propose is an energizing and invigoration Red Bull Energy Gum similar to brands like Jolt or Blitz. Red Bull energizing components like caffeine and multi-vitamins can be used in the gum, including the notorious taurine.

This strategy would allow us to target new consumers, niches (energy gum consumers) and help propagate the Red Bull brand name. This bold, inventive alternative is in line with Red Bull’s organizational culture and can effectively help attract a new kind of consumer. Nevertheless, this would imply important initial capital expenditures, both in marketing and operations. Initial market growth would help increase profit, which would facilitate Red Bull’s eventual diversification. Another serious downside would be the probable emergence of powerful competitors that will hurt the company in the long term.

The second alternative (A2) would be to adopt a defensive strategy by focusing on preserving and extending Red Bull’s market share, rather than pursue overall market growth. The emphasis would be on containing new entrants and building barriers to entry, while reinforcing Red Bull’s dominant position in the energy drink market. The first approach is to try and limit competitors’ access to distribution channels. Red Bull has substantial power over suppliers not only because it dominates the market, but because customers actively seek its product (suppliers gain from buying Red Bull).

It can leverage that power to make exclusivity deals, or work with retailers to monopolize shelf space. The second approach is to use its marketing strengths to go after its competitors very aggressively. Red Bull faces great competition by small firms that seek to enter the market via specific niches, and by systematically targeting those niches it can prevent those firms from getting a foothold in the industry. By doing so, it weakens competitors and builds barriers to entry because of expectations of retaliation.

As the idea is to achieve growth by increasing Red Bull’s share of the market, the company should aggressively go after competitors’ customers, and actively prevent them from taking its own. Because Red Bull is the major driver of growth in the Canadian energy drink market, changing its focus will mean lower growth for the industry overall, which is compensated by the increase in market share. This approach presents some significant challenges for Red Bull whose organizational culture is more about creativity than retaliation.

Red Bull’s young, hip, extreme culture has been designed to conquer new markets, so it may be a stretch to have these same people playing tough with suppliers and overrunning newcomers. A major problem with this alternative is the threat of being hit by antitrust legislation. Because Red Bull controls such a large portion of the market already, it is going to walk a fine line while trying to undermine competitors and therefore decisions should be validated by lawyers to make sure they will not face any problems in the future.

Recommendation Red Bull Canada should pursue A2. Our rationale is twofold: financial and strategic. Financially, Red Bull can achieve higher sales by focusing on market share rather than market growth. Historically, competitors have taken a free ride by going after its customers while Red Bull was focused on growing the overall energy drink market. While this has proven to be a very profitable strategy for Red Bull in other countries, Canada presents an opportunity for Red Bull to control a bigger share of the market.

Under A1, the market would keep growing at it’s current rate of 10% for the next five years, but our market share would decrease from 50% to 40% because of relentless competition. Under A2, industry growth would fall by half (to 5%) but our market share would jump from 50% to 60%. This leaves us with a net $13m NPV over 5 years. Strategically, however, the gains are much more substantial. Preventing the emergence of powerful competitors is very attractive in the long run. In the United States, Red Bull has not been able to achieve a dominant position: it s the largest player but faces a very powerful growing competitor in Monster that had a 27% market share in 2007 compared to Red Bull’s 35%. Not only do Monster and others control a large part of the market, but their existence exposes Red Bull to powerful attacks and undermines its power over suppliers. A2 is designed to avoid this situation by preventing the establishment of strong rivals in the Canadian market and securing Red Bull’s hegemony, for a position of great strength throughout the coming years.

In countries where Red Bull has been introduced, the energy drink market has experienced a short term boom followed by long term stabilization. Energy drinks are currently in the high growth stage in Canada, having been introduced fairly recently, but growth is expected to settle in the next five years at which time Red Bull aspires to be the dominant player in the market. Under A1, the market will meet a threshold around 2013 (appendix 1) and growth will decline to more moderate levels, while Red Bull’s market share will have decreased.

Under A2, the market will grow slower, but the company will achieve a higher market share. This adds up to a long-term NPV of $1,081m. Once the market has matured, Red Bull should shift its strategy towards A1 and pursue diversification. By the time it reaps the profits from A2, the capital expenditures necessary to implement its new product will not seem as substantial. This would also allow Red Bull to eventually capitalize on all the advantages diversification would bring: targeting new consumers, revitalizing a slow cycle market in order to profit from it, and expanding the brand name.

Finally, in the long term A2 will increase Red Bull’s buyer power (through higher sales), decrease supplier power (Red Bull will be the dominant player), lower intra-industry rivalry (no big competitor) and lower the threat of new entrants (high barriers to entry). Implementation Over the next five years, Red Bull should implement the recommended strategy through two fields: marketing and distribution. The young, hip, extreme, active culture that the Red Bull brand effectively creates is far-reaching and should be continually drawn upon when implementing the following strategies.

One thing that Red Bull can do in the Canadian market to undermine its competitors is to go after them one at a time, challenging each brand through their distribution channels as well as through ad-wars. Red Bull’s core competencies of aggressive non-traditional marketing strategies as well as its well-known brand name and image will work to their advantage in these cases. In analyzing the Canadian market specifically, it is apparent that Canadians are very proud of their country; they know and support people and things that are Canadian above anything else.

Red Bull would do well to exploit this by choosing well-known Canadian athletes and sports, such as hockey or snowboarding, to endorse their product in order to be market specific. To reinforce the value of their brand name, Red Bull should continue aggressive distribution in bars and nightclubs. Mixing energy drinks with alcohol is a fast-growing, popular craze that began with drinks such as Red Bull-vodka and Jagerbombs, and Red Bull should be capitalizing on the trend.

This can be done through both marketing their product as the best drink mixer in bars, as well as monopolizing distribution through the nightclub and bar industry. Red Bull enjoys significant buyer power over its suppliers and retailers; it is very hard for a store not to sell Red Bull or for a supplier not to carry it, since people actually go to stores specifically wanting to buy the product. In the past, Red Bull has used its leverage to make stores carry its new products, such as Red Bull Sugarfree, however in line with the new strategy discussed Red Bull will use its influence to cement dominance and undermine its competitors.

As far as distributors are concerned, Red Bull should try to make exclusivity agreements when possible, or at least insist that their retailers not deal with the more threatening competitors. Since Red Bull already works with many of the distributors that focus on young/hip culture, this will be a significant hurdle for competitors. Antitrust regulations are of concern in this area. In terms of retailers, Red Bull will work on maximizing shelf space at the expense of competitors.

The company will also continue to provide Red Bull fridges for stores, since they are not only practical for store owners but are also a great marketing display that reduces space for displays of competitive products. Finally, Red Bull’s should only increase prices to distributors/retailers as they have recently done in the USA once lasting formal relationships have been established. This will reduce any incentive to make deals with the competition, and will maintain goodwill. This is a temporary tactic however; once Red Bull’s place is secure, it will be able to raise prices to increase margins.

In a long-term sense, launching the Red Bull Caffeinated Gum is the next strategic move which coincides with the company’s market share expansion strategy as well as product diversification strategy (Appendix 2). Since the chewing gum market is relatively stable in market share and sales volume, Red Bull will have to closely follow changes in consumer preferences and influences by the bigger players in the market. The success of Cadbury’s Trident was choosing to refocus on the mint flavoured gum while its competitors over-diversified their product lines.

So, the best time to launch Red Bull Gum might be during retail slow down with a refreshing product that revitalizes consumers’ purchasing desires. By studying its competition, Red Bull could launch tactical attacks on its competitors’ weaknesses such as the slow product turn-over rate of market dominators. As companies diversify their product lines and increase their investments in raw material and production, excess inventory is often created that lags sales. Red Bull should put heavy emphasis on leveraging the differentiated feature of its gum through high mark-ups and advertising strategies to achieve higher turn-over.

Also, the gum should first be launched in limited retail outlets to create scarcity, perhaps in a Toronto-based flagship store. An additional aspect of the competitive dynamic of the gum industry is the emergence of smaller players and private brand labels that are slowly stealing local market shares of larger players. Red Bull’s competitors in the energy gum segment such as Jolt or Blitz do not have the brand reputation, so in the long run Red Bull should extend the distribution of its gum to wholesalers and retailers depending on how successful the plan is going on in the first stages.

In doing so Red Bull’s head office must consider both strategic design and implementation. With respect to customers, Red Bull should put forward initiatives and goals such as monitoring consumer preferences as well as understanding consumer satisfaction levels. These goals can later be evaluated by the actual performances in order to discover areas of strength and weakness. By doing so, Red Bull will always be able to consolidate its core competencies while developing new capabilities. Appendix 1

Run down of calculations and assumptions on the alternatives’ market growth, market shares and sales. I market growth – The energy drink market is new and is growing quickly. -The market hasn’t yet matured, but comparisons with other countries suggests that it will settle around $450m. -Under A1, the market will continue growing at it’s 10%. At this rate it will hit the $450m threshold in 2013, at which point growth will fall to 3%. -Under A2, market growth will fall to 5%, but the threshold won’t be met until 2017.

II market share -Under A1, growth will progressively fall to 40%. -Under A2, growth will progressively increase to 60%. III Sales -In the short term, cumulative sales are pretty much close: $600m for A1, $613m under A2 -In the long run, the NPV of sales under A2 are much more attractive than under A1: $1,825m and $1,469m respectively, a $356m difference. -By 2018, our sales would be 38% higher under A2 than A1, even though the energy drink market would 8% smaller. Appendix 2 Chewing gum retail growth in Canada: Source : Market Line http://www. arketlineinfo. com/library/ClientMessage. aspx? code=403 References 1. Cadbury Schweppes plc, Company Profile. Reference Code: 0D2193AC-7D19-476D-903F-069BEC950A48, Publication Date: Jun 2008, www. datamonitor. com 2. Canada’s Confectionery and Chewing Gum Industries, Agri-Food Trade Service, HYPERLINK http://www. ats. agr. gc. ca/supply/3298_e. htm 3. Chewing gum sector’s bubble shows no sign of bursting. (2008, November). Marketing Week, 6. Retrieved November 13, 2008, from ABI/INFORM Global database. (Document ID: 1590343541) 4.

Company Histories, Red Bull Gbmh, HYPERLINK http://www. fundinguniverse. com/ company-histories/Red-Bull-GmbH-Company-History. html 5. Market Line, HYPERLINK http://www. marketlineinfo. com/library/ClientMessage. aspx? code=403 6. Red Bull Official Website, HYPERLINK http://www. redbull. ca/ #page=CompanyPage. AsTimeGoesBy 7. Red Bull gets buzz from tube, HYPERLINK “javascript:showInfoWin(3652,’CSI’)” 8. Statistics Canada, HYPERLINK “http://www40. statcan. ca/l01/cst01/demo10a. htm” http:// www40. statcan. ca/l01/cst01/demo10a. htm 9.

The World Factbook, Canada, HYPERLINK “https://www. cia. gov/library/publications/theworld-factbook/print/ca. html” https://www. cia. gov/library/publications/the-world-factbook/ print/ca. html 10. Wrigley Pioneers New Gum Production Method, Confectionerynews. com, HYPERLINK http://www. confectionerynews. com/Processing-Packaging/Wrigley-pioneers-new-gumproduction-method 11. Wm. Wrigley Jr. Company, Company Profile. DATAMONITOR BUSINESS INFORMATION CENTRE, Reference Code: 6F3771D5-3DC3-41E0-881A-6062D1CE4A1A, Publication Date: Mar 2008, www. datamonitor. com

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