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Celsius: Secular growth in healthy energy drinks (CELH)

Updated: Oct 31, 2020

“…there are a number of other performance energy drinks, there’s Bang, and there are also some other performance energy drinks that are seeking to obtain listings in space in the convenience channel, such as Celsius and C4 and others. And so we think that there will ultimately be additional space allocated to the performance energy drinks.”

“There are other products that are trying to find their own space, the C4 and the Celsius all have their own little twist on it. They’re struggling more with getting distribution. But there will be a performance energy category and I think that will eventually start developing and it will be incremental, but has a different consumer. “

— Rodney Cyril Sacks, CEO, Monster Energy

Celsius is an energy drinks brand oriented towards people with a healthy, active lifestyle. The company sells three lines of drinks: Celsius ORIGINALS sweetened with sucralose, Celsius Naturals sweetened with Stevia and Celsius HEAT, a pre-workout drink. ORIGINALS is the main product line and is being rolled out across convenience stores. The Naturals line is targeted at Whole Foods and similar outlets whereas HEAT is meant for bodybuilders, athletes and the military. Over the last several years, full calory sodas as well as sodas with artificial sweeteners have shown steady declines with health inspired and functional beverages taking shelf space from the category. Some energy drinks have also begun losing share to healthy functional energy drinks. The base-rate growth of energy drinks is about 9% over the next several years (roughly the growth rate of Monster Energy), whereas Celsius grew 73.4% YoY in the last quarter. Celsius contains no artificial preservatives, color or flavors and no aspartame, high fructose corn syrup  or added sugar. The ORIGINALS line does use sucralose. Celsius has a slightly higher caffeine content of 200mg versus Red Bull at 80mg or Zevia at 120mg.

International While Celsius’ primary market is still the United States, it also has a strong presence in Europe, where it grew 64% YoY in the last quarter. Its main market in Europe is Sweden, where it is the number one fitness and number two energy brand after Red Bull according to Nielsen. Celsius also has a meaningful history of sales efforts in China. However, in the first quarter of 2019 Celsius sold its rights to Chinese distribution to Qifeng, its Chinese partner. According to the agreement Qifeng will have the exclusive right to manufacture, market, and commercialize Celsius branded products in China. In return Celsius will received a fixed sum of $6.9 million a year from Qifeng until 2023, after which the royalty fee is calculated as a percentage of revenues. Qifeng will also repay Celsius for all investments made to China to date through a loan made by Celsius with the first $5 million yielding 5% and any amount above that yielding 2%. While I don’t like the fact that Celsius has traded away one of its largest potential markets, it lets the management team in Florida focus time and capital on expansion plans in the US while also providing much needed working capital to support growth.

Distribution Distribution is extremely important for a beverage company. Celsius utilizes (third party) direct store delivery (DSD) distributors and direct to retailer (DTR) sales. Beverages are entirely manufactured and packaged by third party co-packers to whom Celsius provides the packaging as well as most of the ingredients. This lets Celsius operate in a highly capital efficient manner as it does not need to own any real estate or distribution facilities. Celsius stores its ingredients at third-party warehouses. ACV (basically retail store penetration) increased from 10.3% at the beginning of the year to 10.8% but still has a very long runway. Celsius’ primary retailers currently are CVS (7,500 stores) and Rite Aid (3,500 stores) where they are in over 11,000 stores combined. At Target they are in 1,500 stores. Celsius has also most recently closed on a distribution agreement with Big Geyser. Big Geyser services accounts in all channels of trade throughout all five boroughs in NYC, as well as Westchester, Putnam and Suffolk counties and was instrumental in vitaminwater’s success in that area. Big Geyser should ultimately open up another 20,000 stores to Celsius. In the first phase, Celsius will pursue key accounts of the grocery and drug channels. In phase two, the company will supply 7-11 stores. In phase three, the company will backfill other accounts that include independents that account for a lot of the stores. Finally, Celsius is guiding towards an additional 10,000 vending machine opportunity in 2019. What’s important here is not just the number of stores Celsius is going to be rolled out in, but also the number of SKUs per store. Going from two to three SKUs one-third almost doubles sales. Moving from two to four SKUs quadruples sales in those accounts due to the additional shelf space and strong visual impression. All this should show that there is a long runway for growth. Other retailers Celsius is sold through include Publix supermarkets, Sprouts, Winn Dixie, Ralphs, Gelson’s, BristolFarms, Lucky, 24 Hour Fitness, GNC, Gold’s Gym, LA Fitness, RaceTrac, H-E-B grocery, 7 Eleven and The Fresh Market.

Marketing In 2018 Celsius became the main sponsor of the Tough Mudder North America Challenge Series with over 100 events in 35 cities. There is also some limited marketing through ads and “brand ambassadors”. While Celsius is adding lots of shelf-space in convenience stores and other channels, their marketing budget as a $240MM market cap company is constrained compared to larger competitors. While it is clear that Celsius is being rolled on lots of shelves at this point, I wonder how they will bring about strong brand recognition.

Ownership & Management Celsius is majority owned by Carl Desantis, who seems to be the main driver behind the company. His book “Vitamin Enriched” gives some good background on how he built, ran and sold Rexall Sundown, a successful nutritional supplements company. Celsius at its core is not too different in that here the vitamins are just dissolved in water and come in drink format, with an added boost of caffeine. Further parallels are outsourced production and distribution through the convenience store channel. Another noteworthy member of the management team is Matt Kahn: EVP, Marketing. Matt brings extensive CPG experience from Coca-Cola Co., Glacéau vitaminwater, smartwater, Powerade, and Heineken USA where he held roles from Vice President to Chief Marketing Officer. Matt was instrumental in building and rapidly scaling the Glacéau vitaminwater and smartwater businesses. Matt also conceptualized and launched the most successful innovation in POWERADE’s history, POWERADE Zero. Finally John Fieldly, the CEO: Fieldly has been with Celsius since 2012 as the company’s CFO. While he was previously responsible for building out Celsius’ expansion in Asia, in 2018 he transitioned to the CEO role.

Valuation At 3.8x 2019 expected sales of 66MM and with a growth rate of 30-40% per annum achievable over the next few year Celsius is probably cheaper than Monster at 7.5x price/sales. What about profits? For now Celsius is spending every dollar it has on marketing, so even though gross margins are at 40% it will be a long time before Celsius shows meaningful profits. Both gross margins and EBITDA margins might improve when Celsius crosses the $100MM sales mark as this is when Monster started showing its margin potential in the early 2000s. That being said, energy drinks are a more competitive market today than they were back then, and Celsius may have to continue spending on marketing for a longer period of time. This is fine by me as long as it helps build the brands long-term value and competitive position. Keurig Dr. Pepper acquired one of Celsius’ closest competitors, Bai, for $1.7bn in 2017 (7.4x sales) with a view towards growing sales to $500MM in two years. Bringing a smaller product with good brand momentum onto a larger beverage company’s platform can make a lot of sense. Ultimately a sale to a larger competitor may also be on the table. This would require buy-in from Carl DeSantis and possibly Horizon Ventures/Li Ka Shing, and is unlikely to happen until Celsius scales a lot more. Broadly, if you’re thinking about investing in Celsius you should probably ask yourself whether there is a market opportunity for fitness energy drinks to expand the energy drink category as well as whether Celsius is the way to play it. Most Red Bull and Monster Energy consumers are probably not Celsius customers. But is there room to convert some to a healthier alternative? Could it become the go-to brand for athletes and fitness-oriented people? Could more general acceptance of the brand spread from there?

Disclosure: Long CELH

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