Coca-Cola Invests in BodyArmor, To Challenge Gatorade (PepsiCo)

BodyArmor

Coca-Cola (KO) has made a minority investment in the sports drink BodyArmor, as it once again (think: Powerade, Honest Brand) looks to shake up Gatorade’s dominance within the performance drink category (think: hydration). Marketed as a healthier, natural alternative to sugary sports drinks, BodyArmor uses coconut water (lower in sodium, higher in potassium than filtrated water) and excludes artificial colors/high fructose corn syrups from its formula to distinguish its product in a crowded market of enhanced waters, teas and energy drinks. Beyond the equity investment, KO’s bottling system will take over BodyArmor distribution responsibilities, expanding the company’s reach internationally (namely China). Financial details of the pact were not disclosed, but it’s expected that the deal offers Coca-Cola a clear path to full ownership, with the price point to be determined based on “sales and other performance measures”.

Howie Long-Short: Gatorade, a subsidiary of PepsiCo. (PEP), currently controls +/- 75% of the $8 billion domestic sports drink market, but sales are on the decline with consumers becoming more health and wellness conscious. BodyArmor, which has gained in popularity over the last few quarters (it had just 3% market share in ’17), remains a distant 3rd (behind Gatorade, Powerade) with just 6% of the market share. CEO Mike Repole has projected the company will own 10% of the market by 2019. PEP intends on presenting BodyArmor as a premium product when compared with Powerade (which controlled 17.5% of market in ‘17).

The deal makes KO Body Armor’s 2nd largest shareholder, surpassing Keurig Dr. Pepper Inc. (KDP). With KO on board, BodyArmor no longer has the need for KDP to assist with distribution (as they’ve been doing); it’s unlikely KDP will retain its equity in the company, management isn’t interested in owning minority stakes.

It’s been said that BodyArmor “is on track to reach almost $400 million in retail sales this year”, which would place the value of the company between $1-2 billion if you look at the multiples some others within the beverage industry have sold for. For information purposes, KDP acquired 15.5% (since diluted to 12.5%) of the company back in ’15-’16, when the company’s value was said to be less than $200 million. BodyArmor did $253 million in ’17 sales.

Fan Marino: Back in April, BodyArmor introduced its largest ad campaign to date (included 1st TV ad), a comedic series portraying market leader Gatorade as out of touch with the needs of the modern athlete. Conceived, written and co-directed by shareholder (and Emmy/Oscar winner) Kobe Bryant (10% stake), the multi-media campaign places athletes in outdated situations; akin to high performance athletes continuing to drink Gatorade during competition (think: Kristaps Porzingis using carrier pigeons to communicate with family in Latvia, video here). The campaign positions BodyArmor as the sports drink for today’s health conscious athlete, while noting the lack of innovation from Gatorade since its inception in 1965.

All BodyArmor spokes-athletes have equity in the company. In addition to Kobe Bryant, the list of athlete-shareholders includes; Mike Trout, Porzingis, James Harden, Diggins-Smith, Andrew Luck, Rob Gronkowski, Buster Posey, LeSean McCoy, Richard Sherman, Sydney Leroux, Anthony Rizzo, Dez Bryant and Dustin Johnson.

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