Question 1

Energy Drinks
Figure 1: US sales growth of energy drinks and coffee

Source: Euromonitor

Extract 1: These are the Top 5 Energy Drinks

Market-share-wise, here's how things break down according to the most recent figures
available (2014) from Euromonitor International:

Red Bull - The original, launched in 1997, Red Bull enjoys about 43% of the market.

Monster - A 39% market share. The company clearly hopes to surpass Red Bull with Coke's
help (Coke has invested in stakes in the company) though Monster executives noted in their
earnings call last week that both Red Bull and Rockstar have gained share recently.

Rockstar - A strong-but-distant No. 3, the independent Rockstar has about 10% of the
market.

NOS - This Coke-owned brand is named after nitrous oxide, and is often sold in containers
meant to look like nitrous tanks. Its market share is about 3%.

Amp - Owned by PepsiCo, Amp also has about 3% of the market.

Source: Times Magazine

Extract 2: Energy Drink manufacturers use protein to boost declining sales

Since 2008, the energy drink sector has grown by more than 60% in the United States. As a
matter of fact, energy drinks had the second-highest retail sales in the non-carbonated soft
drinks category in 2013 finishing only behind water. Americans are living busier, on-the-go
lives, and high caffeine, high sugar energy drinks appeal to consumers with promises for a
quick energy boost, enhanced mental focus, and added herbal supplements. However, given
the recent concerns by the FDA regarding the safety of caffeine in food products and its
effects on children and young adults, energy drink manufacturers have seen overall sales
start to slow.
However, the energy drink segment grew volume by only 5.5% in 2013, compared to 14% in
2012 and 17% in 2011. According to a survey of 1,500 consumers by the market research
firm Mintel, 36% of respondents reported that they do not drink energy drinks or energy
shots because they heard negative information about their health effects. In addition, around
42% claimed they dont consume energy products because they are not good for my
health.
In an effort to win back the publics positive opinion on energy drinks, manufacturers have
started to promote more health benefits with their products. Take 5-hour Energy for
example. Their energy shot promotes long lasting energy with no sugar and zero net carbs.
In 2011, Monster Energy launched its 10-calorie Monster Rehab line, which offers a variety
of low-sugar, non-carbonated tea energy drinks as a healthier alternative to their standard
calorie-loaded energy drink. In fact, Nielsen listed Monster Rehab on its list of 14
Breakthrough Innovation Winners in 2013 for Monsters revolution in the energy drink sector.

As energy drink manufacturers try to appeal to todays more health-conscious consumers,

energy teas and low-sugar drinks are just the tip of the iceberg when it comes to promoting
health benefits. Its clear that consumers are interested in energy sources that are more
natural (e.g. vitamins, dietary supplements, etc.), and theyre also interested in products that
provide additional benefits apart from increasing energy levels. That being said, some
companies have resorted to adding whey protein into their energy drink formulation to meet
new consumer demands.
Though energy and protein might seem like an odd combination, its one thats worked
surprisingly well for brands thus far. In fact, one of the innovative drinks that helped Monster
Rehab earn a spot on Nielsens list was their Rehab Protean drink, which contained 15
grams of protein per 16 oz. serving. Unlike the stereotypical, sugar-laden energy drinks,
protein-enhanced beverages provide consumers with the energy boost they need while also
providing essential nutrients for their bodies.
Source: Various
Extract 3: Energy Drinks could cause public health problems
Energy drinks will become a significant public health problem if their use among young
people is not addressed through a cap on caffeine levels and restrictions on their sale
and marketing, United Nations researchers have warned.

The World Health Organisation (WHO) study said the primary risk was from high caffeine
levels, which can cause problems such as palpitations, hypertension, vomiting, convulsions
and in extreme cases heart failure leading to death.

The WHO said: The full impact of the rise in popularity of energy drinks has not yet been
quantified, but the aggressive marketing of energy drinks targeted at young people,
combined with limited and varied regulation have created an environment where energy
drinks could pose a significant threat to public health.

A European Food Safety Authority study found that over 70% of 18- to 29-year olds who
drink energy drinks mix them with alcohol. The study authors said research has shown this is
riskier than drinking alcohol alone, possibly because energy drinks make it harder for people
to notice when they are getting drunk even though there is no reduction in intoxication.
They said energy drinks had also been linked to dangers when combined with physical
activity despite often being marketed as boosting sports performance and to obesity and
dental cavities.

In light of this, researchers argue for cap on caffeine levels, citing health risks, particularly
when the drinks are consumed with alcohol. Other recommendations included educating the
public about the risks of energy drinks and better labelling as well as restricting marketing
energy drinks to children.

In the UK, the Food Standards Agency requires high-caffeine energy drinks to be labelled as
such and from December they must contain a warning stating: Not recommended for
children or pregnant or breastfeeding women. A spokesman said: The FSA advises that
people who are sensitive to caffeine should only consume high caffeine drinks ... in
moderation. It is not planning further legislation at present.

In May, Lithuania become the first EU state to pass legislation banning the sale of such
drinks to minors.

Source: Guardian, 14 October 2014

Questions

(a) Compare the trend in sales growth of coffee and energy drinks from 2005 [2]
onwards

(b) (i) What is the five-firm concentration ratio of the energy drink industry? [1]

(ii) With reference to the case material where appropriate, explain how [4]
energy drink manufacturers would compete with each other

(c) Using economic analysis, explain the variations in the growth of the energy
sector as mentioned in Extract 2. [5]

(d) To what extent does the actions of energy drinks manufacturers in Extract 2
benefit society? [8]

(e) Using the data where appropriate, discuss whether banning the sale of
energy drinks to minors will completely eradicate the market failure arising
from its consumption. [10]

[Total: 30 marks]