Celsius: An Almost Unbeatable Growth Stock

It would certainly take time to find a stock out there that has outperformed Celsius Holdings over the past five years. Its shares have skyrocketed roughly 4,200% in that span. Clearly, this company is doing something right. After all, it has rewarded investors even more than Tesla has by a wide margin in the same period of time. Let's delve deeper into how this was possible and Celsius' growth story.

• Incredible growth: Celsius has demonstrated an almost unbeatable track record of growth in recent years, having increased its revenue by approximately 10x and EBIT by 22x between Q3'20 and Q3'23.

• Finding its niche: Celsius has positioned itself as a healthy alternative in the energy drink market, focusing on metabolism-boosting and low-sugar ingredients, which has been a crucial building block for the almost unbeatable success over the recent years.

• Effective marketing and strategic partnerships: Celsius' success can be attributed to its effective marketing strategies, including a unique selling proposition emphasizing health and fitness, collaborations with influencers, and adaptive distribution strategies such as the partnership with PepsiCo in 2022.

Celsius was founded in 2004 in Delray Beach, Florida, by the husband-wife duo Steve and Janice Haley. They marketed their beverage as a "calorie-burning drink" that boosts metabolism. Celsius gained significant attention three years after its inception, securing a major investment from South Florida entrepreneur Carl DeSantis. Despite initial success, the company faced challenges, including being delisted in 2010, one year after its IPO.

Gerry David, a famous management consultant, was then brought in as CEO, to lead a revitalization of the company. Now, Celsius is back on the NASDAQ and one of the most incredible growth stories out there. One key strategic initiative is believed to be the shift of its messaging and branding to emphasize energy and fitness over fat burning.

According to Grand View Research, energy drink sales in the U.S. are expected to grow by more than 8% annually between 2022 and 2030. In this expanding market, Celsius, along with Monster Beverage, stands out as the leading star for its high and consistent growth.

From the third quarter of 2020 to the third quarter of 2023, Celsius achieved impressive growth, increasing its revenue by roughly 10x and EBIT by 22x, respectively. This is particularly remarkable in an industry where building competitive advantages typically is challenging.

Celsius Holdings Revenue and EBIT Growth

Given the difficulty in arguing that Celsius's competitive advantages extend beyond their PepsiCo distribution partnership and brand strength, it's reasonable to suggest that effective marketing, leading to the creation of intangible assets, has been a key ingredient in their highly successful growth journey over the last five years. Here's an overview of some key strategies that have contributed to their success:

• Unique selling proposition (USP): Celsius stands out in the energy drink market with its focus on health and fitness. Their drinks are designed to boost metabolism and are made from natural ingredients, avoiding preservatives and added sugars. This approach appeals to health-conscious consumers looking for clean and wholesome products​​, which is a large structural trend in today's society.

• Influencer collaborations: Celsius has effectively partnered with fitness influencers and health experts, enhancing brand visibility and fostering trust among consumers. These influencers, who align with Celsius's brand values, act as powerful advocates, enabling the company to build a community centered around health and fitness through its products.

• Strategic distribution: Initially targeting fitness enthusiasts, Celsius expanded its focus to mainstream retail beverage distribution channels including supermarkets, convenience stores, and health centers. The company also swiftly adapted to external changes, such as the pandemic, by embracing online marketing. This strategy proved successful, with Amazon becoming one of Celsius's main sales channels.

These multifaceted marketing strategies have not only created but also significantly enhanced Celsius's most valuable asset – its brand. This has positioned the company as a leading player in the competitive energy drink market.

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Celsius and PepsiCo entered into a significant partnership, which was announced and became effective on August 1, 2022. This long-term U.S. distribution agreement marked a major step for both companies, especially in the energy beverage sector.

Under the terms of the deal, PepsiCo made a substantial investment of $550 million in Celsius in exchange for convertible preferred stock. This investment represented approximately 8.5% ownership in Celsius on an as-converted basis. The agreement included an annual dividend of 5% for the preferred shares. PepsiCo's role in this partnership is not just financial but also strategic, as they became the exclusive distributor for Celsius in the U.S. across retail and food service channels, with some exceptions. Moreover, PepsiCo is also the preferred distribution partner for Celsius in international markets.

The partnership is seen as a significant catalyst for revenue growth at Celsius, adding valuable color to its equity story as well. Partnering with a global distributor like PepsiCo, Celsius is expected to secure substantial additional shelf space in existing retailers and make inroads within independent retailers. These latter outlets are key, as they account for a significant portion of U.S. convenience and gas channel sales, where approximately 70% of energy drinks are sold. This collaboration is anticipated to drive efficiencies, consolidating sales, marketing, and distribution efforts, and yielding cost benefits.

The partnership came at a time when Celsius was reporting substantial growth, with triple-digit retail growth year-over-year. The company's domestic revenue had increased by 186% to $273 million in 2021, and international revenue grew by 17% to $41.2 million. The gross profit had increased 111% to $128.2 million. Celsius was available in over 135,000 doors in the U.S., including around 64,000 convenience stores. This expansion was seen as a strategic move for PepsiCo as well, providing them with a new path for growth in the energy drink sector.

In summary, Celsius Holdings has experienced a remarkable journey since its founding in 2004, evolving from a niche calorie-burning drink to a major player in the health-focused energy drink market. Key to its success has been a strategic shift in branding, innovative marketing, influential partnerships, and a crucial distribution deal with PepsiCo. This multifaceted approach has not only amplified their presence but also significantly boosted their financial performance, making them stand out in a highly competitive industry.