Ben Witte is taking expansive vision for his Recess CBD brand, viewing it as platform for broad range of bevs, dissolvable powders, tablets, apparel and other merch, thanks to position as content marketer to creative community.  In short term, co is moving to add more approachable flavors and take out some sugar as it finetunes brand that seems so far to have resonated in markets like NY, where it moves thru DSD house Big Geyser, and Calif.  Most of all, tho, it’s taking it slow, keeping capital raise and geographic expansion modest so far as co awaits regulatory clarity that may coax retail chains into segment and isolate bad actors with suspect sourcing and other issues. 

Former tech exec now in his early 30s offered those views in recent Q&A with Yahoo Finance at Subculture nightclub in Greenwich Village, followed by quick huddle with BBI.  As he made clear, he views Red Bull as role model for way its abundant font of experiential marketing “monetizes itself in cans.”  So creative approach has been at heart of effort from co’s start, in East Village apartment of Calif transplant.  DTC launch was deliberate means of insuring that brand message wasn’t diluted but defined directly by website and Instagram feed, with resulting buzz inducing retailers and distributors to reach out to Recess.  After a month brand already had $5K in back orders with just 2 full-time employees.  He kept initial markets to just NY and LA while awaiting clarifying regs from FDA.  (Updated statement may come next month, Ben reminded.)  Right now, “CBD is everywhere but nowhere,” since it’s not carried in mass retailers like Duane Reade and Target.  Natural retailers like Erewhon and Bristol Farms have carried it (as have smaller NY chains like Fairway and Fresh & Co) but he covets Whole Foods most of all, as “that’s where you build natural brands.”

Witte said he detests co-working spaces, so he figured his tiny staff could occupy back of popup store on lower Broadway that would be set up so it was like “you were walking into our Instagram,” gathering spot for creative community that ended up hosting avg 3 events weekly for 8 months and generating significant buzz in local media (BBI, Mar 19).  More such efforts are sure to follow, he indicated.   

At time Recess started raising money, lotta VCs had so-called vice clauses that keep them out of space, and he said such sensitivities are one reason co doesn’t talk about fundraising and identity of its investors, tho scuttlebutt is that co pulled in $3 mil or more this past fall.  “Couple of million” has been invested so far, is all he’d say at Yahoo event.  Asked by moderator whether he’s heard from strategics like Coke and Pepsi, Ben said yes, he’s had “conversations with most of them” by now.

Also an issue during development phase in early days of category was lack of water-soluble CBD.  Farmer in Hudson Valley connected him to “random guy in New Jersey” with operation that seemed to be out of Breaking Bad TV show, but who proved to have solution.  Now CBD is sourced from fully integrated group in Colo.

Recess has worked hard to position itself as suited to consumption in multiple dayparts – there are users who wake up with it, others who use it as office refresher like La Croix, lunch accompaniment like Spindrift or who use it as an alternative or accompaniment to alcohol, as with kombucha or Red Bull.  Broader aim is to create new consumption occasion, flagged by “Take a Recess” slogan.  Function of brand is to leave users calm, cool, collected – “not wired, not tired.”  As an antidote to modern times, brand feels free in its marketing to make fun of millennial culture and branding.  Crucially, tho, as lifestyle brand connected to creative community, he believes Recess can go wide, into broad range of bevs as well as dissolvable powders and tablets and, thru partners, apparel and other merch. 

By now co employs about 25 staffers full-time in NY and LA.  A mfg partner in Hudson Valley (Drink More Good, near Poughkeepsie) employs 10.  As uncertain as climate has been, so far co hasn't received any nastygrams from FDA, Witte reported, tho co did have to shift production from that Hudson Valley partner “and lay off a bunch of people” because of cloudy regulatory situation at state level.  “I’m calling for regulation,” Witte emphasized, because he views “bad actors” who take shortcuts such as synthetic CBD sourced in China as biggest threat to Recess and category. 

In brief conversation after q&a, Ben told BBI that Recess team is tweaking liquid to make it lighter and more refreshing, drop some of the sugar, and plans to add more familiar, straightforward flavors familiar from soft drink aisle.  Current flavor range of Blackberry Chai, Peach Ginger and Pomegranate Hibiscus may not be appealing across the board, he’s come to realize.

 Monster Beverage turned in robust 3d qtr, beating Wall Street estimates but not alleviating concerns that all its US growth has been comprised by Reign launch as core brand continues to erode.  On conference call yesterday afternoon, MNST brass acknowledged established energy brands like Monster and Red Bull are suffering disruption at hands of newbies like performance energy brands, but said unspecified innovation and distribution tweaks should help MNST remedy situation next year, even as plans by retailers to carve out separate sections for performance brands alleviates squeeze on ancillary Monster brands in main space.  As for looming launch of Coke Energy into US by MNST’s distribution partner and minority investor Coca-Cola, MNST execs yesterday continued their efforts to talk worried investors off the ledge, pointing to early evidence that Coke Energy is by no means a juggernaut so far in Europe.

For Q3, net sales rose 11.3% to $1.13 bil and operating income rose 16.5% to $395.4 mil.  Net sales for core segment, Monster Energy Drinks, which includes the independently operated Reign performance brand, increased 13.5% to $1.06 billion, +14.7% excluding $10.8 mil in adverse currency movements.  Far smaller Strategic Brands segment where Coke-originated brands like NOS, Full Throttle and Predator Affordable Energy are grouped, suffered 9.9% decrease to $66.3 mil, including impact of $1.4 mil in currency movements.  Meanwhile, current qtr is off to brisk start: as vice chmn Hilton Schlosberg noted in presentation on earnings call yesterday afternoon, gross sales in Oct rose 7.3%, +14.6% adjusting for advance buying last year ahead of price increase.

“While there was nothing in the release or call that likely alleviates” concerns about US growth, “the consistent delivery outside of the US and the international business growing in scale should support the top-line growth, even if it comes at the expense of some margin,” wrote Consumer Edge Research’s Brett Cooper.  Sales were trading up today, in bit of a relief rally as investors digested solid report as well as the evidence proffered by MNST brass that Coke Energy launch may have limited impact, if any, on Monster growth.

On call yesterday, Schlosberg cited Nielsen data indicating that in tracked channels Monster Beverage’s share in C&G channel dropped by 1.6 points to 40.7% as core line dropped 4.1 points to 33.5%, Reign launch grabbed 3%, NOS dropped 0.4 points to 3.6% and Full Throttle dropped 0.2 point to 2.7%.  Archrival Red Bull dropped half a point to 33.2% in key impulse channel.  VPX’s Bang gained 4.2 points of share, to 8.2%.  There was share erosion in C&G on coffee/energy side, too.  While Java Monster scored 9.6% $$ gain, rival Starbucks Doubleshot surged at nearly double that rate, +18.1% and Java dropped 2.6 pts of share to 44.7%.  Losses on other coffee/energy entries brought overall portfolio sales down by 5.9%.  Recall that US distribution partner Coca-Cola has been moving in other directions on RTD coffee front, and we’d reported that glass-bottle Caffe Monster entry was likely to be eased out of red system.  On yesterday’s call, Schlosberg said Caffe Monster is being discontinued next year and canned Espresso Monster line will be repositioned.

Recent innovation in N America has mainly been of line-extension variety: Monster Mule Ginger Brew went national, Reign added Orange Creamsicle, co added Monster MAXX, Mango Magic and Monster MAXX Red-Red Extra Strength with Zero Sugar.  Since conclusion of qtr, Java Monster has been augmented, as anticipated, with oatmilk sku dubbed Farmers Oats, offering non-dairy, vegan option, and Reign has added 2 more flavors, Strawberry Sublime and Mango Magic.  But there’s wide expectation that more aggressive innovation is in pipeline for unveiling early next year.

As Established Brand, Monster Now Prey to Disruption, Sacks Allows; New Performance Sets Should Relieve Space Crunch on MNST Innovations   Metaphorically speaking, Monster’s c-team have become their dads, scrambling to keep up with crazy stuff that the kids are always coming up with.  MNST chmn/ceo Rodney Sacks, recovering from removal of benign throat polyp, let vice chmn Schlosberg take lead on presentation.  But he dove in to answer analyst’s question on erosion of core brand, -2.4% in all-outlet, -5% in convenience & gas.  His take: as in other consumer categories, disruption of established brands fostered by consumers’ inclination to try new stuff has meant some new items have taken share (not just from Monster core items but Red Bull’s too, as Schlosberg noted), but overall category continues to grow at healthy 9% clip, “really good growth.”  Monster has quite a bit of innovation in pipeline and some already-launched items “perhaps didn’t get enough shelf space or there have been some shelf space taken from our existing product, which I think has affected sales.”  He added that retailers’ move to allocate additional shelf space to performance energy sector “will relieve pressure on the space we are looking for our existing energy brands and the innovation under the Monster line.”

Added Schlosberg: “If you asked if we are happy with the way things are, obviously, we are not.  We want to see the Monster brand growing.  What we have evidence of is that the price increase has stuck . . . The promotional allowances are very much in line with where they should be and we are not over-promoting.”

Hilton also hinted at tweaks to distribution model, without offering any details.  “We have got plans with our distribution, which has been a challenge to dramatically improve distribution and distribution on shelf and in the coolers,” was all he said.

Middling Performance of Coca-Cola Energy in Europe Suggests It’s Not Dire Threat   Tho couching view in muted terms, Sacks and Schlosberg indicated that early days of Coke Energy in Western Europe suggest new entry isn’t setting world on fire.  Then why hit panic button now that it’s headed to US?  In Coke Energy’s launch markets in Europe, “rate of sale is not keeping pace with initial sales, the percentage market share has been small and it hasn’t really had an impact on us,” Sacks offered.  So main impact, as he’d earlier expressed, was potential for distraction from focus on Monster entries.  “But ultimately, in Europe, things are settling down, our growth rates of our brands are on track and have continued.”  Rodney added, “By and large, the Coke system has pretty much focused on not trying to cannibalize our existing products and take pricing from us and it has worked reasonably well.  There have been a few countries where there have been some challenges and we have addressed them.”  Schlosberg was a bit blunter.  “The numbers that I have seen are showing that they have not performed particularly well and that our brands have continued to grow and our brands have continued to develop in those markets.”  So while Coke Energy product proposition is a bit different in US, “ultimately, we don’t think it will have a major impact on our brand,” Sacks said.

Reign Fights VPX Threat of Entry under Same Name; Heads Overseas; Likely Won’t Hit $235 Mil 2019 Sales Target   Tho MNST brass makes it a practice not to offer sales projections for new products, data included in litigation vs Bang marketer VPX had indicated it was targeting $235 mil in sales this year, starting with Jun launch.  On call, Schlosberg termed Reign sales “solid” to date, but lower than that projection, and reiterated that co’s practice on avoiding projections hasn’t changed.  New brand is heading overseas: it added Sweden in Q3 and hits 2 more markets by year-end.

Meanwhile, legal skirmishing with VPX over launch has broadened.  After failing to win injunction vs Reign launch on grounds it infringed trademark it holds, VPX now has said it will launch its own Reign entry in 16-oz cans in c-stores, Hilton reported.  “We recently filed an expedited motion for preliminary injunction asking the court to stop this product launch and to prevent VPX from infringing Monster’s trademark rights in this way,” he told investors.

Continued Share Gains in Europe, Robust Sales Gains in Asia    Lotsa progress reported overseas.  In Europe/Middle East/Africa segment, production issues “have largely been resolved,” Hilton reported, and net sales surged 34.1% in $$, +40.1% in local currencies, albeit at cost of narrowing of gross margin to 39.3% from 41.3%.  He said co gained share in most key markets in region, including France, Germany, UK, Netherlands, Spain and South Africa.  And in key growth market, Asia, net sales jumped 43.6% in $$, +43.4% in local currencies.  That included 60% hike in Japan, +15.9% hike in S Korea.

In past qtr, Monster Energy headed into red system bottlers in Dominican Republic, El Salvador and Honduras with further international launches planned for later this year, Hilton indicated.  Predator fighter brand entered Botswana and Slovakia, with further markets in Africa and Eastern Europe slated for Q4.  Co continued to flesh out Monster shelf set in China, augmenting core green can with Ultra Violet and Mango Loco in top 40 cities and key accounts.  Ditto in India, where Ultra Violet hit 20% of accounts in Sep and Mango Loco launched.

(In hectic day for earnings calls yesterday, BBI got assist from Seeking Alpha transcript of Monster call.)

Black Rifle Coffee shares skidded 11% in trading today as co drastically cut its revenue projection for 2023 but BRC brass made the case that much of issue stems simply from teething pains of veteran-operated DTC player that's branched out into new terrain including canned coffees in c-stores and bagged coffees in Walmart. After last year projecting co could would get to $500 mil in revenues, BRC dialed it back to $400-440 mil range as it cuts $40 mil from food/drug/mass buildout, another $30 mil from RTDs and $10 mil from its café expansion. One thing it didn't go back on: pledge of getting EBITDA-positive this year, in synch with investors' more sober view in challenging economic environment.