5-Hour Energy: Hours of Energy Without the Beverage

Answer the questions:

1. Using the full spectrum of segmentation variables, describe how 5-Hour Energy segments and targets the market for soft drinks.
2. Which targeting strategy did 5-Hour Energy focus on and how was the product positioned in the market?Positioning is rated as High, Medium, and Low.
3. Who are 5-hour Energy competitors and provide at least two that have similar or different target markets and will this cause challenges in the future?

Company Case

6

5-Hour Energy: Hours of Energy without the Beverage

You've no doubt heard of 5-Hour Energythe small red bottles filled with an energy-infused elixir, located alongside the candy and gum near the checkout at most grocery and convenience stores. Chances are good that you've tried one. You may even be among the more than 4 million people in the United States who have collectively consumed 9 million bottles of 5-Hour Energy in just the past seven days. This upstart brand has had a huge impact on the beverage industry. How did 5-Hour Energy become so big so fast? By targeting the right kinds of customers with a product that gives them exactly what they want at precisely the right moment.

Discovering an Unmet Need

It all started in the early 2000s. India-born Manoj Bhargava had sold his companyan outdoor furniture components makerand retired to Michigan with his wife and son. But after only a couple of months, he grew tired of doing nothing and began looking for a product he could license and turn into the "next big thing." With that in mind, he attended a natural products trade show in Anaheim, California.

Amid meetings with numerous companies, he happened upon the booth for an energy drink developed by a group of PhDs. The 16-ounce concoction claimed to boost energy for hours. Knowing he faced meetings until 10p.m. that evening, Bhargava was concerned that he not would be able to stay awake, let alone pay attention. So, he tried a can of the energy drink. The results were almost instantaneous. "For the next six or seven hours, I was in great shape," Bhargava recalls. Not only was he wide awake, but his levels of focus and awareness were enhanced. "I thought, 'Wow, this is amazing. I can sell this.'"

But when he talked with the drink's owners to discuss potential partnerships, Bhargava learned that they were not interested in selling or even licensing the rights for the product. He looked over the label and made a mental note of its ingredients and thought, "How hard can it be?" Whereas most people with no science or nutrition background would never dream of trying to come up with their own recipe for a product intended for human consumption, Bhargava was not deterred. He got to work setting up his own lab and forming a company he called Living Essentials.

Bhargava quickly realized that a 16-ounce beverage would not succeed in a market saturated with long-standing brands peddled by deep-pocketed companies. As an energy-giving beverage, the new product would have to compete for refrigerator and shelf space with an ever-increasing batch of brands led by Red Bull. It would also face off against some of the most established brands in the world put out by the likes of the Coca-Cola and PepsiCo.

But Bhargava's new concoction didn't have to be a 16-ounce beverage or, for that matter, a beverage at all. "If I'm tired, am I also thirsty? Is that like having a headache and a stomachache," mused Bhargava. After all, Tylenol didn't sell a 16-ounce single serving version of its pain-killing product. As he developed the formula through trial and errorhe always tried the experimental versions out on himselfhe contemplated the customer he was trying to reach and how the product could be positioned to appeal to them.

Profile of an Unfulfilled Customer

In defining that customer, he thought about himself at the trade show. He needed energy to stay awake. But he also needed to be able to pay attentionto focus on what was happening as he met with various people from various companies. He needed energy and focus quickly, preferably in a form that wouldn't weigh him down or produce unwanted side effects. Once he thought in those terms, he considered other types of people who also need those benefitspeople working two jobs to make ends meet, truck drivers who spend hours at a time behind the wheel, the Wall Street trader grinding out 16-hour days, or the person who works on a Hollywood movie set. All those people have two things in commonthey work long hours, and they need to be able to focus on their work.

From his own experience and observation, Bhargava knew that energy drinks, caffeinated soft drinks, and even coffee allfocused on providing energy and the ability to stay awake. But consuming enough of any of those beverages to get the right amount of energy put a lot of liquid in people's bellies, tending to weigh them down and make them feel sluggish. Additionally, product's containing sugar might produce an initial jolt of energy, but that spike is short-lived, followed by a carbohydrate-induced crash into grogginess.

With the target customer in mind, Bhargava set the forma sugar-free two-ounce shot that contained enough caffeine200 milligrams by some estimatesto produce a substantial boost in energy along with a blend of vitamins and amino acids known to increase the human brain's ability to focus. The small dose of liquid wasn't so much a beverage as it was a delivery system.

Positioning through the Marketing Mix

With the product's form established, Bhargava created the name: 5-Hour Energysimple and functional, communicating the product benefit exactly. The product's form was important for ease of consumption and for differentiating it from the beverage options. But it was necessary for another key component of Bhargava's marketing mix strategyto get the product into stores in its own spot, away from the refrigerated beverages and right next to the cash registers.

The first retail chain that 5-Hour Energy's marketing team targeted for distribution was GNCthe largest chain of vitamin and nutrition stores in the country. 5-Hour Energy was a perfect fit for GNC's customersfitness- and health-oriented people who spent hours working out each day on top of their jobs and other life pursuits. GNC's buyers agreed, placing 5-Hour Energy in a small display next to the cash register.

After the first week, however, 5-Hour Energy sold only 200 bottles across GNC's 1,200 stores. The premium price of more than $3 for the little shot was a hurdle. But Bhargava wasn't worried. He knew that the product was sound, the location was perfect, and the price was right to establish an image as a quality product. His hunches were right. After six months, 5-Hour Energy was selling 10,000 bottles a week.

That success gained 5-Hour Energy entry into Walgreen's, CVS, and various convenience store chains throughout the country. With increased distribution, the company ran ads on TV and the internet. The ads were simpleeven low budgetin appearance. But the message was right on. "You know what 2:30 in the afternoon feels like, right? Sleepy? Groggy? Dying for a nap?" said a young, hip, white-collar worker, navigating his way around a typical corporate office. "What do you do? Run for the coffee? Grab a soda? But how long does that last, before you're back for more?" After detailing the benefits provided by 5-Hour Energy, the ad ended with the tagline "Hours of energy now, no 2:30 feeling later."

Adding multiple flavors in regular, extra strength, and even decaf forms, 5-Hour Energy rose to new heights with distribution in Walmart and every other major U.S. grocery chain. By that time, many of other companies were taking notice of the upstart brand and opportunities in the new energy shot category. If 5-Hour Energy had been created by a guy with no background in the business, they could do it better.

Soon, Coca-Cola, Pepsi, Red Bull, Monster, and host of other established beverage makers to begin distributing their own versions of the two-ounce shot, pressing for their share of limited counter space next to cash registers. And they weren't the only new entrants. At one point, there were literally hundreds of brands of two-ounce shots on the market, most from small, opportunistic companies looking to score a quick buck. Almost all came in at cheaper price points than 5-Hour Energy. And the deep-pocketed veteran brands threw their muscle into distribution channels and promoting their newest offerings.

Initially, the new competition made a dent in 5-Hour Energy's fortunes. Within months, the brand's market share dropped from 93 percent to 67 percent. "Everybody tried their products," reports Bhargava. "However, the one thing they all forgot was, you have to have a great product." Bhargava remains a big believer in product quality. "It's not the little bottle. It's not the placement. It's the product. You can con people one time, but nobody pays $3 twice."

As the energy shot market has evolved, Bhargava has been proven right. Even as the market has continued to grow in overall volume, competitors have dropped be the wayside. With little repeat purchase and not enough incentive to stay in the game, even the big brands have decided the battle isn't worth it.

Today, 5-Hour Energy again commands more than 90 percent of the category it created. The number two brand? NVE Pharmaceutical's "Stacker," at just over 3 percent of the market. When asked what other brand 5-Hour Energy most resembles, Bhargava replies, "WD-40." He considers the two brands to be similar in that they are both brands without categories. "Usually, to be a category, there have to be at least two major players. This shot area ... it's really not so much a category as a brand."

As a private company, Living Essentials doesn't disclose its performance. But analysis of scanner data puts 5-Hour Energy's annual retail sales at more than $1.2 billiona number that has gone up every year since the brand's inception. About 25 percent of that retail figure filters down to Living Essential's net profit. That's enough for Bhargava to have amassed a net worth that analysts put somewhere between $1.5 billion and $4 billion. And yet, with its rapid growth and market domination, Bhargava sees much more potential before the market becomes saturated. "If we sold 5-Hour Energy to everyone who needs it, we'd be selling twenty times more."