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Why Monster Beverage’s Margins Expanded Significantly in 3Q15

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Margins in 3Q15

Monster Beverage’s (MNST) margins in 3Q15, which ended September 30, 2015, expanded significantly. The expansion was driven by double-digit sales growth. The company is also benefitting from its newly formed Concentrate segment, which carries higher margins than its Finished Products segment.

The Concentrate segment essentially includes energy drink brands acquired from Coca-Cola (KO) as part of a strategic partnership that became effective in 2Q15. The segment generates revenue by selling concentrates to authorized bottlers that combine the concentrates with sweeteners and water to produce finished beverages.

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Growth drivers

In 3Q15, Monster Beverage’s gross margin increased to 61.5% from 53.8% in the third quarter of the previous year. The significant rise in the 3Q15 gross margin was a result of net sales from the new Concentrate segment, the sale of lower-margin non–energy drink brands to Coca-Cola (KO), higher prices, lower costs for certain raw materials, and favorable changes in the company’s product sales mix.

Monster Beverage’s operating margin increased to 38.5% in 3Q15 from 29.9% in 3Q14. The increase in the company’s 3Q15 operating margin was due to a reduction in distribution costs as well as general and administrative costs as a percentage of net sales. These favorable changes were offset by higher selling expenses and a rise in advertising costs, sponsorships, and endorsements as well as commissions and royalties.

Margins for competitors

Coca-Cola’s operating margin in 3Q15 fell to 20.8% from 22.6% in the comparable quarter of the previous year due to structural changes, currency headwinds, and higher marketing investments.

Although PepsiCo‘s (PEP) gross margin increased in 3Q15, its operating margin fell to 8.7% from 16.5% in 3Q14 due to a $1.4 billion impairment charge related to the company’s Venezuelan operations.

Dr Pepper Snapple’s (DPS) 3Q15 operating margin increased to 20.7% from 20% in 3Q14, driven by productivity measures under its Rapid Continuous Improvement program.

Cott Corporation’s (COT) operating margin improved to 3.8% in 3Q15 from 3.3% in 3Q14 due to an improvement in gross margin as a result of volume stabilization within the Cott North America business unit.

Monster Beverage, Coca-Cola, PepsiCo, and Dr Pepper Snapple together account for 2.2% of the portfolio holdings in the iShares S&P 500 Growth ETF (IVW) and 16.4% of the Consumer Staples Select Sector SPDR Fund (XLP).

For more updates, visit our Nonalcoholic Beverages page.

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