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Why Monster Beverage’s Margins Declined in Q3

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Gross margin fell

Monster Beverage’s (MNST) margins continued to decline in the third quarter. The company’s gross margin fell to 59.8% in the third quarter compared to 62.6% in the third quarter of 2017. The gross margin fell due to the rise in certain input costs like aluminum cans and freight-in costs, the $11.6 million negative impact from the adoption of an accounting standard, higher promotional allowances, an unfavorable domestic product sales mix, and an unfavorable geographical margin mix.

Excluding the impact of the adoption of the accounting standard, the company’s gross margin was 60.3% in the third quarter.

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Operating margin fell by 150 basis points

Monster Beverage’s operating margin fell to 33.4% in the third quarter from 34.9% in the third quarter of 2017. The company’s selling, general, and administrative expense rate improved as a percentage of sales. However, the distribution expenses as a percentage of sales increased to 4.1% in the third quarter compared to 3.2% in the third quarter of 2017. The rise in the third-quarter distribution costs reflected higher carrier contract rates in the domestic market.

Higher costs caused PepsiCo’s gross margin to fall by 30 basis points to 54.3% in the third quarter. PepsiCo’s operating margin fell by 75 basis points to 17.3% due to the impact of lower input costs, higher advertising and marketing expenses, and currency headwinds.

To mitigate the impact of higher input costs, Monster Beverage is increasing the price of some of its Monster energy drinks.

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