5-hour Energy: Get your boost for the day
An inspirational story of someone who dropped out of Princeton college, spent 12 years as a monk in India, came back into the work force only to take low paying jobs such as a taxi driver, laborer and after a few other stints, launched 5 hour energy – one of the largest selling packaged consumer products.
An energy shot, founded by Manoj Bhargav and launched in 2004, gradually took over the market with over $1B in retail sales netting approximately $300 M and gaining 90% market share by 2011. The success of this product is an example of exceptional marketing, efficient operations and a solid business model.
Business model:
5-hour energy is a 2 ounce energy shot that is available in 6 different regular flavors, 5 extra strength flavors and 1 decaf flavor. As per the bottle, the drink contains zero herbal supplements, B vitamins and amino acids, 4 calories and as much caffeine as a leading cup of premium coffee. To prevent a sugar crash, the drink was made sugar free. It was targeted at a slightly older working demographic than other energy drinks that mostly targeted teenagers and young adults. Over time, given the flavorsome taste, everyone from truckers, students, and professionals started using it.
Challenges:
Soon after its launch, 5-hour energy was fending off hundreds of knock offs with similar packaging, look and feel. The energy shot, priced at $3 per bottle – which did not seem very economical for 2 ounce bottle, also had to compete with more established energy drinks such as Red Bull. On the other side, the customers had health concerns with the product given that it was one of the first few, if not the first, “energy shot” in the market.
Key success factors – operating model:
- Packaging: The company chose a 2 ounce bottle since it didn’t want to address fatigue and thirst at the same time – in which case a larger bottle would have been used. More importantly, a bigger bottle would be competing for cooler space with Pepsi, Coke, Gatorade etc. The small size allowed the bottles to be placed near the check-out counter of stores competing with key chains, chocolates and other small items making it more likely to be picked.
- Business Partnerships: 5-hour energy convinced vitamin stores such as GNC to sell its products initially. Subsequently, 5-hour energy was being sold at Kroger, Walmart, Walgreens, gas stations, drug stores and other quick mart locations. The company chose to sponsor sports teams / personalities and their partnership with a NASCAR’s Michael Waltrip racing team and driver Clint Boyer especially helped them gain visibility. Among others, PGA Tour golfer Jim Furk and professional soccer player Oribe Peralta were also sponsored.
- Sampling: They held several free sampling events at work places, sports events, restaurants and bars to promote the brand.
- Efficient Operations / Staying lean: The founder states in his TiEcon 2013 talk (link below) that despite being one of the largest selling packaged consumer products in the world, the company limits its sales and marketing team to just 18 whereas competing firms have up to 300 people. He credits his highly efficient sales force (and other operations) to the fact that the average age of hire is ~48 (more experienced) which is very different from other companies gunning for young adults and MBA’s. He focuses on hiring extremely passionate people who are there for the love of their job and not for incentives and hence maintains a very low turnover rate.
- Simplicity: Part of the mission of the company is to keep things simple. This is stressed several times and they are able to do this by having extremely short to the point meetings, being decisive and following a “fast to failure” approach (try a plan quickly to check whether it works). The company also normally stays away from consultants who according to them, “complicate stuff.”
Conclusion: The company has done an amazing job at providing a range of flavors/strengths for its energy drink. It’s innovative marketing and seamless distribution via various channels have positioned it strongly hence aligning its business and operating models to build a very sustainable business.
On another note, to view the other incredible projects that Living Essentials is undertaking via its holding company, check out the documentary below. Their work in healthcare, water and energy is bound to impact thousands of lives…
https://www.youtube.com/watch?v=YY7f1t9y9a0
Sources:
- http://www.forbes.com/sites/clareoconnor/2012/02/08/manoj-bhargava-the-mystery-monk-making-billions-with-5-hour-energy/
- https://www.fundable.com/learn/startup-stories/5-hour-energy
- http://5hourenergy.com/
- http://www.wsj.com/articles/a-day-in-the-life-of-5-hour-energy-creator-manoj-bhargava-1446479908
- http://mediacrushllc.com/case-studies/5-hour-energy/
- http://adage.com/article/special-report-americas-hottest-brands-2009/5-hour-energy-america-s-hottest-brands-case-study/140458/
The founder of this company is perhaps one of the most self-deprecating CEO. Do you believe that the size of the 2-ounce bottle aids 5-hour energy in keeping its costs down? I’d imagine that the bottle size helps to contain production and distribution costs, which could be an excellent alignment of operating and business models.
Yes Rahkeem the small bottle will surely keep production and distribution costs down – that is a big secondary advantage for them. However, I still believe the main reason they chose the small bottle was to not compete with drinks such as coke and red bull for shelf space. The small size allowed them to be placed at check out counters and they are now at the checkout counter of every Walmart lane which is one of the hardest spaces to get.
Cool post… what an amazing story. I had no idea. How in the world did they get distribution in the early days, I wonder… Should be interesting for a case study!
Thanks for your comment Professor Iansiti. From what I know, initially they used several independent wagon jobbers to get the product across to the market post which they switched to more established distributors.
Hi Rahul – thanks for sharing the story of 5 Hour Energy! I’ve used it sporadically over the years and to your point of the packaging, I think another value proposition of the 2-oz. size (for me at least) is that I don’t like the taste of red bull, so the fact that I can drink the bottle (or half) in just several sips is huge! Other key value drivers for me personally: its portability (I used to keep it in my squash bag when I played in college) and the penetration: I can always rely on finding it at almost any grocery store, check out counter (to the CEO’s point in the video at Walmart), & gas station. Thanks for sharing!
Do you know if it goes well with alcohol rahul? like vodka redbull.
Not sure about that but it is generally not recommended to mix energy drinks and alcohol since caffeine keeps you alert and stimulated due to which you may drink more alcohol without feeling the effect.
Interesting post, I didn’t know the full story here and they are literally everywhere. Although I don’t consume energy drinks, I think this is a very cool example of a simple idea/product that seems to have made it big largely due to solid execution and lean operations. Refreshing in a world today where hiring lots of people and losing money for years and years has become the new norm (until another recession hits at least)… Would be curious to understand their manufacturing model (assume it’s produced by a contract manufacturer?) and their distribution model (Marco raised a good point above, would be fascinating to understand how they gained distribution in end markets dominated by multi-billion dollar CPG companies. I also wonder why Red Bull or companies like Monster didn’t make a competing product and push it through their existing distribution channels. If they didn’t try to launch a similar product perhaps they were just sleepy (pun intended!) and were too caught up in the success in their own products…
This is a really compelling story. I wonder what the initial catalyst was that allowed 5 Hour to make it onto the shelves of so many national chains like GMC and Walgreens so quickly.