In 2019, Red Bull sold one can for almost every person on the planet. But besides selling 7.5 billion cans of a very sweet drink, they also run two Formula One Teams, five professional football clubs and one ice hockey team. Not mentioning events like the crashed ice challenge or the Wings for Life Run. The thousands of athletes that Red Bull sponsors and the media production they run. Obviously, Red Bull does much more than selling an energy drink. But is all that just marketing? We take a closer look at how Red Bull makes money.
The Origin Story Behind the Red Bull Brand
In the summer of 1982, the Austrian businessman Dietrich Mateschitz found himself suffering from jet lag during a business trip to Thailand. He tried a local drink called Krating Daeng, which improved his jet lag substantially. Krating Daeng can be translated to Red Gaur, a Gaur being a huge bison from Southeast Asia. So it basically means Red Bull.
Inspired by the magical qualities of the product, Mateschitz decided to bring the product home in the format of a brand new product category – the energy drink. He pitched his idea several times to Western investors but got turned down because they didn’t see a market for the product outside of Asia.
Mateschitz was well aware that there was no market at the time. So he decided to create one. He was so convinced of his product, that he invested half a million himself.
How Red Bull Disrupted the Beverage Industry
He then teamed up with the boss of the Krating Daeng manufacturer, who also invested half a million for the other half of the company. Next, Mateschitz adapted the formula and flavor for the European market and successfully launched the product in Austria in 1987.
Because the drink was initially banned in Germany, Red Bull profited from the reputation as an outlaw brand. Many Young Germans would cross the border to Austria to buy the banned energy drink, and Red Bull sold over a million cans in their first year.
From Austria, it quickly spread across Europe, first to Slovakia and Hungary in 1992 and then to Germany and the UK in ‘94. When they entered the US market three years later, Red Bull was selling over a million cans every day.
Red Bull’s Outsourcing Strategy Fuels Higher Margins
Soft drink giants like Coke and Pepsi could benefit from deeper pockets, but they underestimated the strategic intent of Mateschitz and the upcoming brand. He created a new species of corporation that focuses only on the downstream activities of the value chain while outsourcing operations such as production and logistics.
That means that Red Bull itself is actually not producing the drink – production and filling of the cans is completely outsourced, so Red Bull can fully commit its resources to selling the drink. Looking at the profit margin, that pays off.
The Genius Behind Red Bull’s Premium Pricing Strategy
One of Red Bull’s secrets to success is that they can charge a much higher price than their competitors. Red Bull makes each can for approx. 9 cents. The suggested retail price for a can is 3.59 USD. The biggest customers like walmart and big grocery stores pay between 44 and 48 USD per case of 24 cans. That means 1.87 USD per can, which is more than 20 times the cost of production.
The reason people are willing to pay so much for sugar water with taurine is Red Bull’s brand power. A result of a well thought-out marketing strategy.
Viral Marketing: How Red Bull Created a Brand New Market
To create a market for his product, Mateschitz first focused on the club scene. It’s really hard to imagine a student party without several packs of Red Bull on hand, since the company actively made use of “student brand managers”.
Brand managers were popular university students encouraged to promote Red Bull on university campuses and to throw parties at different locations, supplied entirely by Red Bull. Volkswagen Beetles with larger-than-life Red Bull cans strapped to their backs showed up at beaches, at colleges, gyms, and even office buildings with free samples.
Bartenders quickly learned that this new drink was a money machine. It is likely that you have at least once tasted a Red Bull mixed with vodka or Jäger, since the mixes became two of the most popular drinks in bars everywhere.
Soon the beverage was sold at nightclubs and festivals around the world, creating a competitive advantage for the Austrian brand. But this was only the beginning of the Red Bull marketing machine.
Strategic Sports Sponsorships Take Red Bull’s Brand Power to New Heights
Through the sponsorship and ownership of sports teams, Red Bull continuously engages with the customer in a deeper way than traditional advertising ever could. This allows its customers to feel active and intense, by drinking from a can that bares the same logo as a Formula 1 car, a skateboard, and a record-breaking parachute.
Instead of sober story telling, Red Bull employs story-performing. They don’t do conventional marketing or try to look for stories to be associated with. They create their own stories and produce the content with their own media house. That means they hold the rights to all pictures of their events.
With social media this results in viral communication effects that drastically improve the return on marketing. The ultimate example for Red Bull’s story-performing was Felix Baumgartner jumping from space in 2012. The project cost Red Bull an impressive 50M USD, but some experts estimated the global reporting about the event to be worth approx. 6 billion USD. So it was probably worth it.
Both, sponsoring extreme sporting events like this and selling products with an edge, enables Red Bull to remain the market leader in its category.
The Red Bull Revenue and Growth Model
In 2019 they sold 7.5 billion cans, which helped create a revenue of over 6bn US dollars. To reach that much revenue, they spend almost a third on marketing. But despite the huge marketing budget, the revenue growth of Red Bull slowed down since 2012.
The company is depending almost completely on one product only: the energy drink. This limits its growth and can eventually become a big risk. Especially with a growing awareness for health and nutrition, the focus on a product that causes obesity, insomnia and diabetes might backfire eventually.
How Red Bull Uses Sports Teams and Media to Diversify
Investments in sport teams and media production are therefore not only marketing activities, but the attempt to diversify and create additional value chains next to the can business.
To implement sport as a business, Red Bull takes advantage of a fully integrated entertainment and media value chain that ranges from media production to team ownerships, broadcasting arrangements and contract management.
One example how that strategy can work are Red Bull’s football teams. Owning more than one club gives them the opportunity to use synergies, for example when developing talent. A player can potentially start his career in Brazil, move to Europe to play in the smaller Austrian league for Salzburg and eventually join Red Bull Leipzig when he is ready to play in the Champions League. At the end of his career he might move to the New York Bulls to spend the last years in the Major League Soccer.
The team in New York is also a good example how private equity in sports can generate value for Red Bull. They purchased the team for an estimated 25M USD in 2006. According to Forbes, the team is now worth 290M USD. So Red Bull was able to tenfold their investment. And with the US soccer market on the rise, the price for a franchise in New York city will most likely soar in the future.
The Red Bull Business Model Still Depends on Beverage Sales
Nevertheless, the overwhelming revenue driver, to this day, remains beverage sales, representing approximately 97% of the total earnings. Red Bull mentions the other activities as “ongoing brand investment”, which indicates that these are losses, not revenue streams – at least not yet.