Red Bull’s Diversification Strategy: Balancing Downstream Focus And Eccentric Marketing

The course introduces the key concepts, tools and theories of strategy, identifies the role of strategy in organisational performance and discusses the main aspects of change management and strategy implementation. The aims of the course are:

1. To provide students with a deep understanding of strategy and its key components;
2. To develop students’ ability to analyse the influence of external and internal factors in strategy formulation and identify he methods of effective strategy implementation;
3. To enable students to identify and critically evaluate the main challenges in strategy implementation process and the ways to address them.
4. Analyse different aspects of strategy formulation and implementation linking theoretical knowledge and practice, with a specific focus on change management;
5. Understand the issues and challenges in strategy formulation and implementation;
6. Identify and critically evaluate the key components of successful strategy;
7. Develop a profound understanding of the relationship between organisational activities contributing to strategy success and an ability to think strategically.
8. Define and evaluate the main challenges in strategy implementation and execution.

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Dominant Thinking About Diversification

Briefly explain the dominant thinking about diversification in the literature (e.g. corporate advantage in developed markets must rest on some form of synergy so unrelated diversification is usually viewed negatively)

What is the dominant thinking about diversification in the literature?

To understand how to formulate diversification in corporate strategy, it is necessary to specify the conditions under which diversification will truly create value. There are three essential tests, as described by Porter:

1. The attractiveness.The industries chosen for diversification must be structurally attractive. An attractive industry is defined as an industry with a return on investment greater than the economy.
2. The cost-of-entry.The cost of entry must not capitalize all the future profits. This is a simple test, as diversification cannot build value to its shareholders if the cost of entry eats up all the capital invested.
3. The better-off.The new unit must gain a competitive advantage from its link with the corporation. The benefits should be observed in the long-run, or the parent company has no rationale to keep this business on its portfolio.  

In a diversification strategy, it is important to consider whether that core competence is enough to give it a competitive advantage in that new industry. Red Bull’s strategy to diversify is contradictory to what academics teach us about successful diversification as it invests in unprofitable, risky businesses that are not directly related.

Red Bull GmbH is a manufacturer and supplier of energy drinks headquartered at Fuschl, Austria. The company offers sugar-free beverages containing caffeine, taurine, alpine water, vitamins to performance athletes and average consumers. Red Bull was founded in 1987 by adapting a Thai beverage and introducing it as a new ‘energy drink’ segment in Austria. Today, it holds the largest market share in energy drinks segment selling over 7.9 billion cans in 171 countries with group sales at ~ £5.4B ¹(as of 2020).

From its very inception, Red Bull has embraced an innovation strategy that placed more emphasis on marketing and brand development than product. In fact, 40% of its revenues are reinvested into marketing even today².? After its launch in 1987, Red Bull did not immediately expand, instead it focused on penetrating its customer base within Austria for the first five years. Over this period, it managed to clearly identify and understand the preferences of its target customer segment to see what works and what does not. Only after this did it grow its geographic presence to Slovakia and Hungary (1992), Germany and the UK (1994), and the US (1997) ³.

In its primary growth phase in the late 1990s and 2000s, Red Bull chose to ditch traditional marketing approaches but rather adopted unconventional approaches such as Red Bull student ambassadors in schools and colleges, empty cans in public spaces, free samples at nightclubs and bars, and continued sponsorship of extreme sporting events. This was done to aggressively target the 18- to 35-year-old millennial male consumer segments who was the target customer for Red Bull.

In over 30 years of its existence, the Red Bull primary product, the energy drink, has not undergone much change. There have been some attempts at some product variations, but these have not been very successful. What differentiates Red Bull from most of its competitors is its unique business model. Red Bull essentially outsources all upstream value chain activities (production and distribution) and exclusively focuses on downstream diversification and marketing as the core of its business operations.

Company Background

Through its unique industry diversification strategy and eccentric marketing campaigns, Red Bull has managed to greatly amplify its brand presence across the world. Red Bull’s is easily one of the most well-established global brand names today that is associated with: extreme sports such as windsurfing, snowboarding, motocross biking, winter sports; established mass sports such as Formula 1, NASCAR, football (soccer); music festivals and record labels; and even spectacle projects such as Red Bull Stratos – the high-altitude skydiving project. Red Bull’s key alternate revenue streams are – (1) Media Production: Red Bull Media House, a multi-platform media company); (2) Sports Teams: owns RB Leipzig, FC Red Bull Salzburg, Red Bull Brazil, New York Red Bulls, EC Red Bull Salzburg, Red Bull Racing, and others); (3) Broadcasting: Red Bull TV Online, Premium YouTube content; (4) Sponsorship: contracts with top professional athletes who promote the brand.

Understanding the customer: Red Bull chose to first identify and develop a deep understanding of the likes/ preferences of its target customer segment before designing a branding-led diversifications strategy that struck the right chord amongst its target audience.

Selling a story, not a product: The company’s approach to brand building and promotions is centred around selling a story to the action-and thrill-seeking consumer who wants to be part of the Red Bull adrenaline-fueled Red Bull lifestyle.

Downstream diversification focus: Red Bull’s unique model of operations of outsourcing production and distribution to solely focus on downstream diversification and marketing enables it continuously to grow its brand following across the world.

Profitable investments: Investments in sports teams, media houses, and sporting events create additional profitable value chains for the business. This also allows Red Bull to leverage synergies within its fully integrated media and sports ecosystem. Sponsoring Felix jumping from space in 2012 cost $50 million but the global coverage about the event was worth approximately $6 billion⁴. Even sporting investments are not only providing much-needed brand amplifications but the could be highly profitable for Red Bull in the long-term. The New York Red Bulls was purchased at $25 million in 2016 but experts peg its worth at $290 million today⁵.

Outlining the conditions under which the dominant thinking does not apply, Draw attention to why this does not apply to Red Bull, i.e. why their strategy has proved successful – despite going against literature

Conditions where the dominant thinking does not apply

Red Bull is part of the highly competitive and mature energy drink market. In order to still differentiate in a place like this, brand and marketing become of increased importance. As outlined in the previous section, Red Bull has invested in unrelated businesses that stand for the same values and has the desired brand image i.e., F1, Extreme Sports etc. The cost of this diversification into unrelated businesses can therefore be considered a marketing expense.

Strategy Focused on Downstream Diversification Coupled with Intensive Marketing

The conditions under which this unrelated diversification is justified are when you are in a mature market already and cannot differentiate on product anymore, thus marketing and branding take the upper hand. From a marketing perspective, the businesses Red Bull invested in are indeed related in terms of values and image, making them reasonable acquisitions. Moreover, the global size and scale of Red Bull’s energy drink operations are still more significant than compared to the diversification investments. Hence, even though the investments into the sports teams might be of high entry cost and low profitability, these expenses still dwarf the relative cost of diversification, while the reach of the marketing efforts is global and vast.

Now, we will try to understand why diversification into unrelated industries has proved so successful for Red Bull, despite it going against conventional wisdom. To do this, we will examine in more detail how Red Bull’s strategy bucks the dominant trend. Let us apply a standard diversification framework to one of Red Bull’s first diversification moves: the acquisition of the New York Red Bulls - formerly MetroStars - in 2005:

1. Is this a good business to be in?

Owning and managing professional football clubs is a famously difficult business. Most teams in the American Soccer League (MLS) are listed as unprofitable.^[1] If one applies Porter’s 5 forces, it’s clear that exceptionally high competition and high supplier power are key drivers for this.

2. Does Red Bull have a competitive advantage within the industry?

It is difficult to see how Red Bull’s existing competencies in energy drinks could be transferred favourably to running a football team. Their deep expertise in marketing may be helpful in selling the club to fans, but this seems dwarfed relative to their lack of experience in an industry with such different business models, stakeholders, pricing structures and value chains. Furthermore, Red Bull has a siloed organizational structure separating management of canned drinks and other ventures, meaning any chance of synergies is reduced even further.

3. Do gains from being in the business outweigh the cost of entry?

Purchasing a football team is extremely expensive. Although there is no publicly available data on what Red Bull’s paid for the acquisition, purchasing a mid-table club in any of the world’s top 5 leagues is estimated to cost around $325m.^[2]

Therefore, it seems that Red Bull’s entry into the MLS does not stand up to this analysis. The industry is unprofitable, they have little transferrable competencies, and the cost of diversification is extremely high. Furthermore, the same could be said for almost all Red Bull’s entries into the sporting sphere. So, how is it that Red Bull has made this strategy so profitable?

1. Using Diversification to Serve the Core Business - not the other way around!

Factors Contributing to the Success of Red Bull’s Eccentric Diversification Strategy

Conventional diversification frameworks - such as the one applied above - evaluate the success of a diversification strategy based on the profitability of the new venture. In Red Bull’s case the profitability of the new venture is secondary to how the new venture boosts profitability in the core drinks business. This means, to understand Red Bull’s success, we must reverse usual analytical paradigm, focusing on how diversification can be used to boost competitive advantage and profits in the core business, instead of how the core business can be used to create competitive advantage and profitability in the new venture.

1. Brand is King: Ultra-Downstream Specialisation

In the energy drinks market, the big players all share extremely similar ingredients and distribution networks^[3], leaving price and brand as the primary modes of competition. Red Bull positions itself as a premium product and so almost exclusively focuses on brand-based competition, outsourcing all upstream manufacturing activities so it can focus exclusively on branding, marketing and selling the drink. As a result, Red Bull are now world leader in branding and marketing, even having its own award-winning “Red-Bull” media house. It’s this exceptional competence that Red Bull uses to create value from its diversification, by using their new ventures to create memorable content and powerful stories about their brand. This boost to their brand image makes them more competitive in the drinks market and boosts the company’s overall profitability, even if the diversification is unprofitable itself.

1. Health Concern: Red Bull’s Biggest Challenge

In 2000, Irish teenager Ross Cooney died after drinking three cans of Red Bull and playing basketball^[4]. Since this point, Red Bull has been under continual criticism and scrutiny from public health organisations. By diversifying into the sports industry, Red Bull not only benefits from sports’ powerful narratives and deep personal connections, but also from the positive associations with healthy lifestyles and fitness. In this way Red Bull overcame its biggest threat, another huge value-add from this diversification that is not picked up on by traditional analysis.

7. 7.5 billion Energy Drinks Sold a Year: Red Bull’s Scale

The scale of Red Bull’s core Business is enormous meaning it can justify large investments. Furthermore, Red Bull’s branding is homogenous across all products, meaning that positive brand associations have huge multiplier effects across all their lines. As a result, even though some diversifications may appear to be overpriced or unprofitable in isolation, when considered in relation to the size of their core business, if it can generate even a small percentage uptake in sales, a large investment will be made back with ease.

1. A Sporting Empire: Synergies across Sports

While there was a time when Red Bull diversified into sports with no prior experience or expertise, it is now an experienced player with an incomparable portfolio. In fact, Red Bull’s novel approach of building a large and diversified portfolio of sports teams has created synergies hitherto unseen. For example, Red Bull owns 4 football teams in different leagues across the world, at various levels of competitiveness, meaning they can transfer players cheaply between teams depending on any given team’s needs in a particular season. This type of synergy is unique to Red Bull, and it helps them create value in typically unprofitable industries. Therefore, although this was not always the case, Red Bull can now create synergies that make acquisitions in the (typically unprofitable) sporting sphere attractive.

References

https://fortune.com/2020/02/17/mls-profits-american-soccer-revenue/

https://www.forbes.com/sites/mikeozanian/2018/06/12/the-worlds-most-valuable-soccer-teams-2018/?sh=34c363ad45c8

https://onlinelibrary.wiley.com/doi/full/10.1111/j.1541-4337.2010.00111.x

https://www.irishtimes.com/news/jury-calls-for-research-into-stimulant-drinks-1.1115757

https://www.redbull.com/gb-en/energydrink/company-profile#:~:text=In%20202 %2C%207.9%20billion%20cans,euros%20to%206.307%20billion%20euros.

https://www.bosshunting.com.au/hustle/how-does-red-bull-make-money/

https://cxp.asia/2021/05/04/red-bull-business-model-diversifying-into-the-future/

https://thebrandhopper.com/2020/10/11/red-bull-masters-of-creating-brand-through-content-marketing/

https://theawarenessnews.com/2021/06/03/red-bull-behind-the-notorious-blue-can/amp/