We are initiating coverage of Dethrone Royalty Holdings, Inc. (OTCQB: DRHC) with a Speculative Buy rating.
DRHC could be the next Monster Beverage (NASDAQ – MNST) success story and become the go-to sports nutrition drink in the next 2 years, driven by its quality hybrid products and athlete endorsement strategy which should attract larger players seeking an acquisition and a key player in this space.
Dethrone Beverage, Inc. (a wholly-owned subsidiary of Dethrone Royalty Holdings, Inc.) entered into a Royalty Agreement with Dethrone Royalty Inc. for the purpose of manufacturing and distributing sports nutrition and water beverages under the Dethrone Beverage brand. The Dethrone Royalty brand was founded by Nick Swinmurn, the founder of Zappos.com and co-owner of the NBA franchise, the Golden State Warriors. The Company has sold clothing and apparel targeted at the Mixed Martial Arts (MMA) and has developed tremendous brand popularity and brand loyalty among fans of this sport, which is one of the fastest-growing in the U.S.
Now, Dethrone Royalty Holdings, Inc. (DRHC), also known as Dethrone Beverage, Inc., produces markets, and sells sports nutrition drinks and other functional water beverages under the Dethrone Beverages trade name in the United States.
DRHC is entering the booming energy drink market with the creation of a new segment combining several niche categories: supplements, energy, and hydration. The High Performance drink was formulated for athletic benefit without sugar or other unsafe ingredients found in some of the drinks produced by the competition. The Company is poised to leverage the popularity of its apparel brand in MMA by sponsoring some of the most popular athletes in MMA, UFC, MLB, NFL, NBA, NHL and other sports with its new High Performance drink product.
Management is leveraging its deep on the ground marketing experience with some of the most popular brands such as Sobe by utilizing an initial short production run and region-by-region sales approach to key distributors and convenience stores, prior to larger production runs to larger chains such as supermarkets. This tried-and-true method is both prudent and clever, as most firms use a more scattered approach and do not have the advantage of the multi-year athlete endorsements or the Dethrone Royalty brand.
While the Company currently offers 2 delicious flavors, as market penetration occurs, management plans to introduce additional flavors.
The growth of bottled water, sports, and other health drinks as substitutes to carbonated soda beverages marks an increasing trend toward health awareness in the consumer market. In 2012, the marketing research firm Global Industry Analysts (GIA) released a comprehensive report that forecast the global use of sports and nutrition foods and drinks to be a $55 billion market in the U.S. alone by 2018. These trends show the societal shift away from carbonated soda drinks to healthier options, and the willingness of the consumer to pay for the convenience and packaging of a commodity like water that is free and comes out of any faucet. This has spawned an emergence of new healthy drinks, teas, flavored water, and juices. A worldwide aging of the population, especially in developed countries, is driving this market with more demand for beneficially healthy products.
In the last decade, billion dollar brands have been created in energy and functional drinks like the privately held Red Bull and Monster (NASDAQ – MNST) brands. Figure 1 shows a study from Zenith International documenting the last five years of growth in the energy drink market.
While Monster and others have leadership status, it has come with a price, as a shift away from what some believe to be “toxic” drinks and toward “safe” energy drinks. The DRHC High Performance product is designed to meet these criteria with zero sugar, zero carbohydrates, 20 calories and 80mg of caffeine in a 16 oz. bottle. Some of Dethrone’s competition has come under intense scrutiny. Nearly 20 deaths have been linked to Monster TM and Redbull TM which contain an extremely high amount of caffeine, between 300 to 600mg of per can. Gatorade TM is considered “sugar water” by some doctors and they also have come under fire for using a flame retardant as one of their ingredients.
In August 2012, the New York attorney general subpoenaed three major producers of energy drinks as part of an investigation into whether the companies mislead consumers about potential health risks associated with mega doses of caffeine, sugar and other ingredients such as taurine. This is part of a larger government initiative examining the links between sugary beverages and rising rates of obesity and diabetes:
Dethrone’s sugar free, low caffeine formula is engineered for athletic performance and offer a strong and healthy alternative to today’s market leaders. Interestingly, after more than 20 years at Number 1, water has overtaken soda as the favorite beverage among Americans. This shift bodes well for Dethrone.
Dethrone has just launched a new beverage category with its High Performance drink. The product is designed to meet the increasing consumer demand for athletic performance drinks without any associated negative health risks. High Performance targets the three areas of muscle recovery, energy, and hydration with zero sugar, zero carbohydrates, a low amount of caffeine, and only 20 calories. Dethrone’s health conscious formula is a strong advantage as the popularity of other energy drinks like Red Bull, Monster, and Five Hour Energy has attracted increased scrutiny from public health advocates. The product was developed over a two year span of extensive research and scientific innovation. The anticipated product launch occurred on February 3 this year at the Texas vs. The Nation bowl game where DRHC was a titled sponsor and the event was broadcast by Fox Sports Southwest and Dethrone Beverage aired ten 30 second commercials.
The majority of energy products in the United States are tag-along products with no distinguishable front-end or back-end marketing plan save for traditional advertising and a social media push. As this segment matures, the barriers of entry will increase while several ‘me too’ products will be forced to exit. The Dethrone High Performance Sports Beverage product is designed to meet a growing target at just the right time.
As noted above, Dethrone already has major brand recognition with fans of MMA, and in recent weeks, management has succeeded in signing multi-year endorsement deals with popular athletes across all major U.S. sports. This front-end strategy for the new High Performance targets both the young demographic that follows the sports but also targets an older one via the healthier option of the DRHC products. This is a key differentiator from its competitors who solely target the under-30 age group.
We believe that the crossover or hybrid nature of the offering is also a major selling point for the Company. The High Performance sports beverage is currently available in two flavors: Blue Raspberry and Fruit Punch.
From the back-end perspective, management plans to utilize a region-by-region marketing approach through sales to regional stores, convenience stores and small distributors, prior to larger production runs to larger chains such as supermarkets. This method worked well for management with other brands and is primed to succeed once again.
Sample Athlete Endorsements
THE DETHRONE BEVERAGE EXECUTIVE TEAM
The management team of Dethrone has a wealth of experience in sales, operations, production and marketing. The leadership has over 50 years combined experience in the beverage industry including experience at Budweiser, Coors, Miller, Southern Wine and Spirits, Whole Foods, Pepsi (NYSE – PEP), Sobe, Arizona Iced Tea, and Xyience.
Toby McBride – Chief Executive Officer
Michael Holley – President
In our view, the biggest risk factors for DRHC are related to potential logjams at the distribution points or if the products do not prove to be as popular as expected. While to a degree it is the “chicken and the egg” scenario as it relates to sales and distribution, the Company is already well on its way to surpass the proof of concept stage. Thus, we believe that the product could prove wildly successful, and it will be ubiquitous and available everywhere. If the sales ramp is muted, garnering additional distributors and distribution points could prove to be difficult. Plus, competition for shelf space remains fierce among all players in the space. Execution risks could push meaningful revenue generation out to a later date, or in a smaller initial ramp, thus impacting the Company’s revenue ramp or time to profitability. Competition from larger firms or even from newer entrants is a typical concern and is also consistent with firms of DRHC’s size and standing. Still, with the strong brand equity of Dethrone coupled with athlete endorsements and the crossover product, we believe that DRHC will overcome these obstacles.
In our view, Dethrone could become the go-to sports nutrition drink in the next 2 years, driven by its quality hybrid products and athlete endorsement strategy which should attract larger players seeking an acquisition and a key player in this space. Our price target is $0.50 by year-end as we believe the stock will be strongly news-driven but we would not be surprised to see the company acquired for a premium down the road, if the strategy proves successful. Numerous brands have been acquired at premium valuations by major players once the 1M cases shipped annual mark is reached. Thus, we rate DRHC Speculative Buy.
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Analyst: Robert Goldman
Rob Goldman has over 20 years of investment and company research experience as a senior research analyst and as a portfolio and mutual fund manager. During his tenure as a sell side analyst, Rob was a senior member of Piper Jaffray's Technology and Communications teams. Prior to joining Piper, Rob led Josephthal & Co.'s Washington-based Emerging Growth Research Group. In addition to his sell-side experience Rob served as Chief Investment Officer of a boutique investment management firm and Blue and White Investment Management, where he managed Small Cap Growth portfolios and The Blue and White Fund.
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