KO Coca Cola Company

By Jennifer Maloney and Cara Lombardo 

Coca-Cola Co. is buying a stake in BodyArmor, the sports drink startup backed by Kobe Bryant and other athletes, marking the latest attempt by the beverage giant to break Gatorade's lock on the sports market.

In addition to taking a minority stake, Coca-Cola's bottling system could soon begin distributing BodyArmor's drinks, executives said. The deal would also allow Coke to later take full ownership of the upstart, they added. Financial terms couldn't be learned.

BodyArmor has sought to challenge Gatorade, which is owned by PepsiCo Inc., and Coca-Cola's Powerade. BodyArmor has marketed its products as healthier alternatives and enlisted younger athletes, like Los Angeles Angels outfielder Mike Trout and Houston Rockets guard James Harden, to invest and appear in its ads.

Gatorade still dominates the market, capturing about three-quarters of the $8 billion in U.S. sports drinks sales, but its sales have declined in recent quarters. BodyArmor has grown quickly in the last year but is still a distant third, behind Powerade, with less than 6% of the market, according to a Wells Fargo analysis of Nielsen data.

Like Gatorade and Powerade, BodyArmor is rich in electrolytes to help with hydration. But BodyArmor, which uses coconut water, is lower in sodium and higher in potassium and is marketed as more natural than rivals. It doesn't use artificial colors like Gatorade or high-fructose corn syrup as a sweetener like Powerade.

BodyArmor is expected to have about $400 million in revenue this year and, based on recent deals in the beverage industry, could be valued between $1 billion and $2 billion.

Under the deal, Coca-Cola would become BodyArmor's second-largest shareholder, eclipsing a stake held by soda rival Keurig Dr Pepper Inc., which also has a distribution deal.

BodyArmor has informed Keurig Dr Pepper that it plans to terminate the current distribution agreement, according to a person familiar with the matter. A Keurig spokeswoman declined to say whether the company plans to keep its stake in BodyArmor.

The amount Coca-Cola would ultimately pay for full ownership of BodyArmor would depend on sales and other performance measures, Jim Dinkins, president of Coca-Cola North America, said in an interview.

He said Coke will position BodyArmor as a premium drink above Powerade.

BodyArmor, which is based in Queens, N.Y., was launched in 2011. Its co-founder, chairman and principal investor, Mike Repole, also helped create Glaceau, the maker of vitaminwater and smartwater and a business that Coke acquired in 2007 for $4.1 billion. In 2013, Mr. Bryant became a top BodyArmor investor and joined the board.

Mr. Repole said the new Coke deal sets the groundwork for distributing BodyArmor internationally, including in China, which would ramp up his challenge to the market leader.

"To me, Gatorade is Blockbuster Video, and BodyArmor is Netflix," he said in an interview. "If you don't evolve, you're not going to be around much longer."

BodyArmor was valued at less than $200 million when Dr Pepper Snapple Group amassed a 15.5% stake in 2015 and 2016, but that stake has since fallen to about 12.5%.

The sports drink category has been under pressure, as consumers spend more on enhanced bottled waters, teas and energy drinks. Gatorade has responded by adding G Organic and low-calorie G2 versions, though the products haven't been big sellers. In June, PepsiCo started selling a sugar-free version called Gatorade Zero.

"Gatorade always attracts new players into the marketplace and they come in with either lower prices, or they try to come in and build distribution," PepsiCo's outgoing CEO Indra Nooyi said last month. "If you look at it over a period of five or seven years, the Gatorade franchise has been extremely resilient."

For decades, Coca-Cola has failed to dent Gatorade's dominance with Powerade or organic sports drinks introduced under its Honest brand. Under a new CEO, Coke has been looking to diversify beyond sugary sodas.

Mr. Dinkins, the president of Coca-Cola North America, said BodyArmor makes an alkaline water for athletes in addition to its sports drinks, allowing Coke to broaden its reach across both categories.

"There are trends, clearly, in the health and wellness space," he said.

Write to Jennifer Maloney at jennifer.maloney@wsj.com and Cara Lombardo at cara.lombardo@wsj.com

(END) Dow Jones Newswires

August 14, 2018 13:23 ET (17:23 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.