After Big Brewers Back Down, Small Alcoholic Energy Drink Makers Thrive

Charge, Phusion Rack Up Big Sales, But Look Over Shoulder as FDA Scrutinizes Category

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CHICAGO ( -- When big brewers left the alcoholic energy drink business two years ago in the face of social concerns -- one critic calls it "alco-speed" -- it left a hole that Tim Baggs was more than willing to fill. And his company has been cashing in ever since.

Mr. Baggs' Portland, Ore.-based Charge Beverages markets one of the hottest sellers in the beer category: fruit-flavored, high-alcohol-content malt beverages whose brightly colored cans and edgy names appear to be winning over young-adult drinkers by the thousands, but has also won the company continued scrutiny from the federal government.

"We're in a good place. We're in a nice little business," Mr. Baggs said. Charge, which makes Core and Axis, has seen its revenue double to $3 million and its distribution network grow to 20 states from five in the past year, Mr. Baggs said. And that's without advertising.

The door was left open after Anheuser-Busch in summer 2008 agreed to remove the caffeine from its offerings, Tilt and Bud Extra, in response to a threatened lawsuit by state attorneys general and activists who charged that the drinks are marketed to underage drinkers and pose health risks. MillerCoors followed months later, announcing a reformulation of its Sparks brand, the then-dominant player in the small, but fast-growing category. With the caffeine removed, sales plunged, and the small marketers seized on the demand.

The segment is still "very small but [the brands] are growing very, very fast," said Eric Shepard, executive editor of Beer Marketer's Insights.

The category leader is Chicago-based Phusion Projects, maker of Four Loko. Sales jumped 435% to $132 million for the year ended Oct. 3, according to SymphonyIRI (which excludes club stores and liquor stores). Also doing well is Joose, made by United Brands Co., Los Angeles; the brand's sales increased 14% to $54 million. It's also inspired hip-hop songs such as "Joose in My System," by an artist named MackNifi$ent.

The brands boast alcohol contents of up to 12% and are sold in tall-boy style cans as big as 32 ounces, such as Core's "Grape El Jefe" priced at close to $3.

But even as they ring up sales at the cash register, the companies are looking over their shoulder at the Food and Drug Administration, which is continuing a lengthy safety review of the products.

Under federal law, additives such as caffeine require special approval, which is new for alcoholic beverages. The big brewers backed down in response to pressure from the Center for Science in the Public Interest, which claims the pre-packaged combination of booze and stimulants is a dangerous mix. "This is aimed at young, entry-level drinkers. It's nasty stuff," said Steve Gardner, the center's litigation director. He calls the drinks "alco-speed" that when consumed make you "an alert drunk, which is way more dangerous than a drunk lying down on the floor."

The FDA a year ago asked 27 drink manufactures to prove that their products are safe. The agency is still reviewing the 19 responses it got back. The matter is a "high priority," said FDA spokesman Michael Herndon, but a decision "could take some time."

The issue grabbed headlines in New Jersey recently when Ramapo College banned the drinks after 23 students were hospitalized with alcohol problems. Some of the students were drinking Four Loko, the Associated Press reported.

Meantime, U.S. Sen. Charles Schumer, D-N.Y., has called on the Federal Trade Commission to investigate the marketing practices of drink makers, which he said are promoting their products as an "everyday energy drink," according to a statement. States are also getting involved, including Michigan, where the liquor-control commission is considering requiring makers to more prominently display alcohol contents.

With that kind of pressure, the future of the segment is very much in doubt, said Eric Schmidt, manager of information services at Beverage Information Group, a market-research company. "It is definitely a high-gross segment of the marketplace, but I don't know how long it's going to be sustained," he said.

Mr. Baggs' argument is that the government should not meddle because consumers know best. "If you consume too much of anything, it's bad. We've never been a country that socially polices itself."

Perhaps hedging its bets, Charge has begun marketing noncaffeinated versions. Mr. Baggs said sales are just as robust as regular versions, but sales figures from the big brewers suggest demand is not as strong once the kick is stripped. MillerCoors' Sparks, which now has no stimulants, had sales plummet in the past year by nearly 30% to about $40 million, according to SymphonyIRI.

But the stimulant boost remains a differentiating point for the drink makers. For instance, Catalyst, by Catalyst Beverage Co., touts its "6% alcohol, caffeine, taurine and L-carnitine to really get you going," on its website.

If they can't sell caffeinated drinks, the small manufacturers would once again be on equal footing with MillerCoors and Anheuser-Busch, which are still marketing their noncaffeinated versions -- and have access to much wider distribution networks.

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