Coca-Cola bets on Kobe sports drink in fight with Gatorade

(In this August 14 story corrects paragraph 2 to show Powerade is not ceding market share to Gatorade)

A truck transports bottles from the Coca-Cola company on the outskirts of Moscow, August 6, 2014. REUTERS/Maxim Shemetov

(Reuters) - Coca-Cola Co KO.N is buying a minority stake in a sports drink brand backed by basketball star Kobe Bryant, it said on Tuesday, seeking to mount a stronger challenge to PepsiCo's PEP.O Gatorade.

Coca-Cola’s investment in BodyArmor - which will make it the brand’s second largest shareholder - comes as its Powerade drink competes for market share with Gatorade. Coke has also been rattled by falling demand for its trademark fizzy drinks.

While Coke says there is “much work to be done” at Powerade, PepsiCo said last month that Gatorade was seeing higher demand after launching zero-sugar versions.

“Proud of our team at @DrinkBODYARMOR and our new partnership with the @CocaColaCo who believes in our mission of becoming the #1 Global Sports Drink. Thanks @Gatorade, we’ll take it from here,” Bryant said on Twitter.

Gatorade and PepsiCo's other sports drinks account for nearly a third of a $20 billion U.S. market, according to Euromonitor International. Monster Beverage MNST.O and Red Bull follow close behind, with Coke trailing in fourth place with a 7 percent share. Coca-Cola also has a 16.7 percent stake in Monster.

“(BodyArmor) is a positive for Coca-Cola, which is continuing to pursue its product portfolio diversification strategy,” said RBC Capital Markets analyst Nik Modi.

BodyArmor is also backed by Dr Pepper Snapple - now part of Keurig Dr Pepper KDP.N - which made a $20 million investment in 2015 and boosted its ownership to 15.5 percent in 2016.

But Wells Fargo analyst Bonnie Herzog said Coca-Cola’s investment could end BodyArmor’s agreement with Dr Pepper.

“We have learned that BodyArmor has notified Keurig Dr Pepper that they are terminating their existing distribution agreement,” she said. “Although the timing and mechanism by which distribution will transition over to Coca-Cola’s bottling system is still uncertain.”

Neither Keurig Dr Pepper nor BodyArmor responded to Reuters’ requests for comment.

Coke did not disclose the size of its investment or other financial details but said it could increase its ownership in BodyArmor, whose higher-priced energy drinks use natural flavors and sweeteners such as pure cane sugar and coconut water concentrate.

“We would not be surprised if Coca-Cola eventually acquires the remainder of BodyArmor,” Wells Fargo’s Herzog said.

Coca-Cola, however, has historically stayed away from full-blown acquisitions, settling instead for acquiring partial stakes in companies - a strategy that allows it to test-drive potentially risky bets.

Bryant, who first invested in BodyArmor in 2013 two years after it was launched, is now its third biggest shareholder. The brand also has endorsement deals with baseball player Mike Trout and another NBA star, James Harden.

Reporting by Aishwarya Venugopal in Bengaluru; Editing by Sai Sachin Ravikumar