Dive Brief:

• Coca-Cola acquired a minority stake in BodyArmor for an undisclosed amount with an opportunity to fully acquire the sports drink brand in the future. The Atlanta company will become the second-largest owner of BodyArmor, it said in a statement.
• As part of the deal, BodyArmor​ will gain access to Coca-Cola's bottling system, enabling the brand to accelerate growth of its premium line of sports performance and hydration drinks. The stake will allow Coca-Cola to better challenge Gatorade with a healthier product line and roster of well-known athletes tied to the brand.
• "Consistent with our strategy of incubating bolt-on M&A deals, we believe taking an initial minority stake today, with a clear path to ownership, will allow BodyArmor​ to continue to grow the business in a sustainable manner while maintaining the brand’s leadership and edge that have made it so successful," Jim Dinkins, president of Coca-Cola North America, said in a statement on the company's web site.

Dive Insight:

Coca-Cola has long been rumored as a potential partner with BodyArmor as the beverage giant looks to broaden its reach beyond soda and into healthier waters, juices, teas and sports drinks in demand by consumers. Unlike Gatorade and Coca-Cola's own Powerade, BodyArmor is marketed as a premium sports drink through its use of coconut water, low sodium and high potassium levels, absence of artificial colors and use of sugar in place of high fructose corn syrup.

Coca-Cola seemed to indicate Tuesday that it would eventually acquire BodyArmor. In an interview, Dinkins told The Wall Street Journal that the amount Coca-Cola would ultimately pay for full ownership depends on sales and other performance measures.

The involvement with BodyArmor is a smart move for Coca-Cola, which has struggled to compete with PepsiCo's Gatorade, far and away the market leader with about a 75% share. Coca-Cola has Powerade in its portfolio, but it has not been able to erode Gatorade's dominance.

BodyArmor not only gives Coca-Cola a better-for-you sports drink, but a hydration beverage for consumers on the go. It also has a roster of high-profile athletes tied to it — including Kobe Bryant and baseball player Mike Trout — giving additional credibility to BodyArmor and boosting its reach among millennials and other consumers concerned about what they drink. 

While sports drinks are still dominant in the beverage space, a growing number of consumers have turned away from them in favor of other options. Manufacturers have been trying to reformulate their drinks to meet those consumers' needs. PepsiCo launched an organic version of Gatorade in 2016, made with organic cane sugar and no artificial colors. So far, sales have been disappointing. PepsiCo also launched Gatorade Zero, its first sugar-free version of its popular energy drink, in April.

Bonnie Herzog, a senior analyst for Wells Fargo Securities, said Coca-Cola would drive long-term value from BodyArmor​ by incorporating it in its bottling network and expanding the sports drink's global reach. She viewed the deal as a negative for PepsiCo and Keurig Dr Pepper, the later of which holds a small stake of its own in BodyArmor.  

"We are pleased that KO, through its new minority stake in BodyArmor, will gain access to one of the most exciting and fastest growing brands in the sports drink category," Herzog said in an analyst's note. "We see a long runway of opportunity for BodyArmor​ and expect Gatorade ... to continue to cede share to BodyArmor."

Coca-Cola said BodyArmor ​will continue to operate independently with co-founder and chairman Mike Repole and his management team remaining in place. The beverage giant has a long history with Repole, who helped create smartwater and vitaminwater maker Glaceau, which Cola-Cola purchased in 2007 for $4.1 billion. This relationship, and the decision to keep Repole,​ will be key to maintaining the independence and growth of BodyArmor, which now has about 6% of the sports drink market.

"Mike and his team have a unique capability to understand consumer needs and develop breakthrough products that meet these needs, and also to create commercial strategies to grow these brands in the marketplace," Dinkins said on Coca-Cola's web site.

Coca-Cola hasn't given up on its core soda brands like Diet Coke and Sprite, which remain lucrative sources of revenue for the company. But it's cognizant of the fact that some consumers no longer drink sodas, or consume much less than they used to. Through purchase of brands like vitaminwater and Honest Tea, Coca-Cola has expanded their reach, often through the introduction of new products and into new markets. BodyArmor offers the same opportunities — and may help shield the beverage giant from more changes in consumer trends.