How PepsiCo moved Celsius's gross margin 9 points

In August 2022 Celsius Holdings handed its entire U.S. distribution to PepsiCo. Over the next two years gross margin climbed from 41.4% to 50.2%, an 8.8-point move most brands never see. The same deal quietly embedded a cost that now eats about 34 cents of every revenue dollar.

When I sit down with founders who are about to sign a big distribution or wholesale deal, the first thing they want to talk about is the top line. How much volume does the partner add. Celsius Holdings, the maker of the CELSIUS energy drink, is the cleanest public case study I know for why that is the wrong first question. The right one is what the deal does to your cost structure, in both directions, because a single agreement can move gross margin more than years of operational tuning, and the same agreement can bury a cost that compounds for a decade.

Here is the arc, straight from the filings. In August 2022 Celsius made PepsiCo its exclusive U.S. distributor and raised $550 million of preferred equity at the same time. Two fiscal years later, gross margin had gone from 41.4% (FY2022) to 50.2% (FY2024), a verified 8.8-point improvement in SEC data. That is the number that makes the deal look like a masterstroke. It also hides the part that matters most for anyone modeling their own deal.

The 2022 deal, and what Celsius actually agreed to

The structure had three moving parts. First, PepsiCo became the exclusive U.S. distributor, folding Celsius into PepsiCo's direct-store-delivery (DSD) network instead of a fragmented set of independent distributors. Second, PepsiCo bought $550 million of Series A preferred stock carrying a 5% annual dividend. Third, Celsius had to clear the old territory, which meant paying out its prior distributors.

That third piece is the one operators skip, and it is expensive. Celsius recorded roughly $193.8 million in distributor termination fees in FY2022. Critically, that charge hit operating expense (SG&A), not cost of revenue. So even though FY2022 revenue more than doubled to $653.6 million, the company posted an operating loss of $157.8 million, a negative 24.1% operating margin. The headline that year looked like a disaster. It was actually the cost of buying a better cost structure.

When I talk to founders this size, the pattern I see again and again is that they model the new partner's economics and forget the bill for leaving the old one. The pre-transition cost and the post-transition cost are two completely different numbers, and only one of them shows up in the pitch deck. Celsius described the deal as margin accretive. The filings show it was, but only after a year that looked ugly on every income-statement line that a lender or board glances at first.

The gross margin move, verified from the filing

Now the part that makes the deal famous. Here is the trajectory, pulled from SEC data.

An 8.8-point gross margin gain in two years is the kind of move most brands spend years trying to engineer through packaging tweaks, co-packer renegotiations, and freight audits. Celsius got the bulk of it from one structural decision. That is the seductive part, and it is real. But notice the operating margin line in the same table: it swung from negative 24.1% to positive 20.2%, then fell back to 11.5% in FY2024 even as gross margin kept rising. Something below the gross-profit line was working against them, and it was growing. Hold that thought.

Why the margin moved, in specific costs

This was not a rebrand or a pricing story. The FY2024 10-K names the drivers, and they are boring in the best way.

Outbound freight fell from $58.7 million in FY2023 to $50.7 million in FY2024, while revenue grew. That drops freight from roughly 4.5% of FY2023 revenue to about 3.7% in FY2024, a direct gross-margin tailwind, and exactly what you would expect from folding into a national DSD network that already runs those trucks at scale. Freight sits inside cost of revenue, so every point it falls flows straight to gross margin.

Underneath that, raw and package material unit costs came down as volume scaled. Management cited "decreases in raw and package material unit cost and reduced outbound freight cost as a percentage of revenue" as the primary drivers in the FY2024 MD&A. There is also a timing wrinkle worth naming: FY2023 carried transition inefficiency as the network changed hands, and the full benefit only landed in FY2024 once the switch was complete. So the clean story is not "sign deal, margin jumps." It is "sign deal, eat a messy transition year, then scale into the lower cost base."

This is the reality I try to get across to operators eyeing a wholesale partner. The margin improvement in a distribution deal is a scale effect, and scale effects have a lag. If you underwrite the deal assuming the good number shows up next quarter, you will get scared out of it during the transition. Celsius's own numbers show the payoff arrived a full year after the ink dried.

The embedded cost: promotional allowances

Here is the part almost nobody models. A promotional allowance is money the brand gives back for pricing support, co-op advertising, slotting, and contractual distributor support. Accounting-wise it is not a cost of goods and it is not a marketing expense. It is a reduction of revenue, which means it lands above gross profit. It quietly shrinks the top line before any margin percentage is even calculated.

For Celsius, promotional allowances grew from $158.5 million in FY2022 to $315.2 million in FY2023 to $455.1 million in FY2024. In FY2024 that equals about 34% of net revenue. Read that again: for every dollar of net revenue Celsius reported, roughly 34 cents had already been handed back through trade spend before the income statement started.

The mechanics of trade spend are exactly what founders describe when they first move into grocery. The way one operator put it to me: when you go into a grocery channel there is a whole category of spend you owe these people, and one of the first bills is a listing fee, where you pay per SKU just to get on the shelf. Slotting, co-op promo, pricing support all stack on top. What Celsius shows is what happens when that spend is negotiated inside a distribution agreement with a partner that controls the shelf: it does not stay flat as a percent of revenue. It climbs. From FY2023 to FY2024, promotional allowances jumped from about 24% to about 34% of net revenue, roughly a 10-point swing, and that is most of the reason operating margin fell even as gross margin rose.

When a concentrated channel stumbles

The final risk is concentration, and it is the piece our full Celsius teardown keeps coming back to. PepsiCo went from 22.2% of revenue in FY2022 to 59.4% in FY2023 and 54.7% in FY2024. At the peak, nearly 60 cents of every revenue dollar flowed through one partner, and PepsiCo receivables were 69.0% of total accounts receivable at the end of FY2023. That is bargaining power, and it sits on the partner's side of the table.

You can watch it hit the numbers in a single quarter. In Q2 2024, Celsius ran a 52.0% gross margin. In Q3 2024 it fell to 46.0%, a six-point sequential drop, as the largest distributor adjusted its inventory build and ordering and promotional activity increased. Six points of gross margin in one quarter is more margin than most brands generate in total. It did not come from a cost shock or a pricing war. It came from one partner's ordering behavior, combined with contractual promotional commitments, moving through a channel that carries more than half the business.

A single distribution deal moved Celsius's gross margin nearly 9 points, faster than any operational program could. The same deal handed one partner majority control of the revenue line and let trade spend climb to a third of net revenue. The lesson is not that concentration is bad. It is that the deal that lifts your margin and the deal that can swing it 6 points in a quarter are the same deal, and you sign both at once.

What to model before you sign a deal like this

If you are weighing a distribution or big-wholesale agreement, here is the framework I walk founders through, built on what Celsius's filings actually show.

Model two separate cost states. The pre-transition state is what it costs to clear your existing distributors or channel. Celsius paid $193.8M for that, and it torched an entire year of operating income. The post-transition state is your new cost structure at scale, which for Celsius was 8 to 9 points of gross margin, but only after a lagging transition year. Underwrite both, and expect the ugly year.

Model promotional allowances as a revenue deduction, above gross margin, not as a marketing line below it. This is where operators get surprised, because trade spend behaves like a percentage that grows with the relationship. Celsius went from 24% to 34% of net revenue in a single year. If you model it as flat, your forecast is wrong in the direction that hurts.

Price the concentration. When one partner becomes 55 to 60% of revenue, their inventory and ordering decisions become your quarterly margin. A brand at that concentration cannot treat a distributor renegotiation as routine, because the exit is expensive and, in Celsius's case, essentially two decades away. That is worth remembering: the wholesale contribution margin through retail can be genuinely good, often better than people expect once product is strong, but the trade-off is that you hand real control of the revenue line to someone else.

And keep the benchmark in view. Monster Beverage, the category leader, ran 53.1% gross margin in FY2023 and 54.0% in FY2024, aligned with the mature Coca-Cola bottler system. Celsius at 50.2% is close but not there. The gap is the headroom a distribution deal can eventually close, and the reminder that even a great deal takes years to reach the equilibrium the incumbent already lives in.

Sources and methodology

Celsius Holdings FY2024 Form 10-K is the primary financial source. Revenue, gross profit, and operating income for FY2022 through FY2024 come from the Consolidated Statements of Operations. Freight expense ($26.8M, $58.7M, $50.7M) is from Note 2 (Shipping and Handling Costs). Promotional allowances ($158.5M, $315.2M, $455.1M) are from Note 4 (Revenue). Distributor termination fees ($193.8M in FY2022) and PepsiCo revenue concentration (22.2%, 59.4%, 54.7%) are from Note 2. The filing index is available on SEC EDGAR.

Annual and quarterly line items were verified against SEC XBRL data. Gross margin, operating margin, and revenue for FY2022-FY2024 and for the Q2 2024 (52.0%) and Q3 2024 (46.0%) sequential comparison were cross-checked against the structured SEC EDGAR XBRL company facts for CIK 0001341766. Where the working brief and the filing disagreed on the size of the margin move, the filing figure (8.8 points, FY2022 to FY2024) was used.

The Monster Beverage benchmark comes from Monster's own results release. Gross margin of 53.1% (FY2023) and 54.0% (FY2024) is from the Monster Beverage 2024 fourth quarter and full year results. Monster's model is aligned with the Coca-Cola bottler network, which is why it is used as the mature-distribution comparison.

Distribution Agreement terms are drawn from the filed agreement and the 10-K business section. The exclusive U.S. distribution structure, $550 million preferred equity, 5% dividend, and the effectively unlimited term with an exit window near year 19 are described in the FY2024 10-K and the underlying Distribution Agreement filed with the SEC. The August 1, 2022 announcement and deal structure are documented in the Celsius Holdings and PepsiCo partnership investor presentation.

A note on charts. This piece ships with data tables rather than interactive charts because the charting service was unavailable at publish time. Every figure in the tables ties to the SEC sources linked above.

Frequently asked questions