31 Mar 2015 Coke’s fight for a future
The US has now seen a full decade of decline in the consumption of carbonated soft drinks and consumers’ shift away from the category is only expected to increase in the coming years. With public health officials pointing at soda as the culprit behind rising obesity and diabetes rates, it should come as no surprise at this juncture that these are challenging times for The Coca-Cola Company. For the world’s largest beverage company, the question is no longer whether or not it needs to reinvent itself to thrive but whether or not it can, and if it can, then how?
As much as the consumption of soda has declined in the US, it should be noted that The Coca-Cola Company isn’t turning away from its base. Nor should it. After all, carbonated soft drinks still account for about half of the non-alcoholic beverages sold in the US. The brand has, however, been mindful of the better-for-you trends of the industry, and accordingly has targeted the more health-conscious consumer in its introduction of the low-calorie, naturally sweetened Coca-Cola Life.
Additionally, the strong performance of Coke’s mini-cans suggests that the company can justify pricing more for less when positioning its product as a specialty purchase, a treat rather than a daily fixture to be slugged throughout the day. Even so, it seems unlikely Coke would really be able to sustain growth through pricing initiatives, as historically it’s a company that’s made its money by selling syrup. Lots of it.
“There still seems to be this feeling within the large beverage companies that if they can achieve the taste at zero calories or naturally sweetened, then the consumer’s going to come back,” says Neil Kimberley, Vice President of Strategy and Brand Development at Essentia Water and a former executive with Snapple and Hershey’s. “But this issue really may be deeper than that. We now have generations of kids who have grown up without carbonated soft drinks being the signature taste experience of their childhood.”
In February, Coke CEO Mukhtar Kent admitted as much during a quarterly earnings call, telling analysts that the brand was attempting to find new spaces to reach consumers.
“Today the average household globally consumes 26 beverages per day and of these 26 beverages only 1.4 are Coca-Cola company brand,” he said.
If that’s the case, the company still needs to figure out a way to connect with youth – even if it isn’t through the Coke brand. Growing the business by way of acquisition is nothing new for the company, and in its most recent efforts to diversify its portfolio the company purchased equity in Monster Energy and Keurig Green Mountain last year. But unlike the outright purchases of Fuze and Glaceau in 2007, Coca-Cola has taken an alternative, arguably more conservative approach in its recent stakes in Monster and Keurig. In doing so it’s allowed the company to participate in two major growth categories – energy drinks and single-serve, at home – in a big way, while allowing Monster and Keurig to maintain their independence and continue their companies’ forward momentum.
With Monster, Coca-Cola purchased a 16.7 percent stake for approximately $2.15 billion, firmly establishing itself within the energy drink category that they have previously struggled to find their footing in. As part of the deal Monster has transferred its non-energy brands over to Coca-Cola and in return, taken on Coke’s energy drink portfolio, which includes Full Throttle and NOS.
The most important aspect of the deal is that Coca-Cola will now serve as Monster’s primary global distributor, letting Monster into to its unrivaled worldwide distribution system. Given that nearly 80 percent of Monster Beverage’s sales are in the United States, there’s tremendous opportunity here for both companies to grow and for Monster to strengthen both its on-premise and international presence, areas where rival Red Bull has thrived. Coca-Cola will be able to reap the massive distribution profits of carrying Monster on its trucks while protecting itself from the baggage of negative press surrounding energy drinks that would have likely accompanied a full-on acquisition of the company.
In the case of Keurig, Coca-Cola appears to be making an investment that the potential future of single-serve beverage consumption will involve final preparation at home. At the top of 2014 Coca-Cola bought a 10 percent stake in the company and three months later increased that stake to 16 percent, making it Keurig’s largest shareholder.
The companies have also signed a 10-year agreement for Coca-Cola’s brands to produce single-serve pods for Keurig’s systems, which is particularly relevant due to the forthcoming launch of Keurig Cold, an in-home brewing system that will give consumers the ability to create a variety of still and sparkling cold beverages, including soda, enhanced waters, juices, sports drinks, and teas. Keurig currently sees a penetration of 13 percent of U.S. households with its RTD single-serve coffee systems, but the launch of Keurig Cold could increase that penetration significantly. If Keurig Cold takes off, Coke’s got an entirely new channel to get its products to consumers by way of the Keurig brand.
“This isn’t something that’s going to change the beverage industry overnight, but it does have the potential to significantly impact it over a long period of time,” says Kimberley. “This is really a bet on where the market could be in the future.”….