With more than 1.9 billion drinks served every day, Coca-Cola is one of the world’s largest beverage companies.
From its humble beginnings, selling a single product at a drugstore for five cents a glass, the company now has a roster of 200 brands that include Coke, Fanta, and Sprite. But with US soda consumption on the decline, the soft drink maker has been forced to pivot.
In 2021, Coke launched Topo Chico Hard Seltzer, the company’s first move into alcoholic beverages in the US in almost four decades.
The company has also made recent investments into the sports performance drink category with Body Armor and the purchase of UK coffeemaker Costa.
And while the pandemic has caused major disruptions, in the first quarter of 2021 Coke reported net revenue was up 5% to $9 billion dollars.
”We were very focused over the last 12 months, focusing on really improving our marketing, we cut the portfolio of brands in half. We got really focused on our innovation pipeline, we work with our bottlers to really support the customers in new and different ways where they are open. And the sum of all that, along with a new organization, we have stood off, allowed us as you say, to come back to the pre pandemic levels”
James Quincey, CEO, Coca-Cola
Coke is eagerly anticipating some reopening’s and vaccine rollouts. In the meantime, it faces a number of challenges, including further COVID-19 disruptions and ongoing tax litigation with the IRS.
In November 2020, a US tax court said that Coca-Cola had to pay the bulk of its $3.4 billion tax bill. Coke said it would ultimately prevail in litigation with the IRS, but then its potential liability could be as high as $12 billion.
So, after 135 years in business, can the soft drink giant stay on top? And what will the secular decline of sugar sweetened beverages in the US mean for the future of Coca-Cola?
Selling Syrup
Coca-Cola traces its history to a soda fountain in Atlanta, Georgia. In 1886, pharmacist John Pemberton created a Carmel colored syrup, took the mixture to a nearby drugstore, where carbonated water was added, and the drink sold for five cents a glass.
According to author Mark Pendergrast, the mixture contained caffeine, lots of sugar, and for the first few years, a small amount of extract from coke leaves, in other words, cocaine.
And at first, their ads were primarily promoting it as a medicine. It was supposed to cure morphine addictions, which it did not in Pemberton’s case unfortunately, but it was supposed to be an aphrodisiac. It was supposed to cure basically whatever ails you.
In 1888, Pemberton began to sell the recipe to a well capitalized businessmen named Asa Candler, and by 1895, Coca-Cola was available in every state in the US. By the turn of the century, Coca-Cola adverts were appearing on clocks, trays, and posters.
The drink was moving from soda fountains and into bottles. The company’s advertising budget reach a million dollars in 1911, the equivalent of about $27 million dollars today.
By the 1920s and 1930s, Coca-Cola had reinvented itself as an all American soft drink and was entering new markets abroad.
Exempted from sugar rationing during World War Two, the company set 64 portable bottling plants around the globe, distributing more than 5 billion bottles of Coca-Cola.
And it wasn’t just Americans who are hooked on sugary drinks. According to Pendergrast’s book for ”God Country and Coca-Cola”, in Germany, with the supply of key ingredients being curtailed due to the war, local operators invented a new drink called Fanta.
The flavored beverage, the first new product from the company, eventually made its way to the US in 1960. Coke produced a slew of other new innovations too. In 1960, steel 12 ounce cans were introduced, in 1963, Tab, the company’s first diet drink launched.
In 1971, the ‘I’d like to Buy the World of Coke commercial aired, and 1982 saw the debut of diet coke. In 1985, in an attempt to boost sales and compete with rival Pepsi in the soda wars, the company reformulated its classic soda and launched New Coke.
The move was a major misstep, with widespread disapproval from fans and pundits alike. Just 79 days after the soda was launched, the company reversed course and the original formula was reinstated.
And while the consumption of sugar sweetened beverages in the US was rising during the 1990s, the company was about to face an even bigger threat.
In the early 2000s, health and wellness concerns rose to the top of most consumers agenda. Soda consumption began to decline.
The peak happened around in the early 2000s from a consumption stand point, if you look at per capita consumption, and then it has been declining ever since.
At the same time that we started to see carbonated soft drinks decline in consumption, was about the same time that we started to see increased concerns about sugars and simple carbohydrates.
But despite that drop, Americans and people everywhere were still hooked on soda. Between 2011 and 2014, almost half of US adults were drinking at least one sugar sweetened beverage a day.
How Coca-Cola Makes Money
The soda market in the US is a $38.5 billion dollars business according to IBISWorld and includes companies like PepsiCo, Dr. Pepper, and of course Coca-Cola.
With consumers mostly stuck at home forgoing restaurants, concerts, and sporting events, the pandemic has been a mixed bag for soft drink makers.
PepsiCo announced first quarter 2021 net sales reach more than $14.8 billion, almost 7% higher than a year earlier, fueled by pandemic snacking in its Frito Lay division and higher sales of drinks like Bubly sparkling water and Starbucks ready to drink coffees.
With more people reaching for a caffeine fix while working out of their home office, Dr. Pepper’s coffee business got a jolt too. The company announced first quarter 2021 net sales of $2.9 billion dollars, more than 11% higher than the prior year.
And while Coca-Cola saw 2020 net revenue decline 11%, the soft drink maker bounced back with first quarter 2021 net revenue of $9 billion dollars, up 5% from a year earlier.
”Whilst there is uncertainty and volatility particularly in the near term ahead of us, we feel confident about the corridors what we are setting for the top line and the bottom line guidance, and we believe that we will be able to emerge stronger from this crisis.”
James Quincey, CEO, Coca-Cola
A major issue for the soda giant according to analysts – Coke has more exposure to restaurants like McDonald’s and sports venue than its peers PepsiCo or Dr. Pepper.
What that means is they had a lot of market share to lose in those channels and so as those channels closed, they had obviously disproportionate impact in terms of their revenue and their market share.
To make up for that loss, the soft drink maker slashed its global workforce in 2020 by about 11% and trimmed its roster of brands from 400 to 200. Tab, the company’s first diet soda, was culled.
But Coca-Cola has several key advantages that will allow the company to reinvigorate its business, according to analysts. For starters, Coke’s diverse geographic position should provide the company with a steady stream of growth.
Coca-Cola products are sold in more than 200 countries and territories worldwide. Coke also has one of the world’s largest non-alcoholic beverage distribution systems and derives more than 40% of sales from developing and emerging economies with a growing middle class.
In 2020, Coca-Cola had net operating revenue of $33 billion, almost 66% of that came from outside the US. In developed markets where Coke is firmly established and competition is rife, the company has proven profit growth strategies driven by innovation.
Even in the US as soda consumption has been declining, the value of the category has still been increasing. According to analysts, one strategy coke uses is price pack architecture, which generally refers to consumers willingness to pay extra for packaging innovations.
In Coke’s case, it discovered consumers not only preferred smaller size drinks, but were willing to pay more per ounce for them.
Another key advantage Coke has positioned itself in an area of the supply chain that is less capital intensive and requires less labor and overhead than rival beverage companies like Pepsi.
Most of Coke trademark beverages are not packaged and delivered by the company. In general, Coke focuses its operations on producing the concentrate for its beverages and ships those mixtures to bottlers for processing, packaging, and distribution.
Sustainability
In 2020, environmental group Break Free From Plastic took a global audit of plastic trash, working with almost 15,000 volunteers in 55 countries collecting plastic bottles, coffee cup lids, shampoo bottles, and surgical masks in a two month cleanup.
The group said that for the third year in a row, soft drink giant Coca-Cola emerged as a top global polluter with almost 14,000 Coca-Cola branded plastics collected in 51 countries.
According to Greenpeace, as of 2018, Coca-Cola has produced over 110 billion single use plastic bottles. The environmental group estimates than in the decade leading up to 2018, Coca-Cola increased the number of single use plastic bottle by about a third accounting for almost 70% of Coke’s packaging globally.
While Coca-Cola is not the only multinational corporation that relies on plastic packaging, the company’s size illustrates the scale of the problem.
Other top polluters according to Break Free From Plastic include PepsiCo, Nestle, Unilever, Mondelez International, and Mars.
According to a report by the World Economic Forum, at least 8 million tones of plastic enters the ocean each year, the equivalent of dumping the contents of an entire garbage truck into the ocean every minute. Plastic packaging makes it the largest share of this problem.
To do its part, in 2018, Coca-Cola announced it would use at least 50% recycled material in its bottles and cans by 2030. And by the same date, collect or recycle a bottle or can for each one it sells. The company also launched a plastic bottle made up of 30% plant based materials in 2009.
And in 2020, Coca-Cola partnered with Danish startup Pobaco to develop a 100% paper bottle, that project is in its infancy. But critics argue that due to the high costs associated with recycling, and with less than 30% of plastics bottles in the US recycled, those efforts might not be enough.
Another criticism Coca-Cola faces, is its water use. About a third of Coca-Cola bottling plants operate in water stressed areas and more than 73% of the water used by the company goes to growing ingredients like cane sugar, oranges, and apples.
To improve water efficiency, the company reduced or removed water using its manufacturing process.
In 2004, Coke was using 2.7 liters of water to make one liter of product. By 2018, it was using 1.92 liters of water to make one liter of product.
The company also announced in 2016, that by replenishing watersheds and partnering with organizations, it was returning 100% of the water used in its drinks back to the environment and local communities.
New Markets
With the pandemic slowing down its North American fountain business and its Western Europe away from home channels, Coke saw a 4% decline in the sale of sparkling soft drinks in 2020.
”Clearly the consumers have adapted and the ones that I think are very likely to stick, are clearly a big uptick in ecommerce. And obviously ecommerce is much more important to a number of other sectors. It has really started to accelerate in terms of grocery, in terms of beverages, I think that will endure and I don’t mean ecommerce just in terms of what you buy, to have delivered to the house but also in the away from home channels. The amount of takeaway, the amount of delivery.”
James Quincey, CEO, Coca-Cola
But it may be new product offerings that have the biggest impact for the soft drink maker. Roughly 25% of Coca-Cola’s revenue was generated from new or reformulated products like Coke Zero and Coke Energy in 2020 compared with roughly 15% two years ago.
In 2021, Coke launched Topo Chico Hard Seltzer. The company’s first move into alcoholic beverages on its home turf in almost four decades. Since then, Hard Seltzers volume more than tripled.
”Very early days for Topo Chico in certain countries in Latin America and also Europe, but we are very excited. Good consumer reaction, good customer action, good rates of sale, very early days and coming very soon to the US.”
James Quincey, CEO, Coca-Cola
The company is investing in other categories too. In 2018, Coca-Cola acquired a minority ownership stake in sports drink maker Body Armor and in 2019 Coca-Cola completed its $4.9 billion acquisition of Costa. Costa has over 4000 coffee shops in Europe, Asia, and the Middle East, and offers everything from vending machines to ready to drink products.
The coffee segment globally is growing 6% annually. And with health and wellness concerns are the top of most people’s agenda, it could be innovations in the soft drink makers traditional soda business that brings in some of the biggest gains.
”There are consumers shifting towards lower calorie beverages and we are certainly behind that trend. Coke Zero Sugar not just is growing in 2021 in the first quarter, but actually grew in 2020.”
James Quincey, CEO, Coca-Cola
And while Coke might not recover as quickly as its peers, because much of its business is outside of the US where vaccine rollout and economic conditions remain uncertain, analysts say the company expect a strong recovery.
Globally the rate of vaccination, the rate of reopening businesses is going to vary by country, it will very much translate into Coke’s business and so it definitely will not be a linear recovery for Coca-Cola, but a strong recovery nonetheless.
