FMCG

by Greg Thain

  In 1981, the Woodruff era finally came to a close. Roberto Goizueta became chairman and CEO of The Coca-Cola Company and issued in the era of what Goizueta himself christened ‘intelligent risk-taking’. Five big moves were made, two of which led to a vigourous re-appraisal of precisely what ‘intelligent’ meant. The appraisals were later assisted by that most fully-informed of all human analytical procedures, hindsight.

  The Acquisition of Columbia Pictures

  The levelling off of growth in the soft drinks category already had Coca-Cola’s minds turning to greater diversification - the company were already in ocean farming and orange groves - but Goizueta upped the ante in 1982 with the $750 million acquisition of Columbia Pictures. While the studio was profitable after a run of box office successes, the entertainment business was far more volatile than Coca-Cola had been used to. After something of a rollercoaster ride, the studio’s mega-flop, Ishtar, which made back only a quarter of its then vast $55 million budget, convinced Coca-Cola it needed to reduce its exposure to such lunacy. Later in 1987 the company spun off 51% of its entertainment division before selling its remaining stake to Sony in 1989.

  Diet Coke

  The launch of Diet Coke on August 9th, 1982 was the first brand extension of Coca-Cola in its entire history. While the move was reactive, prompted by the sparkling success of Diet Pepsi (around since 1964) versus the flat sales of Tab, the move was a success, with Diet Coke soon gaining number one status in the diet drinks market before becoming the world’s number two selling carbonated soft drink behind Coca-Cola itself. The recipe used for diet Coke was not the original minus sugar and plus sweeteners, but a different one entirely, which convinced the intelligent risk-takers that the Coca-Cola brand could withstand having more variants, so they followed up with Caffeine-Free diet Coca in 1983, Cherry Coca-Cola in 1985 and Diet Cherry Coca a year later.

  New Coke

  The success of Diet Coke played a crucial role in the ill-fated decision to launch New Coke. While the inexorable success of the Pepsi Challenge was undoubtedly the prompt to look at changing the hallowed recipe, the confidence to actually do it came from the success of the Coke variants, Diet Coke in particular, whose recipe formed the basis of New Coke. Plus, as we have seen, Candler had fiddled around endlessly with the recipe in his early days and had not been shy to remove cocaine when its presence had become both liability and necessity. Maybe the hallowed recipe was just a function of the conservatism of the Woodruff years? Maybe it was. But, as we all know, New Coke proved a classic case study of research only being as good as the questions that are asked. Within three months of its April 23, 1985 launch, Coca-Cola Classic was back on the market and the whole thing was being post-rationalised by traumatised executives as having been a success really because of the anger it had induced in previously passive brand loyalists.

  Back to Bottling

  As we have seen, before Goizueta took charge, the company had been determined to regain control of its American bottling network and in 1980 had acquired the Coca-Cola Bottling Company of New York for $215 million. Goizueta accelerated this process, acquiring the Associated Coca-Cola Bottling Company in 1982 for $417.5 million. But the big change came in 1986 when the company was approached by the descendants of John T. Lupton (backer of the two Chattanooga dollar-owing lawyers nearly a century ago), to sell Coca-Cola the JTL Corporation, the system’s largest single bottler controlling 14% of U.S. output. At the same time these negotiations were running, the second-largest bottling operation, owned by Beatrice Foods, also came onto the market. Coca-Cola couldn’t face the thought of these two colossal bottlers being bought by entities unknown, so it borrowed the vast sum of $2.4 billion to purchase them. The two were then combined with Coca-Cola’s existing bottling assets to create Coca-Cola Enterprises (CCE), of which the company immediately spun off 51% to pay off their debt, giving CCE the remit of vacuuming up as many other bottlers as it could. After CCE merged with the Johnston Coca-Cola Bottling Group in 1991, keeping mostly Johnston management to run the new entity, CCE had annual revenues of $5 billion a year (half those of the entire Coca-Cola Company) and would soon expand its operations overseas.

  Global Sponsorships

  As a truly global brand, Coca-Cola was best placed to benefit from the sponsorship opportunities afforded by the massive increase in commercialisation of global events such as the Olympics and the soccer World Cup, which really got going with the 1996 summer Olympics in Coca-Cola’s home town of Atlanta.

  After Goizueta left in 1997, the focus shifted more towards acquisitions and new product development, bringing into the company portfolio brands such as Powerade - to combat PepsiCo’s Gatorade - Dasani - to get a piece of the rapidly growing bottled water market - Barq’s Root Beer, Indian brands such as Limca, Maaza and Thums Up - to gain immediate critical mass on the company’s return into India - and the 1999 deal to buy the rights for Schweppes, Canada Dry, Crush and Dr. Pepper in 157 countries outside of North America. A major restructuring in 2000 that involved the loss of over 5,000 jobs was the inevitable outcome of an acquisition splurge that had helped expand a brand portfolio into the hundreds. However, the 2002 launch of Vanilla Coke in response to Vanilla Pepsi confirmed that, when it came to the core cola brands, Coca-Cola was still too much of a follower and not enough of a leader.

  How International Are They?

  Very. The first sales to Canada and Mexico were recorded in 1897 and the first international bottler - in Panama - was established in 1906. The company entered China in 1927 and reached its 100th country - Sierra Leone - in 1957. Coca-Cola is sold in over 200 countries and is absent only in countries that ban it for political reasons, such as Iran, Syria, Myanmar (Burma), North Korea and Cuba. International unit case volume has exceeded unit case volume in the United States since the 1970s.

  How Are They Structured?

  The Coca-Cola structure has always been driven by the need to manage four things: brands, syrup/concentrate manufacture, company-owned bottling operations and independent bottler relationships. By the early-mid 2000s, the company structure was essentially split into bottling and non-bottling functions via two operating groups, bottling Investments and corporate. Under corporate, operating groups were divided by different regions, Europe, Eurasia and the Middle East, North America and Asia, Latin America and Africa, all of which had a high degree of local operating autonomy in advertising. Each region also managed many local brands, although global brand equities were managed for the most part by the central, Atlanta-based marketing function. There was also a global customer division to manage the large global customers and a special division to manage the McDonalds relationship alone.

  Regionally, the business was split in 2004 as follows:

  · Europe, Eurasia & Middle East – 33% of sales and selling129 brands

  · North America – 30% of sales and selling 93 brands

  · Asia – 21% of sales and selling184 brands

  · Latin America – 10% of sales and selling105 brands

  · Africa – 5% of sales and selling 86 brands

  The company’s own fountain operations, together with the finished beverages the company sold such as fruit juices and sports drinks, accounted for around 10% of total volume sales in the year, the remaining 90% going through bottlers with whom the company had one of three relationships. 7% of volume went through bottlers the company owned outright, 25% went through independent bottlers and the remaining 58% went through bottlers in which the company had a non-controlling stake. The largest four of these were:

  · CCE. Territories covered were 46 US states, Canada, UK, Belgium, France, Luxembourg, Monaco and the Netherlands. The Coca-Cola Company had a 36% stake

  · Almost as big as CCE was Coca-Cola Hellenic Bottling Company SA, whose territory was essentially the rest of Western Europe and all of Eastern Europe including Russia. The company’s stake was 24%

  · Coca-Cola FEMSA, a Mexican holding company whose territories included around half the pop
ulation of Mexico, 15% of Brazil, 30% of Argentina, 38% of Guatemala and essentially all of Columbia and the rest of Central America. Coca-Cola had 40% ownership

  · Coca-Cola Amatil covered Australia, New Zealand, Indonesia, Fiji, South Korea and Papua New Guinea with the company having 34% ownership

  The 2010 acquisition of the North American elements of CCE changed the picture somewhat and led to a three-division structure: Coca-Cola International, Coca-Cola America and Bottling Investments Group (BIG). Under Coca-Cola International came the Europe, Pacific, Latin American and Eurasia and Africa regional operations. Coca-Cola Americas was the amalgamation of the acquired parts of CCE with their existing US foodservice business, Minute Maid and the Odwalla juice business. North American supply chain operations and company-owned bottling operations in Philadelphia became a new entity Coca-Cola Refreshments. Coca-Cola North America also dealt with franchise management, a marketing division and an innovation group.

  What Have They Been Doing Recently?

  2004

  The mid-year appointment of E. Neville Isdell as Chairman and CEO brought about a hard dose of reality-checking for the company. Neville, a career company man who had retired in 2001 from running the world’s second-largest Coke bottler, was somewhat underwhelmed by what he found on his return. The company’s rapid expansion from a handful of brands to around 400 had, perhaps not unexpectedly, led to some degree of lack of focus, as shown in the year’s results: a 2% volume increase and 4% top line growth that were, in Neville’s words, ‘unsatisfactory’. And this was not a one-off. In only three years out of the previous ten had the total revenue growth rate exceeded 3%. In 2004, every single region underperformed against their past five- and ten-year compound average growth rates. While execution was excellent in parts, it was patchy overall. It was clear, Neville thought, that ‘a course correction is required’.

  The course correction would consist of five key elements:

  · Roles and responsibilities needed to be simplified and clarified

  · Marketing and innovation would be re-energised with a permanent $350 million to $400 million annual increase

  · Best practices would be shared wider and faster

  · Innovation focus would be focused on diet and light products

  · M&A strategy would seek new, profitable segments of the non-alcoholic beverage industry

  It wasn’t as if the company had not been innovating. Launches in the year somewhere in the world included diet Coke with Lime (the second-best selling Diet Coca extension), Coca-Cola C2 (a hit in Japan and a miss in the US), Sprite Icy Mint (first launched in China where it helped total sales grow 22%), Fanta Free in Scandinavia, Fanta Naranja Chamoy (a spicy Mexican drink that grew the Fanta brand by 13%) and numerous new Minute Maid lines. But too many areas of the business were either stagnating or, in the case of the German market (down 11% in the year), in deep trouble. The shake-up had been long overdue.

  2005

  Despite the gargantuan size of the whole Coca-Cola system of company plus bottlers - $80 billion revenue with hundreds of thousands of employees - the Neville effect wasn’t long in coming. First up in March had been a restructuring of the regions, creating three new regional entities:

  · East, South Asia & Pacific Rim (9% of sales)

  · European Union (16% of sales)

  · North Asia, Eurasia and the Middle East (16% of sales)

  Accompanied by the remaining:

  · North America (28% of sales)

  · Africa (6% of sales)

  · Latin America (25% of sales)

  All regions apart from North America reported into the Coca-Cola International Division.

  The promised extra $400 million was pumped into marketing and innovation with nearly 400 new products launched in the year, taking the product count to over 2,400 spread across over 400 brands. Despite a host of new launches in carbonated soft beverages - Coca-Cola Zero, Diet Coca Sweetened with Splenda, Sprite Zero / Diet Sprite Zero and a re-launch of Fresca - case volume increased by only 2%, although the 2% increase in regular Coca-Cola volumes was in fact the highest for five years.

  The successes behind a total company volume increase of 4% had come from the very places at which Neville had directed his effort, still beverages. Water grew by 17%, helped by the launch of nine new Dasani flavours in the year which, along with more international expansion, grew the Dasani brand by 29%. Sports drinks grew by 23% (with Poweraid now available in 76 countries) and energy drinks, previously almost a nonentity in the company, grew by a massive 200%. Minute Maid chipped in with 11% growth, as did Nestea in the Beverage Partners Worldwide joint venture with Nestlé, which added 23%. As well as global number one in carbonated soft drinks, Coca-Cola was now number one in juice and juice drinks, number two in sports drinks and number three in bottled water.

  To restart momentum in the much larger carbonated beverages portfolio, the newly formed marketing, strategy and innovation group in Atlanta began work on a new global campaign, The Coke Side of Life, along with a new digital platform for the brand, iCoke. Long-term partnerships with the International Olympic Committee and FIFA were renewed right through to 2020 and 2022 respectively. Had the corner been turned?

  2006

  Unit volume again increased by 4%, helped by another 367 additions to a global price list that now included over 2,600 items. After a stellar year in 2005, still beverages grew by another 7%, while the Coca-Cola brand had an excellent year by its standards, growing 3%, with the rest of the sparkling beverages doing slightly better at more than 4%. The heart of the portfolio was in good shape. Coca-Cola, Sprite and Fanta accounted for 56% of total company growth in the year. Even better news was that Coca-Cola Zero, now available in nineteen key markets, was undoubtedly a hit for the company, as was the new global advertising campaign, The Coke Side of Life, launched in over 100 countries. It out-performed the last few years’ advertising and one spot got the highest ratings in the company’s history.

  Within the regions, Africa matched the company growth rate of more than 4%, as did the European Union on existing business, while adding another 2% with the acquisitions of German and Italian water brands. Latin America did one better, growing by 7%, led by the Coca-Cola brand itself across all key markets. The region was also boosted by the acquisition of a major Mexican and Brazilian juice maker. Problem areas were North America where a 1% gain in foodservice and hospitality was wiped out by a 1% decline in retail. The worst case though was East, South Asia and the Pacific Rim, where volumes were down 5%, almost entirely due to a catastrophic double-digit decline in the Philippines, which prompted the company to buy out the bottler and do the job itself.

  But undoubted star of the show was the North Asia, Eurasia and Middle East region which grew by 11%, not least because it just happened to be made up of three energetic emerging markets, China, Russia and Turkey. The other key success was the newly formed Bottling Investments Group which ran all the 100%-owned bottlers, growing by 16%, although much of that came from the acquisitions of bottlers in China, South Africa and Philadelphia, a clear sign that the company was keen to increase its full ownership of its bottling system whenever it felt it was being let down by the bottlers.

  2007

  Momentum in the business was clearly building, with an improved 6% plus increase in case volume. What the company called its Three Cola Strategy - a focus on driving Coca-Cola, Diet Coke and Coca-Cola Zero - was paying dividends, as the combined brand grew by 4%, its biggest increase since 1998. A further key to growth was the continued success of Coca-Cola Zero, the company’s most successful new beverage since Diet Coke, now available in 55 countries and already one of Coke’s 13 billion $ brands. While much emphasis had been placed on the more exciting areas of still beverages, sparkling drinks still accounted for 80% of company sales, so had to do well for the company as a whole to do well. More good news then was the 8% increase for Sprite and a 5% increase in Fanta.

  Within the still beverages part
of the portfolio, another 450 new lines had appeared, either through innovation or acquisition, the most notable of the latter being the company’s largest ever – that of glacéau, the maker of vitaminwater and smartwater - for $4.1 billion. Also added in the year was the purchase (jointly with the largest Latin American bottler) of Jugos del Valle, which added fifty juice brands in Brazil and Mexico. Latin America was now the largest by-volume region in the company, bigger than North America, where sales of sparkling products declined by 2% in another lacklustre year. CCE needed to pull its socks up.

  Elsewhere, the European Union inched ahead by 3%. Africa added more than 10% - almost all in sparkling beverages – with Eurasia at plus 16%, showing what could still be done with the brands in emerging markets. On the bottling investments side, the newly owned Philippines set-up stabilised the business there, while bottlers in the troubled German market were combined into one unit to ensure greater consistency. The company was now starting to take category environmental concerns more seriously, opening the world’s largest PET bottle recycling plant as part of a commitment to re-use 100% of its PET packaging in the United States.