by Greg Thain
The year ended with the announcement of a planned transition in leadership, with E. Neville Idsell planning to handover the CEO reins in July 2008 to long-timer Muhtar Kent, while remaining as chairman for a further nine months. It had been a good innings for Neville.
2008
The global economic problems that hit in the second half of 2008 did little to stem the flow. Unit volume increased by 5% and operating revenue by 11% to reach a shade under $32 billion, a very impressive 46% increase since Neville took the reins in 2004, with the extra billion cases sold the equivalent of a new market the size of Japan. The company could not be faulted for how it had tackled the challenge of a beverage for every need and occasion: there were now nearly 3,000 different offerings (over 750 of which were low- or no-calorie) within nearly 500 brands, another 700-plus new products having been added during 2008 alone, over 200 of them juice products. This meant still beverages had doubled their share of sales from 11% to 22% in the space of eight years and were now delivering nearly 60% of company growth.
The glacéau acquisition had got off to a flying start, increasing its North American case volume by double-digits and launching into five new markets, Australia, Canada, Great Britain, Mexico and New Zealand. Other highlights included the still fizzing Coca-Cola Zero, up 35% in the year as it hit 52 new markets, the highly successful sponsorship of the Beijing Olympics - where the company was found by the Nielsen Company to have been the most recognised and effective sponsor - and the continued success of emerging markets, now contributing over 50% of company sales. While Latin America continued to power ahead by another 8%, the newer emerging markets for the company had been posting impressive, consistent growth numbers:
5 Year CAGR
Brazil+10%
China+19%
Poland+13%
Russia+20%
Turkey+15%
As is the way with these things, the new man at the helm had rearranged the regions as follows:
· Eurasia & Africa (Africa, Middle East, Turkey, Russia, India, CIS states)
· Europe (Western and Eastern Europe up to Russia)
· Pacific (China, Japan, Philippines, Thailand, Australia and all other Pacific countries)
· Unchanged were Latin America (if it ain’t broke, don’t fix it) and North America (definitely broke, not sure how to fix it).
North America had declined by 1% in the year and its five-year CAGR was a completely underwhelming 0%. In stark contrast to CCE and the remaining independent US bottlers, the performance of the company-owned bottlers could not have been more different, up 14% with 42% of the markets covered experiencing double-digit growth. While many if not most of these markets were emerging and thus had much better dynamics than the US, it cannot have escaped Coca-Cola management’s notice that they were building a good track record in running bottlers, and particularly in turning around failures. Coca-Cola itself was now its own second-largest bottler behind CCE.
2009
Despite the fact that even Coca-Cola was not immune to the global economic crisis, with top-line sales falling 3% albeit with a 3% increase in case volume, it still became the latest brand to join the $1 billion club, as the portfolio continued its relentless expansion. There were now over 3,300 products, although Coca-Cola itself was the only one sold in every market with a company presence. Combined with Diet Coke and Coca-Cola Zero (up another 9% in the year) Coca-Cola was a $56 billion global brand at retail, but a brand still not past its peak, at least in some parts of the world. Over the previous twenty years, an extra 5.8 billion cases of the combined Coca-Cola brand had been sold, with almost half of that growth coming from Latin America, primarily Mexico and Brazil. During 2009 alone, the brand had grown double-digit in India, Pakistan and Nigeria, three of the top eight most populated countries on earth. At the other end of the spectrum, only 5% of the global brand growth over twenty years had come from North America, a paltry average increase of 15,000 cases a year.
Unsurprisingly, trends like these had resulted in somewhat different strategies for developed versus developing markets. In developed markets, the strategy was two-fold: to grow through product enhancements such as added vitamins and/or nutrients - a good example being the newly introduced Burn Energy Shots - while reducing calories and where possible addressing sustainability issues such as packaging and carbon footprint. The second phase in developed markets was the acquisition of brands with higher growth potential, such as the 2007 purchase of glacéau (glacéau smartwater sales grew 33% in the year) and the 2009 investment in the Innocent natural smoothie and juice company.
In developing markets, the strategy was to do what the company had spent most of its existence doing, driving demand and new consumption opportunities, although with a much better-equipped brand toolkit at its disposal than in previous times and markets. Still holding good was the old plan of building capacity ahead of demand; the company and its bottlers were making multi-billion dollar investments in Brazil, China, Mexico and Russia, four countries whose annual sales growth equalled adding a market the size of Germany, the company’s sixth-largest!
Within the year, sparkling beverages moved forwards only 1%, although with Coca-Cola up 2%, Coca-Cola Zero up 9% (thanks to launches in another 26 countries), and Sprite up 6%, it seemed the minor and regional brands were the ones suffering most. Still beverages prospered regardless of the economic conditions, with water up 7%, teas 14%, and energy drinks 35%. Regionally, as might have been expected, the sick patients were Europe and moribund North America, which lost 3% volume in sparkling beverages whilst gaining a scant 1% on still. These were tough market conditions for any gain in anything, but in truth, the region had been going nowhere for a long time.
2010
This was the year Coca-Cola Company took the big decision: for the first time, it gained control over its North America bottling route-to-market. The deal was huge, costing a net $1 billion after the sale to CCE of their Norwegian and Swedish bottlers, plus ceding to CCE the right to buy Coca-Cola’s 83% stake in their German bottler. While the bottling investments division had by now built up considerable experience, systems and tools in running an integrated system - Coke One - the CEE North American bottling operation was an order of magnitude larger, encompassing 75% of US bottler volume and almost 100% of Canada’s. It would be the largest vertical integration in US business history.
The arguments for the acquisition were strong on both the hard and soft side. First and foremost, CCE hadn’t been delivering; company volumes in the U.S. had been stagnant for years. On the relationship side, it could be argued that Coca-Cola had fallen into the trap it thought it had avoided when it created CCE in the first place, that of having a bottling partner who was too big and too powerful. The company move into rapid portfolio expansion had exacerbated the inherent tension in the brand owner – bottler relationship. While the brand owner took risks with its revenue by funding R&D and brand advertising, the bottler took risks with its capital by having to gear up for both the new brands and also support the ‘opportunity cost’ of its delivery assets, carrying yet more new and therefore un-guaranteed Coke brands on its trucks when it could be carrying proven sellers from other companies. And Coca-Colahad indeed inherited with the deal some contracts to bottle and distribute actual rivals: Doctor Pepper and other brands, which it subsequently extended geographically in a 20-year deal that cost the company over $700 million. This was a very a good example of how the need to make the most efficient use of the bottling plants and delivery trucks had now become a Coca-Cola problem.
The inevitable outcome was more tension, which merely added to existing systemic conflicts: just as the bottler wanted higher selling prices and lower concentrate prices, the brand owner wanted precisely the opposite. And these were conflicts that, with someone the size of CEE, would not always resolve themselves in the brand owner’s favour. Or, when they did, the brand loyalty on the part of a gigantic bottler constantly courted by other drinks companies might well begin to w
aver. Coca-Cola decided that the entire US system would be better off without any likelihood of increasing tensions, given the company’s explicit strategy of adding yet more beverage brands into the portfolio. It was a big bet, and one the company needed to pay off.
After this big – gigantic - news, it went almost unnoticed that the company enjoyed a very respectable year, growing case volume by 5%, adding another billion cases of shipped product, now up to 25.5 billion cases, and nearly another $5 billion in top line sales. Sparkling beverages increased by 3%, driven almost entirely by growth in Eurasia and Africa of 10%. Russia had its biggest ever increase in sales of the Coca-Cola brand and the ever-dependable Latin America added 4%. Even North America managed to claim a 1% increase, thanks to some additional cross-licensed brands that came with the CCE deal (CCE also bottles some non-Coca-Cola brands in North America). But base business was still flat.
Once again driving company growth was the ever-expanding roster of still beverages, up 10% globally in the year. The new rising star in the company was Minute Maid Pulpy, the biggest driver of the 21% increase in still sales in the Eurasia and Africa region. Pulpy had been developed and launched in China five years previously to meet local expectations of what a fruit juice should be like and had already been rolled out to another eighteen countries, where consumers fully agreed with the formulation, making the brand the latest member of the $1 billion sales club. Still beverages even increased by 5% in North America, led by double-digit growth for both Powerade and Simply, and now accounted for 24% of company sales, which made the company the world’s largest juice and juice-drink operation.
2011
The first full year of the One Coke model operation in North America seemed to have got off to a reasonable start, reporting a 4% growth - the best for years – with sparkling up 3%, although this did include the third party brands. Like-with-like sales of sparkling only inched ahead by 1%, a small improvement over CCE’s efforts in the preceding few years but hardly a flying start, given that Coca-Cola Zero had just had its fifth year of double-digit increase. Globally, brand Coca-Cola grew by 3%, as did Fanta, while Sprite did even better at over 5%, all helped by stellar performances such as China, where case volumes increased by 13%, the ninth year out of the last ten the company had grown double-digit. Russia was still growing strongly, increasing sales of the Coca-Cola brand by over 10%. Investment dollars were being poured into these markets: in China, where the company and its bottlers had already invested over $3 billion in the past three years, another $4 billion was committed to the next three. Russia was to receive $3 billion over the next five years, while the Middle East and Africa would get $5 billion over the next ten.
Another 500 products joined the price list, now over 3,500 lines strong and a three-fold increase compared to a decade previously, while the juice drink Del Valle joined the roster of $1 billion brands, the 15th to do so. Since acquiring the parent company, Jugos del Valle, distribution had expanded from two Latin American markets to fifteen and more than doubled sales. Del Valle, along with Minute Maid Pulpy (up another 20%) produced another strong 7%-plus increase in sales of the juices and juice drinks categories.
But the company wasn’t just innovating new beverages. The company’s new Freestyle fountain dispenser, which could serve over 100 different beverages, was now in more than eighty US markets and the company partnered with Google to test cashless vending machines that dispensed product with a mere wave of a smartphone. On the sustainability front, the new PlantBottle, made partially from plants, was licensed for use by Heinz on their iconic ketchup brand and also helped Dasani return to significant growth. All good stuff. But the big question remained as yet unanswered: had the company done the right thing in buying the CCE North American operation?
What is Their DNA?
For such a gigantic enterprise, Coca-Cola is a remarkably focused company: since they divested themselves of Columbia Pictures, they have done nothing but sell soft drinks, virtually all they did before the purschase. So it is not surprising their DNA is rooted in the dark arts of beverage marketing.
Brand Building
While one would expect all the companies in this book to be highly competent at brand building, all would no doubt aspire to be as good at it as Coca-Cola has been with Coca-Cola itself. It is very easy to take for granted the status of the Coca-Cola brand and its ever-increasing sales, but it is sobering to reflect that most brands invented in the 1800s are now either gone or well past their best. That Coca-Cola continues to scale new heights is not inevitable or due to some locked-in, insuperable entry barriers; as we have seen with the kinds of companies Coca-Cola has been buying, there are very few of those in the beverages category. The brand is as successful as it is solely because the company has made it so. From iconic advertising to the most liked page on Facebook, via the most effective global events sponsorships, the mastery of the science of impulse purchasing and much else, Coca-Cola has and continues to set standards of marketing excellence across the brand management spectrum others can only aim for. They don’t really make their money from buying and selling brands, or trading off past glories, they make it by nurturing and growing the world’s most valuable brand.
Local Focus
Because of the economics of bottling and canning – it’s expensive to ship something that is 99% water over long distances - the company has always had to have a local focus on the operations side. And despite the iconic global campaigns, much of the heavy lifting of creating the sale has always been done at the local level, mostly by the bottler but increasingly by the company, as it has built its expertise in running the bottling side. But even so, it is still a staggering fact that only one of its 500 plus brands – Coca-Cola itself – is sold in all its markets. A select number of brands such as Sprite and Minute Maid are global in all but name, but the vast majority of the company’s product range consists of regional or national brands.
Coca-Cola has repeatedly added local and regional brands to the portfolio, usually doing a better job at brand-building that the previous owners. The most striking example of Coca-Cola being as strong local player is in India, where it bought its way back into the market in 1993 by acquiring the leading local cola brand, Thums Up, which was already competing head-on with Pepsi. One would perhaps have expected ham-fitedness of such a global giant, either killing Thums Up outright or at best letting it wither on the vine. But Coca-Cola got behind it, built its equity, and turned this quintessentially Indian brand into the leading sparkling beverage in India.
Optimism
Perhaps the most striking thing about Coca-Cola is in how the company perceives the world around it. Despite size and leading position, it has almost always seen nothing but boundless opportunity to grow both the company and the Coca-Cola brand. There are no complaints about recessions or adverse currency movements or big, nasty, aggressive retailers; factories and workforce are not seen as deadweight costs. Instead the focus is on the 97% of beverages consumed in the world that aren’t provided by the Coca-Cola Company. In so doing, there is none of the insular arrogance that can sometimes be associated with American-based companies, more an unquenchable optimism that the future can and will be brighter than the past. It is refreshing.
Summary
The Coca-Cola Company is one of the most written about and best understood packaged goods companies in the world. Apart from the secret formula recently transferred from an Atlanta bank vault to a vault in the Coca-Cola world attraction, there is no secret about what it does and how. The transition from a one-brand to a multi-brand company and then a broadly based beverage company has not been seamless, but it has been a lot more successful than it might have been. The mushrooming of the brand portfolio has not led Coke astray and dented progress of the brand itself: Coca-Cola Zero has been one of the brand success stories of the 21st-century. Acquisitions have been very impressive in terms of consistency too: profitable growth has invariably resulted without diminishing the heart and soul of the busines
s.
Admittedly, given the two-tier nature of the beverages route to market, it is perhaps easier to make beverage acquisitions than it is to acquire fully integrated businesses with countless factories, people and widely differing cultures to be integrated. But that should not diminish what The Coca-Cola Company has achieved. This is now a very different company to the one that thought the maxed-out market for carbonated beverages meant the next step was the movie business, or the one that believed the Pepsi Challenge absolutely demanded the launch New Coke. It is a company that has manoeuvred itself into a very strong position to capture future growth, particularly in emerging markets, while still continuing to build its core, the Coca-Cola brand itself.
But how will the fully integrated business in the US market fare? There are now no indolent bottlers to blame. There is a huge, capital-intensive infrastructure that significantly changes the historical business model and the regional balance of sales and profits. Somewhat perversely, given the scale of opportunity in emerging markets, there is greater dependence on the performance of the US market than there has been for decades. Before the CCE acquisition, the company held around a 30% stake only in the franchise profits of the US market. The 30 is now 80, whilst the stake in CCE’s profits in its European markets has shrunk from 35% to zero. Coca-Cola needs to make the US market work.
Colgate Palmolive
Where Did They Come From?
In 1802, Robert Colgate, a British immigrant farmer, closed down a candle and soap-making business he had been running for the previous two years and went back to farming. The same year, his son, William, perhaps fired by a filial zeal to show his father a thing or two, started his own soap business but fared no better, lasting only a year. But William was no quitter. He moved to New York City and spent three years learning the ropes of the soap and candle business before once again setting up on his own in 1806.