Coke sticks to strategy as soda sales slide

Instead of moving away from sugary drinks, the beverage maker decides to boost advertising.

By MSN Money Partner Apr 10, 2014 1:00PM
By MCaption: An employee arranges bottles of Coca-Cola at a store in Alexandria, Va.
Credit: © Kevin Lamarque/Reutersike Esterl, The Wall Street Journal


For 13 years running, Americans have been drinking less Coke. Now Diet Coke sales are falling off a cliff. Globally, sales growth of soda is slowing amid concerns about sugar intake and obesity.


The trends are industrywide, but it is especially bad news for Coca-Cola (KO), a company that derives almost 75 percent of its global sales volume from carbonated soft drinks.


"Sugar water with bubbles is not the future of the world. There's an existential issue,'' said Tom Pirko, an industry consultant at Bevmark LLC.


A growing number of industry analysts suggest Coca-Cola should spend less to advertise cola and more to diversify aggressively through acquisitions of companies, like energy-drink maker Monster Beverage (MNST). Sales of Coke's nonsodas, including Minute Maid juice, Dasani water and Powerade sports drinks, rose 5 percent last year by volume.


But that isn't what Coke says it has in store. Instead, the Atlanta-based company plans to double down on its namesake brand. The company is boosting advertising, introducing new products, and using singer Taylor Swift as a pitchwoman. Chief Executive Muhtar Kent has said that last year, when Coke's U.S. soda volume dropped 2 percent, was an anomaly. Soda can return to healthy growth, even in the U.S., especially if it is a brand name like Coke, he said.


"Coca-Cola remains magical. We need to work even harder to enhance the romance of the brand in every corner of the world,'' Kent told investors in February. He regularly refers to flagship Coke as the company's "oxygen'' and "lifeblood.''


For starters, he plans to increase global advertising by $1 billion over the next three years. The company spent $3.3 billion last year. Much of the increase will be devoted to soda, including the Sprite and Fanta brands. Coke says its sponsorship of this year's World Cup soccer tournament in Brazil will be the company's largest marketing campaign ever.


Coke is defending aspartame, the main artificial sweetener in diet soda, citing more than 200 studies affirming its safety. At the same time, it plans to roll out Coca-Cola Life, a moderate-calorie version sweetened with stevia plant extract, across more countries, after releasing the drink in Argentina and Chile last year.


Coke in February struck a deal to sell soda through Keurig Green Mountain's (GMCR) countertop machines, inching closer to a former executive's dream that Coke one day would stream from kitchen taps.


The company defends its course, noting that its global beverage volume rose 2 percent last year and revenue increased 3 percent, in currency-neutral terms, despite tough economic conditions. Coke says it has continued to win market share in the U.S. and globally from PepsiCo (PEP) and other rivals in soda and noncarbonated beverages. Past investments in its core brands, including Coke, consistently have paid off, it says.


Coke said Kent wasn't available for comment, citing the quiet period ahead of its earning report on April 15. Foreign-exchange losses from a strengthening dollar are expected to place a significant drag on profit this year.


Skepticism is growing -- even inside the company -- about whether Coke can still meet its target for 3 percent to 4 percent annual volume growth in a world in which soda volume rose only 0.9 percent last year, according to Euromonitor.


At a global planning meeting late last year, Steve Cahillane, who then was president of Coca-Cola Americas, said growth targets were unrealistic, according to people familiar with the matter. He had been viewed as a potential successor to Kent. A few weeks later, Cahillane left the company in an organizational shake-up.


John Faucher, a beverage analyst at J.P. Morgan, said Coke should diversify more aggressively through acquisitions. Coke already is the world's biggest juice company but could bulk up in areas like tea, coffee and dairy, where it is a much smaller player. "Interest rates are low and they have a ton of cash,'' Faucher said.


Coke's cash and short-term investments totaled $17.12 billion at the end of December, up from $13.46 billion a year earlier.


Industry trackers say potential U.S. candidates could include Arizona Beverage Co., with an estimated market share of 25% in ready-to drink teas, and Monster, the country's biggest energy drink maker by volume. But Arizona's owners are locked in a protracted court dispute, and Monster's marketing and ingredients are being scrutinized by regulators, complicating any deals.


Kent has said that Coke is always looking at acquisitions, but the company declines to comment on any possible targets.


Coke still has plenty of supporters, including Berkshire Hathaway (BRK.A), long the beverage maker's largest shareholder. "I'm 100% in accord with Coca-Cola's business strategy and regard Muhtar Kent as the ideal CEO for Coca-Cola,'' Berkshire Chairman Warren Buffett said by email.


Coke already has 11 nonsoda brands with more than $1 billion each in retail sales and an unrivaled distribution network, and operates in every country except Cuba and North Korea. In Eurasia and Africa, Coke's beverage volume rose 7 percent last year.


"This is more of an emerging-markets and developing-markets story; that's the way we look at it," said Kurt Havnaer, a portfolio manager at Jensen Quality Growth Fund. The U.S. mutual fund owns about $150 million in Coke shares.


Still, investors have cooled on Coke. The company's share price has fallen 2.7 percent over the past year, while the  Standard & Poor's 500 Index ($INX) has climbed 21 percent. Last week, Budweiser maker Anheuser-Busch InBev (BUD), the world's largest brewer, supplanted Coke as the biggest beverage company by stock-market capitalization.


The pace of Coke's global soda volume growth slowed to 1 percent last year from 3 percent in 2012 as concerns about health and obesity spread. Last month the World Health Organization suggested that individuals limit consumption of added sugars in food and drinks to 6 teaspoons a day -- less than the 9 teaspoons in a 12-ounce can of Coke.

Soda volume in Mexico, Coke's second-largest market, have fallen an estimated 5 percent or more since the country introduced a tax on sugary beverages in January.


The new drag on Coke's U.S. business is diet soda. Diet Coke volume has been down for eight straight years, accelerating the decline in the past three. Diet Coke sales plunged 6.8 percent, in volume terms last year, according to Beverage Digest. Diet Pepsi sales fell 6.9 percent, but PepsiCo, with its enormous snacks and foods business, is far less dependent on soda than Coke is.

More from The Wall Street Journal


Tags: KOMNSTPEP
66Comments
Apr 10, 2014 2:29PM
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I still like my Coca-Cola...especially with a little RUM.
Apr 10, 2014 2:53PM
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They raised their prices to over $5 a pack?! Simple as that.
Apr 10, 2014 2:11PM
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"A growing number of industry analysts suggest Coca-Cola should spend less to advertise cola and more to diversify aggressively through acquisitions of companies, like energy-drink maker Monster Beverage "

Why not- if the kids aren't drinking enough sugar, hook them on caffeine.
Love those industry analysts.
Apr 10, 2014 2:54PM
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Coke Zero is much better than Diet Coke.  I gave up most soft drinks when Coke lied about bringing back the old Coke.  It never came back.  I collect Coca Cola memorabilia and I have original Coke bottles.  The original ingredients include pure cane sugar, not high fructose corn syrup.  My doctor has told me to stay away from anything with high fructose corn syrup since it is not metabolized like sugar. 

Apr 10, 2014 2:58PM
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Soft drinks, colas, sodas, etc. are toxic.....and people are finally starting to understand.
Apr 10, 2014 3:13PM
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Everything in moderation.  Anything and everything will kill you if you are binging or overindulging.  Everything in moderation.
Apr 10, 2014 4:01PM
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Get rid of the Aspartame.  I quit buying and drinking them because of it.  You lost a bundle from me cause I drank diet coke like it was going out of style until I finally decided to quit drinking them because of the killer Aspartame.  I also tell everyone I know not to buy them anymore until they change it.  I admit, I do miss drinking them, but I refuse to poison myself anymore with it.  Please make a change!!!

Apr 10, 2014 3:37PM
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Advertising is not gonna work. More people are finding out everyday on shows like Dr Oz that carbonated sugary, high fructose corn syrupy, brown soft drinks are making them sick and ruining their bodies: Pancreatic cancer, heart attacks, depression, diabetes, on and on. It's only a matter of time before the rest of the world catches on. I hope sales go to zero!
Apr 10, 2014 1:54PM
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Diet coke sales are falling because only fat women who want to think they are doing something good for their bodies drink it.  Maybe some of these whales have wised up and are now drinking water...

Bring on the down votes fat diet coke drinkers...

Apr 10, 2014 2:11PM
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There are several reasons why this is happening, people are waking up and realizing this stuff will not only kill you in the end, but the chemicals to sweeten it will make you want more junk food like pizza, pasta, burgers, fries ect.ect.ect.  But let the buyer beware, use the internet for more than just posting stupid stuff on Facebook, you should only be drinking water, most of everything else is laden with sugar, sugar substitutes or loaded with chemicals.  There are a handful of natural products out there that are really natural and good for you.  Like my nutritionist say's---"If you can pronounce it, don't buy it.  Obviously, Coke will ultimately find some way to fool the FDA but inventing and labeling a product as "Natural and Good for you", but's that's because some lobbyist is lining the pockets of political (Both Republican and Democrat) cronies with tons of money to tell you lies.  It's nice to see America is wake up from its slumber, well let's not go too far, but this is a start... 

Apr 10, 2014 3:07PM
Apr 10, 2014 3:14PM
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Coke Zero (more recently introduced and significantly marketed) is a superior tasting diet Coke beverage and has cannibalized the sales of Diet Coke. Story fails to point this out. Combined sales of the 2 products is more appropriate measure.
Apr 10, 2014 3:06PM
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People are concerned about sugary soft drinks, so they're not drinking Diet Coke, which doesn't contain sugar. This makes a lot of sense.
Apr 10, 2014 4:13PM
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i lived on diet coke in the 1980's.

 

and i'm still around!

 

and i still drink it.

Apr 10, 2014 3:48PM
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Nothin' better than a RC Cola and Moonpie!
Apr 10, 2014 2:57PM
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They will be the tobacco of this century.. Watch what happen if your lucky enough to live to the end of this new century.. WHO just released new directive that states only 5% of your daily intake should be from sugar.. Several years back they said 10% and the industry lobbied congress to cut funding to WHO...World Health Orginization
Apr 10, 2014 5:49PM
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Been drinking diet caffeine-free coke for yrs & yrs.  Would not give it up.  HANG IN THERE COKE!
Apr 10, 2014 4:26PM
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Who doesn't think this is all about price?  Diet coke has nothing to do with sugar!  Obesity?  That seems counter intuitive!  I quit drinking Diet Coke, my favourite soft drink, when the price hit $1.99 for a two litre bottle!  I'm tired of seeing all the grocery prices rocket past the inflation claims.  I would rather save my money for something more enjoyable.  Accordingly, I put Diet Coke on the chopping block since it offers zero calories, zero carbohydrates, and way less than the average daily requirement for salt! 
Apr 10, 2014 2:19PM
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Maybe they can advertise the Diet Coke with all the cheesy bacon burgers that fast food joints are pushing these days.  Drinking soda helps to put your body in an acid state of which cancer thrives in. I've had my fair share of vices in my life but thank God soda consumption was never one of them!
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