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 includes 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 on 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're open. And the sum of all that,
along with a new organization we've stood off has allowed us
as you say, to come back to the pre pandemic levels.
Coke is eagerly anticipating some reopenings 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 that is 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?
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 addiction for one
thing, 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
and 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 today,
And that became wildly successful by 1900-1910, there
were Coca Cola bottling plants in every small town not only in
the south, but throughout the country.
By the 1920s and 30s, 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 and in
support of GIs, the company since 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 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
standpoint, if you look at per capita consumption, and then
it's it's 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.
The soda market in the US is a $38.5 billion dollar business
according to IBISWorld and includes companies like PepsiCo,
Keurig 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, Keurig Dr. Pepper's coffee business got a jolt too.
The company announced first quarter 2021 net sales of $2.9
billion 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 up 5% from a year earlier.
Coca Cola has really been hit hard by the pandemic and it's
definitely not out of the woods yet.
Whilst there is uncertainty and volatility particularly in the
near term ahead of us we feel confident about the corridors
what we're setting for the top line and the bottom line
guidance, and we believe that we will be able to emerge stronger
from this crisis.
A major issue for the soda giant. According to one analyst,
Coke has more exposure to restaurants like McDonald's and
sports venues than its peers PepsiCo or Keurig 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
revenues 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 been increasing.
According to Johnson, 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's 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.
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
bottles 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 tonnes 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 Pabaco to develop an 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 plastic bottles in the US recycled, those efforts might
not be enough.
Another criticism Coca Cola is faced is over 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 to local communities.
With the pandemic slowing down its North American fountain
business and its western Europe away from home channels, Coke
saw 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 e
commerce. And obviously e commerce is much more important
to a number of other sectors it's 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,
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, according to Morningstar. In 2021, Cok
launched Topo Chico hard seltze the company's first move int
alcoholic beverages on its hom turf in almost four decades. I
2019, hard seltzers volume mor than tripled
Bery early days for Topo Chico hard seltzer in certain
countries in Latin America and also Europe, but we're very
exciting. Good consumer reaction, good customer action,
good rates of sale, very early days and coming very soon to the
US.
The company is investing 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 for 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 at 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're certainly behind that trend Coke Zero Sugar not just
is growing in 2021 in the first quarter, but actually grew in
2020.
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 can expect a strong recovery.
Globally, the rate of vaccination, the rate of
reopening all that is going to vary by country it'll 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, we expect in 2021.