Coke is at a crossroads as ‘obesity and health headwinds’ grow

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Posted: Tuesday, March 11, 2014 12:00 am

Can this brand be saved?

Coca-Cola has reigned for years as the world’s No. 1 brand, but last year both Apple and Google overtook it in Interbrand’s annual ranking.

The first lady, Michelle Obama, is on a campaign against obesity, urging Americans to drink more water. Former Mayor Michael R. Bloomberg tried to ban sales of giant-size high-sugar soft drinks in New York City. And the Food and Drug Administration recently proposed new food labels that would more prominently display grams of added sugar, including the high-fructose corn syrup used in Coca-Cola.

With the longstanding backing of legendary investor Warren Buffett, Coca-Cola has been seen as the ultimate value stock, delivering steady returns in good times and bad. But the company recently reported declining sales of soda in the critical North American market along with disappointing sales growth globally, alarming investors. This year, Coke shares have dropped nearly 7 percent, which is cataclysmic by Coca-Cola standards.

“Carbonated beverages are in precipitous decline,” said John Sicher, publisher of Beverage Digest. “The obesity and health headwinds are difficult and are getting stronger.”

It’s not just Coke that’s affected. By some measures, the Pepsi brand faces even bigger problems. But Coca-Cola is uniquely vulnerable, given that about 60 percent of its revenue comes from the sale of soft drinks, the bulk of it from Coke and Diet Coke.

“Coca-Cola is the mother brand,” said Martin Lindstrom, a brand and marketing consultant and the author of six books, including “Buyology” and “Brandwashed.” “The whole company is affected. Coke has to stop the erosion in the United States or it will cascade elsewhere.”

Several prominent branding and marketing experts were consulted for insights into Coke’s problems and what the company could do. The very idea that the Coke brand may be in trouble is startling, given that Coca-Cola has thrived for 127 years and has survived countless passing health fads, in part because its flagship product contains both caffeine and sugar, which can be addictive.

And it’s not as if Coke isn’t moving product. Its chairman and chief executive, Muhtar Kent, told analysts meeting recently in Boca Raton, Fla., that while he “wasn’t satisfied” with Coke’s performance in 2013, “Brand Coca-Cola is growing and is very healthy globally.” He continued: “Since 2010, we’ve added 1.1 billion unit cases, bringing volume to 11 billion unit cases in 2013. This is the equivalent of adding another Brazil from a brand Coca-Cola perspective.”

And a Coca-Cola spokesman said the company would increase media spending by up to $1 billion by 2016 to support its brands.

For his part, Buffett is still bullish on the company. His Omaha-based Berkshire Hathaway Inc. is Coca Cola’s largest shareholder and increased its ownership interest to 9.1 percent in 2013. Buffett calls it one of Berkshire’s “Big Four” investments.

In a CNBC interview last week, the 83-year-old said of the company: “It’s a very, very good business — but it’s under more attack. ... Still, close to a quarter of all liquids consumed in the United States are carbonated soft drinks. You know, I drink five a day and I’m feeling good.”

But a number of branding and marketing experts agree that Coke is at a critical juncture.

“The big soft drink companies, and Coke in particular, are at the most important crossroads in their long lives,” Sicher said.

No easy solutions are seen, and even an acclaimed ad campaign like Coke’s “It’s Beautiful” on the Super Bowl can do only so much. Coca-Cola faces deep-seated problems, the analysts said, that have been brewing for at least a decade. (Sales in North America of carbonated beverage by volume have been declining for nine straight years, Sicher said.)

The reasons are varied and complex. Lindstrom noted that his research indicated that the average age of a Coke drinker was 56.

“They think they’re young when they drink it,” he said. But “young people themselves are turning to alternatives like energy drinks.”

Lindstrom said surveys indicated that young people did not like highly carbonated drinks. Coke is more heavily carbonated than Pepsi, and roughly twice as carbonated as the energy drinks Red Bull and Monster, which are rapidly gaining market share, especially among the young.

The growing appeal of coffee and dark chocolate-infused beverages, especially in Japan and Europe, has shifted the flavor preference toward bitter and away from sweet, Lindstrom said.

And parents, who in previous generations often introduced their children to Coke, typically when they were ages 6 to 8, have been holding back, largely because of health concerns.

“Having your first Coke was a milestone. It was embedded in society,” Lindstrom said. “Those childhood memories stick for a lifetime. But that generational handoff is breaking down. Parents have become uncomfortable with it.”

Ravi Dhar, professor of management and marketing and director of the Center for Customer Insights at the Yale School of Management, agreed that Coke’s challenge was especially difficult because it was tied to the broader consumer shift from carbonated beverages, and not the Coke brand per se.

“This is not unlike canned soup and Campbell’s challenge,” he said. “People are still consuming a lot of beverages and soup. It’s just not of the carbonated cola or canned soup type.”

He and others stressed the importance of Coke’s continuing efforts to develop a natural, healthy, low-calorie sweetener.

“For Coke to regain brand relevance, it has to try and meet changing consumer goals,” Dhar said. “Innovation is one way. A different way may be to try to identify relevant goals that can be tied to moments which are made for carbonated beverages. This requires deep consumer insights and being on the offense rather than defense about the category.”

Tim Halloran, founder of the Atlanta consulting firm Brand Illumination and author of “Romancing the Brand,” who spent 10 years working for Coca-Cola, said “Coke must use innovation and make news” to “make sure that a 125-plus-year-old brand keeps a modern perception and to offset health concerns that have been voiced by everyone from health advisers to the first lady.”

Sicher of Beverage Digest said: “Calorie and sweetener innovations are critical. We’ll know within the next two to three years if they succeed.”

Last year, Coca-Cola introduced Coca-Cola Life, which it describes as a naturally sweetened, reduced-calorie sparkling beverage, in Argentina and Chile.

“It’s another example of how we are working to be part of the solution to the obesity problem, giving consumers a blend of sugar and natural zero-calorie sweeteners,” the company told analysts this month.

Coca-Cola may also need to take more radical steps.

Seth Godin, a marketing consultant, founder of the popular website Squidoo and author of the book “Purple Cow,” which argues that brands need to stand out, said Coke “has a priceless brand.” But, he went on: “They’re not in the sugary-water business. They’re in the storytelling business. They think their assets are bottlers, shelf space and futures contracts on sugar. But the real asset is trust, share of mind and a story. So they should obsess about making something new, creating services and experiences and interactions that people will happily pay for that have zero to do with beverages that make people obese.”

Still, Coke has its defenders.

“It has incredible distribution and consumer loyalty,” said Bruce Greenwald, an authority on value investing and a professor at Columbia Business School. “Every once in a while, there’s a bad quarter and people panic. And it’s possible this time it really is the end. But are Americans really getting healthier? I wouldn’t bet on it.”

The Omaha World-Herald Co. is owned by Berkshire Hathaway Inc.

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