How Coke Is Making The Most Out Of Falling Soda Volumes

Consumers, over the years, have gotten used to “buying in bulk.” If a product in the grocery store costs $1 for a one-pound box, then if you get the larger 5 pound box, you will save because it will cost less than the expected $5. You get a discount for “buying in bulk.” We trade in the convenience of lifting a smaller container, and have to lift a larger box, in exchange for a cost saving.

While this has been the norm for many years, over the last couple of years this phenomenon may be reversing.  Especially in the soda aisle. Instead of buying larger sizes and saving more, consumers are now, willingly, trading back to get smaller sizes and paying more per portion for it. In the case of The Coca-Cola Company (NYSE:KO), this shift in consumer behavior has several reasons, but mostly it seems to be an outgrowth of the health conscious trend. “Don’t want to drink too much?” Get a smaller can. “Don’t want so many calories?” Buy a smaller can. “Don’t want so much sugar?” Just drink a smaller can. And suddenly, consumers are buying more and more of the smaller (“more convenient”) sizes, and don’t mind paying up for them. The entire “buying in bulk” phenomenon in reverse.

One beneficiary of this recent trend is Coca-Cola. As long as consumers want smaller portions, why wouldn’t the smart marketers at Coca-Cola give it to them? And, if it turns out it actually is better for the company to turn out less and get paid more?  It only makes sense for Coke to give consumers what they want.

This trend is especially prevalent in North America, but may also extend to other regions, as the message spreads: “Soda isn’t bad. It’s good. But too much could be bad, so drink smaller portions….”  And these smaller portions should help to increase profits at Coke and the other carbonated soft drink (CSD) companies.

Currently, 15% of the company’s total sales are in these newer smaller cans and bottles. This figure should increase over time. Up to 20%, perhaps? But this will be a benefit to Coca-Cola and is actually a benefit to consumers, as well.  It is healthier to drink less calories and sugar. It seems like a win-win situation.

It’s not news that CSDs have been losing favor with customers, especially in North America, but Coca-Cola has found a way to extract growth from this segment by altering its strategy — focusing on higher price per unit rather than more volumes. While volume sales of CSDs have continuously declined in the U.S. for ten consecutive years now, Coca-Cola is seeing growth in the form of higher proportionate sales of the smaller cans and bottles, which have been strategically priced.

Let’s explain this.

In Q2, Coca-Coca said that while sparkling volume rose 1% in North America, transactions rose 2% — this means more proportionate sales of smaller packages. Why the mini cans and bottles are gaining on the traditional larger-sized bottles and cans is because they effectively address the biggest issue that consumers have with soft drinks — high and unhealthy amounts of sugar concentration.

We estimate a $42 stock price for Coca-Cola, which is slightly lower than the current market price.

See our full analysis for Coca-Cola

Although having the same amount of calories per unit volume, the 7.5 ounce, 8 ounce, and 8.5 ounce packages obviously have lower calories in total, than the larger size containers, which, as the numbers would suggest, is enough to appease the heath conscious customer. While the value of Coca-Cola’s core products, comprising the 12-ounce package and the two liter, declined 2% this past year, the value of transaction packages, such as smaller cans and bottles, rose 15%. ^[1] The transaction packages represent about 15% of the company’s total U.S. CSD volume now, growing by double-digit percentages in Q3. In fact, as customers look for low cumulative consumption of sugar, Coke’s mini can sales have risen by double-digit percentages since their introduction in 2007.

This bodes well for Coca-Cola for two reasons. Firstly, although volumes are decreasing, customers are paying more for their soft drinks. For example, Coca-Cola will generate lower revenue per volume on the purchase of a 1.25 liter bottle, compared to an 8.5-ounce aluminum bottle. Customers are trading-in volume, and paying more on a per ounce basis, in order to consume lower calories and avoid wastage. Why this stands to benefit Coke is because these smaller bottles and cans have a higher price per unit, and contribute positively to the mix, driving profitability growth.

Secondly, emphasizing more on the sales of mini cans and bottles means lower calorie consumption in one sitting, which works well for Coca-Cola’s image. In 2014, the three soft drink giants, Coca-Cola, PepsiCo (NYSE:PEP), and Dr Pepper Snapple (NYSE:DPS), announced their aim of reducing calorie consumption through their offerings by 20% by 2025 in the U.S.  One such way is by introducing low-calorie variants of their popular soft drink brands. However, skepticism about the use of artificial sweeteners in some, and bitter aftertastes of certain natural sweeteners, have kept customers away from diet/no calorie drinks, as well. So, smaller cans and bottles seem like a win-win. Fighting alongside health activists is helping Coca-Cola not only spur positive consumer perception but also expand margins.

After selling Coca-Cola in 6.5-ounce bottles for over 50 years, the company introduced a larger bottle as the push for upsizing began in 1955. ^[2] Coca-Cola has now altered its strategy yet again. From focusing on more volume, the company is realigning its strategy to emphasize more on the smaller cans and bottles. The push for more volume sales was incentivized by the company’s financial model of selling beverage concentrates to bottlers. However, volume sales of CSDs have consecutively fallen in the domestic market, as customers have cut down on their consumption of beverages containing high amounts of sugar. Hence, the drive for higher volumes would probably meet with high customer resistance.

Conclusion:

Coca-Cola is now pushing for more sales of its smaller cans and bottles, which benefits both the company and the customer, and with the incremental marketing spend that the beverage maker is putting into North America, revenues could get a further boost.  Maybe this is a marketing campaign that won’t have to try too hard to be successful.

See the links below for more information and analysis:

• Coca-Cola earnings review: another quarter where growth gets wiped out by currency translations
• Bottled water is a potential growth category that can’t be ignored
• Soda makers wonder: where could growth in U.S. come from?
• Coca-Cola beats consensus estimates; delivers strong growth in Q1
• Negative currency translations overshadow PepsiCo’s strong organic growth in Q1
• Trefis analysis: Coca-Cola Coke U.S. Revenues
• Trefis analysis: Coca-Cola Diet Coke International Revenues

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Coca-Cola figured out how to make more money by selling less soda, finance.yahoo.com [↩]
2. Less is more: For Coca-Cola, small packs mean big business [↩]