Coca-Cola’s Brand Building Initiatives Could Shoulder Sluggish CSD Sales

The Coca-Cola Company (NYSE:KO) leads the U.S. carbonated soft drinks (CSD) category, with almost one-and-a-half times the market share of its closest competitor, PepsiCo (NYSE:PEP). The U.S. is the largest market for the beverage giant by a distance, contributing 42% to the net revenues in 2013. CSDs in the domestic market constituted around 13% of the company’s overall volumes last year. However, Coca-Cola’s soda volumes have declined in the last couple of years in the country, owing to growing health concerns among consumers regarding consumption of sugary soft drinks. CSD-making companies now face an uphill battle in North America, with declining consumption and increasing soda taxes. Earlier this year, Mexico imposed a one-peso-per-liter (around 7.6 cents) tax on sugary soft drinks. On the other hand, states such as California and Illinois are in the middle of passing soda taxes, which would almost double the price of a 24-pack soda case. Beverage companies will look to pass this extra cost onto consumers by adjusting their bottle prices. Price rise is expected to further hamper soft drink sales going forward. As a result, Coca-Cola might witness another year of decline in CSD volumes.

In order to spur sales of its CSD portfolio, the management aims to deliver innovation in product, packaging, equipment, and consumer engagement. Coca-Cola is developing new low/no calorie products using the natural sweetener stevia to save the ailing diet soda segment. The company’s introduction of its Freestyle machine in 2012, which dispenses more than 100 drinks, reflected innovation in equipment. In terms of improving consumer engagement, Coca-Cola will introduce its CSD offerings compatible with the Keurig Cold home carbonation system later this year. The beverage giant is now looking to further increase advertising and media investments, despite already being one of the most recognizable brands in the world. Coca-Cola aims to draw this incremental fund by maximizing productivity. This move could benefit Coca-Cola as it not only aims to boost sales of the company’s beverage portfolio on the back of increased marketing and promotional activities, but also aims to improve functionality and efficiency of operations.

We estimate a $41.11 price for Coca-Cola, which is around 6% above the current market price.

See our full analysis for Coca-Cola

Coca-Cola Launches Its Higher Productivity Plan

While Coca-Cola’s worldwide CSD volumes remained flat last year, CSDs in the U.S. suffered a 1% decline in volumes. In February, the company announced its plans to save an incremental $1 billion in productivity by 2016, which would be redirected to media investments. Coca-Cola aims to achieve this through system standardization, supply-chain optimization, and industrious resource and cost allocation. In line with this productivity savings plan, the company plans to save $550-$660 million this year. Coca-Cola is already one of the most valued and recognizable brands in the world, and plans to invest further in brand-building initiatives. The beverage maker was one of the official sponsors for the Winter Olympics held in Sochi in February, and is also sponsoring the FIFA World Cup to be held in Brazil in June. Being a consumer product, large scale promotional activities could spur sales for Coca-Cola.

Strong Consumer Bond Is Crucial For Cola Sales

According to the chief marketing and commercial officer at Coca-Cola, Joseph Tripodi, the company spends over $4 billion on marketing around the world. ^[1] Coca-Cola spent $3.3 billion on advertisements in 2013, representing 7% of its net sales. ^[2] In contrast, PepsiCo’s advertising expenses were $2.4 billion last year, only 3.6% of its net revenues. ^[3] Despite Coca-Cola’s stronghold in the soft drink industry and vast global reach, the company plans to further increase its marketing spend next year. Coca-Cola believes in expanding its consumer base through experiential marketing, which aims at creating an emotional connect with customers. Positive consumer perception is crucial for Coca-Cola, as it faces headwinds in the CSD category due to the unhealthy tag associated with these drinks. In fact, a study suggests that the chemical “4-Mel” used in some soft drinks for coloration is carcinogenic. ^[4] Although the Coca-Cola samples taken in this study used low levels of 4-Mel, presence of cancer-causing ingredients is bad publicity for sodas and could hurt consumer demand. With aggressive marketing and advertising spend going forward, Coca-Cola will hope to retain its current consumer base, and possibly improve CSD sales in the next few years.

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1. “Coca-Cola marketing tops $4 billion, Tripodi says“, bloomberg.com [↩]
2. “Coca-Cola 10-K“ [↩]
3. “PepsiCo 10-K“ [↩]
4. “Potential carcinogen found in certain soft drinks“, January 2014, wilx.com [↩]