The Atlanta-based Coca-Cola Company (KO, Financial), the multibillion-dollar American multinational company that has been quenching the thirsts of global consumers for more than a century, is fighting two major survival battles – one being the future of the cola industry as a whole and the second one linked to the survival of its diet soda segment.
Headwinds faced by the Industry
The soda industry is going through a rough patch. Growing consumer activism against carbonated drinks portraying them to be one of the major culprits behind obesity, diabetes and other health problems has led to a negative sentiment hitting brands across board. The soda consumption in U.S. and other countries has been rapidly declining. The main flagship brands of Coca-Cola and PepsiCo. Inc. (PEP, Financial) are witnessing slower growth figures globally. According to market research firm Mintel, unlike the earlier scenario when soda was considered a staple across age groups, it is now considered an occasional treat. The trend holds true for an important target age group of 18 to 36. This trend is reflected in the slowing sales growth across board. Coca-Cola is facing declining soda sales in some major consumption countries like Australia. American consumers are adapting to healthy and natural diets as a result of which they are ditching carbonated drinks for natural drinks or the lesser evils. Mexican Coke made from cane sugar has really caught up with Americans due to its natural source of sucrose, and it is finding a cult following in the country.
Diet sodas are bleeding beverage giants
There is a visibly sharp drop in the sales of low-calorie soft drinks in the U.S. According to data from market research firm EuroMonitor, in the past five years the sales volume of low-calorie sodas has tumbled by almost 20%. This year the diet soda category is expected to drop further by 5%. It is believed that by 2019, the total sales volume of diet soda will be one third of the (peaked) volumes that the segment achieved in 2009. Diet, the coke brand, has been losing its sheen and customer base. A study of top diet brands reveals that Diet Coke, the third top-selling soda in the U.S., has witnessed a drop of 15% in its sales in the past two years.
Diet Pepsi is the second biggest diet brand that has also been hit very badly, with its sales volume plummeting by approximately 35%. In the past decade or so, Diet Coke and Diet Pepsi sales have shrunk by 20%. Even smaller brands like Diet Rite by Texas-based Dr Pepper Snapple Group Inc. (DPS, Financial) and Diet 7-Up have seen a drop of 25% and 33% respectively in the last eight years. Even the Coca-Cola Zero brand which had met with an astounding success after its launch in the early 2000s has seen its sales volume take a dip and come to a halt in recent years. According to Euromonitor, the Coca-Cola Zero brand showed signs of contraction last year.
The diet segment played its part in pulling down the sales volume in 2014 and the annual volume growth of Coca-Cola below 3% for the first time. Coca-Cola’s global sales grew by just 2% in the past fiscal year.
The company launched Coca-Cola Life in Japan earlier in March 2015 assuring consumers of fewer calories and less sugar through the use of stevia leaf extract, a sweetener believed to be better for the body than sugar. But it needs to be seen how much success this new sugar supplement brings to Coca-Cola in the Japanese market.
Mistrust on the sucrose supplement
A growing mistrust of artificial sweetners among the consumers is one of the major issues that the diet segment is battling. There is a surmounting negative sentiment among consumers about artificial sweeteners, and they have the right to be wary of anything that is unknown and not plain original sucrose. Diet sodas have been recently linked to belly fat.
Americans are treating themselves with the original soda
As mentioned earlier, the original product is itself becoming a treat instead of the norm and there is a consumer attitude shift in America wherein people feel that if they are having a carbonated soda once in a while; then why not have the original soda; thereby skipping its diet counterpart.
To add to the problem, most global currencies are depleting against the strengthening dollar and like many other U.S. multinationals, Coca-Cola is also hit by it.
Repairing the holes and revitalizing the ship
The soda category continues to generate approximately 70% of sales volumes for the beverage giant. Taking into account the deplorable state of the diet soda market, the company CEO Muhtar Kent, is concentrating his strategy on the core carbonated drinks category. The marketing budget has been increased for the core products. Coca-Cola is betting high on the Freestyle soda machine which is now installed at 27,000 fast food restaurants in America. The increasing turnout at restaurants will lead to further increase in the portions dispensed by the machine. Efforts are also being made to improve the distribution network. Both these aspects are expected to positively impact the bottom line of the company in the long run. The newly appointed chief marketing officer of Coca-Cola, Marcos de Quinto, is making sure that his entry infuses new life in the company’s promotion mix. The company is on the lookout for its next big global campaign and it has asked the creative agencies to churn out something big after riding on the "Open Happiness"Â campaign for the past six years in more than 200 global markets.
Parting thoughts
The company hopes that the renewed focus on core products, improved distribution network and a fresh lease of life through a new global campaign will help it tide over the troubled waters (contracting diet segment); and the stock will achieve higher single digit earnings growth this year. Let’s stay tuned to watch the impact of these new strategies on its financial numbers in the quarters to come.
