As the world’s biggest beverage company and arguably the best-known brand on the planet, Coca-Cola would seem to have little need to look to others to continue its dominance.
Drill down into the numbers on individual beverage segments, however, and it becomes clear that Coke — to borrow one of the company’s past advertising slogans — is not “it” in every category. That’s especially true in North America, its largest market.
While Coke leads in soft drinks, the segment with the biggest sales in non-alcoholic beverages, it lags in market share in the fast-growing tea, coffee and energy drink categories.
That, in part, explains continued speculation that the Atlanta-based beverage giant wants to buy Monster, the energy drink behemoth.
The issue popped up again a few weeks ago when the Wall Street Journal said Coke was in talks to buy Monster, sending the energy drink company’s shares skyrocketing. Coke responded by saying it was not in discussions on a deal “at this time” but continued to review its relationship with the brand. Coke has a distribution deal to supply half of Monster’s products to stores.
Moving the needle in categories it does not lead in is one of the priorities in Coke’s 2020 Vision — its road map for the next eight years and meeting goals that include doubling revenue — states that the company wants to be No. 1 in every segment “that’s of value to us.” The phrase is a qualifier the company tacks on to give it wiggle room in business it no longer sees as profitable, like its partnership with French water company Dannon.
This is important because consumption of soft drinks is falling while rising for other products, including water and energy drinks. Soft drink consumption per capita is down 150 eight-ounce servings from its 1998 peak, according to figures from industry observer Beverage Digest. In 2010, bottled water moved ahead of milk and beer as the nation’s second most popular beverage choice.
One reason for Coke’s struggles: The company excels at its core business — the soft drinks it has been making since the company’s founding — but has not been as adept in newer categories, experts say. As examples, they point to the company’s success with Coke Zero, one of the nation’s top- selling drinks, and its failure with Coke Blak, its coffee experiment from 2006.
Experts also say Coke has not been as nimble in recognizing changes in consumers’ tastes, playing catch-up on energy drinks and teas. While tea companies Arizona and Snapple were creating a market, Coke offered Honest Tea — an acquisition — and a joint venture with Nestea to compete. But their entry was late.
“They just never were able to keep pace,” said Michael C. Bellas, chairman and chief executive officer of Beverage Marketing Corp., a consulting and data firm. “It was one priority in a massive product line.”
Others argue that Coke’s strategy is to let entrepreneurs take the risks, create the market and then swoop in and buy them when demand is sufficient, a theory central to the Monster rumors.
While Coke has its own energy drinks in Full Throttle and Nos, their combined 5.4 percent market share is a blip compared to Monster’s 34.8 percent, according to Beverage Digest figures. In fact, the market share of energy drinks from Coke and archrival Pepsi are less than those of third-place entrant Rockstar, which has an 18.7 percent share. Red Bull, the second place player, has a 29.5 percent share.
Even after denying talks with Monster, analysts, noticing Coke’s statement left the door open to a future acquisition, pounced on that potential.
UBS analyst Kaumil S. Gajrawala said in research notes that a deal remains possible over the long run, but that Coke needed to act quickly.
“We believe it would be in Coca-Cola’s best interest to act before Monster rolls into Asia and Latin America in a more meaningful way,” Gajrawala said. “We believe past negotiations were impeded by disagreement over price and viability of Monster as a global trademark.”
To be fair, the experts said Coke has made strides toward moving more quickly to catch on to new trends. The company created a Venturing and Emerging Brands unit five years ago to be on the ground scouting the country for new products and picking up on the latest consumer rages.
And John Sicher, editor and publisher of Beverage Digest, said it’s no secret that large consumer product companies struggle to create and grow small brands and Coke is no exception. Unlike Monster or Honest Tea, giants such as Coke, Pepsi and Dr Pepper Snapple, have their eyes on multiple balls.
“But Coke’s Venturing and Emerging Brands Office is specifically designed to deal with that challenge and Coke is focusing a lot of effort on how to acquire and grow small brands,” Sicher said.
The company itself will point out that it has moved the needle in areas in which it did not have a strong foothold a decade ago. In bottled water, Dasani recently took No. 1 honors in the category against Aquafina, the former champion from Pepsi. However, Nestle Waters has the largest share of the overall market when sales of its seven brands are combined.
And Coke leads in the enhanced or flavored water segment, thanks its ownership of Smartwater and Glaceau, the maker of Vitaminwater, which the company bought in 2007 for $4.1 billion. It also has seen Simply Orange, its premium orange juice that it created, take the No. 1 spot in its category in the nation, watched Gold Peak tea drive almost half the growth in the category in 2011, and celebrated as Powerade improved sales 13 percent in the first quarter of 2012. Gold Peak and Powerade also are brands Coke created.
Additionally, the company has announced a Fuze tea line it hopes will bolster its opportunities in the segment.
“One of the most important parts of our strategy is to accelerate the growth of our core Coca-Cola trademark and other iconic brands,” said Coke spokesman Scott Williamson.
But even with a full court press, the company has an uphill battle to become No. 1 across the board, Bellas said. Coke will need its competitors to make huge missteps or cede their positions for Coke to take the lead.
“Look at how hard it has been for them to catch up to Gatorade,” he said. “Powerade has been around for 20 years and they are just beginning to gain market share.”
John Faucher, an analyst with JP Morgan, said the problem is not one of will, but one of focus. With more than 500 brands globally under its belt (it had about 300 brands a decade ago), Coke will find it incredibly hard to duplicate what Monster did with any brand that it launches on its own, especially in areas that are not its core.
“There is something to be said about focus,” he said. “A company with the kind of focus Monster has had will be able to market better because they live it every day.”
Therefore Coke has to figure out whether it wants to roll the dice and start something on its own — which products such as Full Throttle suggests it has trouble gaining traction with — or buying something like Monster or Glaceau, which is costly and may take several years to recoup its investment.
And while Coke would probably like to be No. 1 in every category, it’s probably unrealistic.
“What you want is to be competitive and gaining share in all those markets,” he said.
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