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Why Coca-Cola Still Dominates The Beverage Market - YouTube
Channel: CNBC
[6]
With more than 1.9 billion
drinks served every day, Coca
[9]
Cola is one of the world's
largest beverage companies. From
[13]
its humble beginnings selling a
single product at a drugstore
[16]
for five cents a glass, the
company now has a roster of 200
[19]
brands that includes Coke,
Fanta, and Sprite. But with US
[23]
soda consumption on the decline,
the soft drink maker has been
[26]
forced to pivot. In 2021, Coke
launched Topo Chico hard
[31]
seltzer, the company's first
move into alcoholic beverages in
[34]
the US in almost four decades.
The company has also made recent
[39]
investments into the sports
performance drink category with
[41]
Body Armor and the purchase of
UK coffeemaker Costa. And while
[46]
the pandemic has caused major
disruptions in the first quarter
[49]
of 2021 Coke reported net
revenue was up 5% to $9 billion
[53]
dollars.
[54]
We were very focused over the
last 12 months on focusing on
[57]
really improving our marketing,
we cut the portfolio of brands
[60]
in half. We got really focused
on our innovation pipeline, we
[64]
work with our bottlers to really
support the customers in new and
[68]
different ways where they're
open. And the sum of all that,
[71]
along with a new organization
we've stood off has allowed us
[74]
as you say, to come back to the
pre pandemic levels.
[77]
Coke is eagerly anticipating
some reopenings and vaccine
[80]
rollouts. In the meantime, it
faces a number of challenges,
[84]
including further COVID-19
disruptions and ongoing tax
[87]
litigation with the IRS. In
November 2020, a US tax court
[92]
said that Coca Cola had to pay
the bulk of its $3.4 billion tax
[96]
bill. Coke said it would
ultimately prevail in litigation
[100]
with the IRS, but that is
potential liability could be as
[103]
high as $12 billion. So after
135 years in business, can the
[108]
soft drink giant stay on top?
And what will the secular
[111]
decline of sugar sweetened
beverages in the US mean for the
[114]
future of Coca Cola?
[119]
Coca Cola traces its history to
a soda fountain in Atlanta,
[123]
Georgia. In 1886, pharmacist
John Pemberton created a carmel
[128]
colored syrup took the mixture
to a nearby drugstore, where
[131]
carbonated water was added, and
the drink sold for five cents a
[135]
glass. According to author Mark
Pendergrast, the mixture
[138]
contained caffeine, lots of
sugar, and for the first few
[141]
years, a small amount of extract
from coke leaves, in other
[144]
words, cocaine.
[145]
And at first, their ads were
primarily promoting it as a
[150]
medicine. It was supposed to
cure morphine addiction for one
[158]
thing, which it did not in
Pemberton's case unfortunately,
[163]
but it was supposed to be an
aphrodisiac. It was supposed to
[166]
cure basically whatever ails
you.
[169]
In 1888, Pemberton began to sell
the recipe to a well capitalized
[173]
businessmen named Asa Candler,
and by 1895 Coca Cola was
[177]
available in every state in the
US. By the turn of the century,
[182]
Coca Cola adverts were appearing
on clocks, trays, and posters
[185]
and the drink was moving from
soda fountains and into bottles.
[189]
The company's advertising budget
reach a million dollars in 1911,
[192]
the equivalent of about $27
million today,
[195]
And that became wildly
successful by 1900-1910, there
[201]
were Coca Cola bottling plants
in every small town not only in
[206]
the south, but throughout the
country.
[208]
By the 1920s and 30s, Coca Cola
had reinvented itself as an all
[212]
American soft drink and was
entering new markets abroad.
[216]
Exempted from sugar rationing
during World War Two and in
[219]
support of GIs, the company
since 64 portable bottling
[223]
plants around the globe,
distributing more than 5 billion
[226]
bottles of Coca Cola. And it
wasn't just Americans who are
[229]
hooked on sugary drinks.
According to Pendergrast's book
[232]
for 'God Country and Coca Cola',
in Germany with the supply of
[236]
key ingredients being curtailed
due to the war, local operators
[239]
invented a new drink Fanta. The
flavored beverage the first new
[243]
product from the company
eventually made its way to the
[246]
US in 1960. Coke produced a slew
of other new innovations too. In
[251]
1960, steel 12 ounce cans were
introduced, in 1963 tab, the
[256]
company's first diet drink
launched in 1971. The 'I'd like
[260]
to Buy the World of Coke'
commercial aired, and 1982 saw
[263]
the debut of diet coke. In 1985,
in an attempt to boost sales and
[268]
compete with rival Pepsi in the
soda wars, the company
[271]
reformulated its classic soda
and launched New Coke. The move
[275]
was a major misstep, with
widespread disapproval from fans
[278]
and pundits alike. Just 79 days
after the soda was launched the
[281]
company reversed course and the
original formula was reinstated.
[285]
And while the consumption of
sugar sweetened beverages in the
[287]
US was rising during the 1990s,
the company was about to face an
[291]
even bigger threat. In the early
2000s, health and wellness
[295]
concerns rose to the top of most
consumers agenda. Soda
[298]
consumption began to decline.
[300]
The peak happened around in the
early 2000s from a consumption
[303]
standpoint, if you look at per
capita consumption, and then
[306]
it's it's been declining ever
since.
[308]
At the same time that we started
to see, carbonated soft drinks
[312]
decline in consumption was about
the same time that we started to
[314]
see increased concerns about
sugars and simple carbohydrates.
[319]
But despite that drop Americans
and people everywhere were still
[322]
hooked on soda. Between 2011 and
2014, almost half of us adults
[327]
were drinking at least one sugar
sweetened beverage a day.
[332]
The soda market in the US is a
$38.5 billion dollar business
[336]
according to IBISWorld and
includes companies like PepsiCo,
[339]
Keurig Dr. Pepper, and of course
Coca Cola. With consumers mostly
[344]
stuck at home forgoing
restaurants, concerts, and
[346]
sporting events, the pandemic
has been a mixed bag for soft
[349]
drink makers. PepsiCo announced
first quarter 2021 net sales
[354]
reach more than $14.8 billion
almost 7% higher than a year
[358]
earlier, fueled by pandemic
snacking in its Frito Lay
[361]
division and higher sales of
drinks like Bubly sparkling
[364]
water and Starbucks ready to
drink coffees. With more people
[368]
reaching for a caffeine fix
while working out of their home
[370]
office, Keurig Dr. Pepper's
coffee business got a jolt too.
[374]
The company announced first
quarter 2021 net sales of $2.9
[378]
billion more than 11% higher
than the prior year. And while
[382]
Coca Cola saw 2020 net revenue
decline 11%, the soft drink
[386]
maker bounced back with first
quarter 2021 net revenue of $9
[390]
billion up 5% from a year
earlier.
[393]
Coca Cola has really been hit
hard by the pandemic and it's
[397]
definitely not out of the woods
yet.
[399]
Whilst there is uncertainty and
volatility particularly in the
[403]
near term ahead of us we feel
confident about the corridors
[407]
what we're setting for the top
line and the bottom line
[409]
guidance, and we believe that we
will be able to emerge stronger
[413]
from this crisis.
[414]
A major issue for the soda
giant. According to one analyst,
[418]
Coke has more exposure to
restaurants like McDonald's and
[421]
sports venues than its peers
PepsiCo or Keurig Dr. Pepper.
[424]
What that means is they had a
lot of market share to lose in
[428]
those channels. And so as those
channels closed, they had
[432]
obviously disproportionate
impact in terms of their
[434]
revenues and their market share.
[437]
To make up for that loss, the
soft drink maker slashed its
[440]
global workforce in 2020 by
about 11% and trimmed its roster
[444]
of brands from 400 to 200. Tab,
the company's first diet soda
[449]
was culled. But Coca Cola has
several key advantages that will
[452]
allow the company to
reinvigorate its business
[455]
according to analysts. For
starters, Coke's diverse
[458]
geographic position should
provide the company with a
[460]
steady stream of growth. Coca
Cola products are sold in more
[464]
than 200 countries and
territories worldwide. Coke also
[468]
has one of the world's largest
non alcoholic beverage
[471]
distribution systems and derives
more than 40% of sales from
[474]
developing and emerging
economies with a growing middle
[477]
class. In 2020, Coca Cola had
net operating revenue of $33
[481]
billion, almost 66% of that came
from outside the US. In
[486]
developed markets where Coke is
firmly established and
[489]
competition is rife. The company
has proven profit growth
[492]
strategies driven by innovation.
[494]
Even in the US as soda
consumption has been declining,
[498]
the value of the category has
still been been increasing.
[501]
According to Johnson, one
strategy coke uses is price pack
[504]
architecture, which generally
refers to consumers willingness
[507]
to pay extra for packaging
innovations. In Coke's case, it
[511]
discovered consumers not only
preferred smaller size drinks,
[514]
but were willing to pay more per
ounce for them. Another key
[518]
advantage Coke has positioned
itself in an area of the supply
[521]
chain that is less capital
intensive and requires less
[524]
labor and overhead than rival
beverage companies like Pepsi.
[528]
Most of Coke's trademark
beverages are not packaged and
[531]
delivered by the company. In
general, Coke focuses its
[534]
operations on producing the
concentrate for its beverages
[537]
and ships those mixtures to
bottlers for processing
[539]
packaging and distribution.
[545]
In 2020, environmental group
Break Free From Plastic took a
[548]
global audit of plastic trash
working with almost 15,000
[552]
volunteers in 55 countries
collecting plastic bottles,
[555]
coffee cup lids, shampoo
bottles, and surgical masks in a
[559]
two month cleanup. The group
said that for the third year in
[562]
a row soft drink giant Coca Cola
emerged as a top global polluter
[566]
with almost 14,000 Coca Cola
branded plastics collected in 51
[570]
countries. According to
Greenpeace as of 2018, Coca Cola
[574]
has produced over 110 billion
single use plastic bottles. The
[578]
environmental group estimates
than in the decade leading up to
[581]
2018, Coca Cola increased the
number of single use plastic
[585]
bottles by about a third
accounting for almost 70% of
[588]
Coke's packaging globally. While
Coca Cola is not the only
[592]
multinational corporation that
relies on plastic packaging, the
[596]
company's size illustrates the
scale of the problem. Other top
[600]
polluters according to Break
Free From Plastic include
[602]
PepsiCo, Nestle, Unilever,
Mondelez International, and
[606]
Mars. According to a report by
the World Economic Forum, at
[610]
least 8 million tonnes of
plastic enters the ocean each
[613]
year, the equivalent of dumping
the contents of an entire
[616]
garbage truck into the ocean
every minute, plastic packaging
[620]
makes it the largest share of
this problem. To do its part in
[624]
2018, Coca Cola announced it
would use at least 50% recycled
[627]
material in its bottles and cans
by 2030. And by the same date,
[631]
collect or recycle a bottle or
can for each one it sells. The
[635]
company also launched a plastic
bottle made up of 30% plant
[638]
based materials in 2009. And in
2020, Coca Cola partnered with
[643]
Danish startup Pabaco to develop
an 100% paper bottle, that
[647]
project is in its infancy, But
critics argue that due to the
[650]
high costs associated with
recycling, and with less than
[653]
30% of plastic bottles in the US
recycled, those efforts might
[657]
not be enough.
[658]
Another criticism Coca Cola is
faced is over its water use
[662]
about a third of Coca Cola
bottling plants operate in water
[665]
stressed areas and more than 73%
of the water used by the company
[668]
goes to growing ingredients like
cane sugar, oranges, and apples.
[673]
To improve water efficiency, the
company reduced or removed water
[676]
using its manufacturing process.
In 2004, Coke was using 2.7
[681]
liters of water to make one
liter of product. By 2018, it
[684]
was using 1.92 liters of water
to make one liter of product.
[688]
The company also announced in
2016, that by replenishing
[691]
watersheds and partnering with
organizations, it was returning
[695]
100% of the water used in its
drinks back to the environment
[698]
and to local communities.
[703]
With the pandemic slowing down
its North American fountain
[706]
business and its western Europe
away from home channels, Coke
[709]
saw 4% decline in the sale of
sparkling soft drinks in 2020.
[713]
Clearly the consumers have
adapted and the ones that I
[716]
think are very likely to stick
are clearly a big uptick in e
[720]
commerce. And obviously e
commerce is much more important
[723]
to a number of other sectors
it's really started to
[726]
accelerate in terms of grocery
in terms of beverages, I think
[729]
that will endure and I don't
mean ecommerce just in terms of
[732]
what you buy, to have delivered
to the house but also in the
[737]
away from home channels. The
amount of takeaway the amount of
[741]
delivery,
[741]
But it may be new product
offerings that have the biggest
[744]
impact for the soft drink maker.
Roughly 25% of Coca Cola's
[748]
revenue was generated from new
or reformulated products like
[751]
Coke Zero and Coke Energy in
2020 compared with roughly 15%
[755]
two years ago, according to
Morningstar. In 2021, Cok
[759]
launched Topo Chico hard seltze
the company's first move int
[763]
alcoholic beverages on its hom
turf in almost four decades. I
[767]
2019, hard seltzers volume mor
than tripled
[769]
Bery early days for Topo Chico
hard seltzer in certain
[773]
countries in Latin America and
also Europe, but we're very
[775]
exciting. Good consumer
reaction, good customer action,
[778]
good rates of sale, very early
days and coming very soon to the
[782]
US.
[783]
The company is investing other
categories too. In 2018, Coca
[786]
Cola acquired a minority
ownership stake in sports drink
[789]
maker Body Armor and in 2019,
Coca Cola completed its $4.9
[794]
billion acquisition for Costa.
Costa has over 4000 coffee shops
[798]
in Europe, Asia, and the Middle
East, and offers everything from
[802]
vending machines to ready to
drink products.
[804]
The coffee segment globally is
growing 6% annually. And with
[808]
health and wellness concerns at
the top of most people's agenda,
[810]
it could be innovations in the
soft drink makers traditional
[813]
soda business that brings in
some of the biggest gains.
[816]
There are consumers shifting
towards lower calorie beverages
[820]
and we're certainly behind that
trend Coke Zero Sugar not just
[823]
is growing in 2021 in the first
quarter, but actually grew in
[827]
2020.
[828]
And while Coke might not recover
as quickly as its peers, because
[831]
much of its business is outside
of the US where vaccine rollout
[834]
and economic conditions remain
uncertain, analysts say the
[838]
company can expect a strong
recovery.
[840]
Globally, the rate of
vaccination, the rate of
[843]
reopening all that is going to
vary by country it'll very much
[845]
translate into Coke's business
and so it definitely will not be
[848]
a linear recovery for Coca Cola,
but a strong recovery
[851]
nonetheless, we expect in 2021.
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