With more than 1.9 billion
drinks served every day, Coca Cola is one of the world's
largest beverage companies. From its humble beginnings selling a
single product at a drugstore for five cents a glass, the
company now has a roster of 200 brands that includes Coke,
Fanta, and Sprite. But with US soda consumption on the decline,
the soft drink maker has been forced to pivot. In 2021, Coke
launched Topo Chico hard seltzer, the company's first
move into alcoholic beverages in the US in almost four decades.
The company has also made recent investments into the sports
performance drink category with Body Armor and the purchase of
UK coffeemaker Costa. And while the pandemic has caused major
disruptions in the first quarter of 2021 Coke reported net
revenue was up 5% to $9 billion dollars. We were very focused over the
last 12 months on focusing on really improving our marketing,
we cut the portfolio of brands in half. We got really focused
on our innovation pipeline, we work with our bottlers to really
support the customers in new and different ways where they're
open. And the sum of all that, along with a new organization
we've stood off has allowed us as you say, to come back to the
pre pandemic levels. Coke is eagerly anticipating
some reopenings and vaccine rollouts. In the meantime, it
faces a number of challenges, including further COVID-19
disruptions and ongoing tax litigation with the IRS. In
November 2020, a US tax court said that Coca Cola had to pay
the bulk of its $3.4 billion tax bill. Coke said it would
ultimately prevail in litigation with the IRS, but that is
potential liability could be as high as $12 billion. So after
135 years in business, can the soft drink giant stay on top?
And what will the secular decline of sugar sweetened
beverages in the US mean for the future of Coca Cola? Coca Cola traces its history to
a soda fountain in Atlanta, Georgia. In 1886, pharmacist
John Pemberton created a carmel colored syrup took the mixture
to a nearby drugstore, where carbonated water was added, and
the drink sold for five cents a glass. According to author Mark
Pendergrast, the mixture contained caffeine, lots of
sugar, and for the first few years, a small amount of extract
from coke leaves, in other words, cocaine. And at first, their ads were
primarily promoting it as a medicine. It was supposed to
cure morphine addiction for one thing, which it did not in
Pemberton's case unfortunately, but it was supposed to be an
aphrodisiac. It was supposed to cure basically whatever ails
you. In 1888, Pemberton began to sell
the recipe to a well capitalized businessmen named Asa Candler,
and by 1895 Coca Cola was available in every state in the
US. By the turn of the century, Coca Cola adverts were appearing
on clocks, trays, and posters and the drink was moving from
soda fountains and into bottles. The company's advertising budget
reach a million dollars in 1911, the equivalent of about $27
million today, And that became wildly
successful by 1900-1910, there were Coca Cola bottling plants
in every small town not only in the south, but throughout the
country. By the 1920s and 30s, Coca Cola
had reinvented itself as an all American soft drink and was
entering new markets abroad. Exempted from sugar rationing
during World War Two and in support of GIs, the company
since 64 portable bottling plants around the globe,
distributing more than 5 billion bottles of Coca Cola. And it
wasn't just Americans who are hooked on sugary drinks.
According to Pendergrast's book for 'God Country and Coca Cola',
in Germany with the supply of key ingredients being curtailed
due to the war, local operators invented a new drink Fanta. The
flavored beverage the first new product from the company
eventually made its way to the US in 1960. Coke produced a slew
of other new innovations too. In 1960, steel 12 ounce cans were
introduced, in 1963 tab, the company's first diet drink
launched in 1971. The 'I'd like to Buy the World of Coke'
commercial aired, and 1982 saw the debut of diet coke. In 1985,
in an attempt to boost sales and compete with rival Pepsi in the
soda wars, the company reformulated its classic soda
and launched New Coke. The move was a major misstep, with
widespread disapproval from fans and pundits alike. Just 79 days
after the soda was launched the company reversed course and the
original formula was reinstated. And while the consumption of
sugar sweetened beverages in the US was rising during the 1990s,
the company was about to face an even bigger threat. In the early
2000s, health and wellness concerns rose to the top of most
consumers agenda. Soda consumption began to decline. The peak happened around in the
early 2000s from a consumption standpoint, if you look at per
capita consumption, and then it's it's been declining ever
since. At the same time that we started
to see, carbonated soft drinks decline in consumption was about
the same time that we started to see increased concerns about
sugars and simple carbohydrates. But despite that drop Americans
and people everywhere were still hooked on soda. Between 2011 and
2014, almost half of us adults were drinking at least one sugar
sweetened beverage a day. The soda market in the US is a
$38.5 billion dollar business according to IBISWorld and
includes companies like PepsiCo, Keurig Dr. Pepper, and of course
Coca Cola. With consumers mostly stuck at home forgoing
restaurants, concerts, and sporting events, the pandemic
has been a mixed bag for soft drink makers. PepsiCo announced
first quarter 2021 net sales reach more than $14.8 billion
almost 7% higher than a year earlier, fueled by pandemic
snacking in its Frito Lay division and higher sales of
drinks like Bubly sparkling water and Starbucks ready to
drink coffees. With more people reaching for a caffeine fix
while working out of their home office, Keurig Dr. Pepper's
coffee business got a jolt too. The company announced first
quarter 2021 net sales of $2.9 billion more than 11% higher
than the prior year. And while Coca Cola saw 2020 net revenue
decline 11%, the soft drink maker bounced back with first
quarter 2021 net revenue of $9 billion up 5% from a year
earlier. Coca Cola has really been hit
hard by the pandemic and it's definitely not out of the woods
yet. Whilst there is uncertainty and
volatility particularly in the near term ahead of us we feel
confident about the corridors what we're setting for the top
line and the bottom line guidance, and we believe that we
will be able to emerge stronger from this crisis. A major issue for the soda
giant. According to one analyst, Coke has more exposure to
restaurants like McDonald's and sports venues than its peers
PepsiCo or Keurig Dr. Pepper. What that means is they had a
lot of market share to lose in those channels. And so as those
channels closed, they had obviously disproportionate
impact in terms of their revenues and their market share. To make up for that loss, the
soft drink maker slashed its global workforce in 2020 by
about 11% and trimmed its roster of brands from 400 to 200. Tab,
the company's first diet soda was culled. But Coca Cola has
several key advantages that will allow the company to
reinvigorate its business according to analysts. For
starters, Coke's diverse geographic position should
provide the company with a steady stream of growth. Coca
Cola products are sold in more than 200 countries and
territories worldwide. Coke also has one of the world's largest
non alcoholic beverage distribution systems and derives
more than 40% of sales from developing and emerging
economies with a growing middle class. In 2020, Coca Cola had
net operating revenue of $33 billion, almost 66% of that came
from outside the US. In developed markets where Coke is
firmly established and competition is rife. The company
has proven profit growth strategies driven by innovation. Even in the US as soda
consumption has been declining, the value of the category has
still been been increasing. According to Johnson, one
strategy coke uses is price pack architecture, which generally
refers to consumers willingness to pay extra for packaging
innovations. In Coke's case, it discovered consumers not only
preferred smaller size drinks, but were willing to pay more per
ounce for them. Another key advantage Coke has positioned
itself in an area of the supply chain that is less capital
intensive and requires less labor and overhead than rival
beverage companies like Pepsi. Most of Coke's trademark
beverages are not packaged and delivered by the company. In
general, Coke focuses its operations on producing the
concentrate for its beverages and ships those mixtures to
bottlers for processing packaging and distribution. In 2020, environmental group
Break Free From Plastic took a global audit of plastic trash
working with almost 15,000 volunteers in 55 countries
collecting plastic bottles, coffee cup lids, shampoo
bottles, and surgical masks in a two month cleanup. The group
said that for the third year in a row soft drink giant Coca Cola
emerged as a top global polluter with almost 14,000 Coca Cola
branded plastics collected in 51 countries. According to
Greenpeace as of 2018, Coca Cola has produced over 110 billion
single use plastic bottles. The environmental group estimates
than in the decade leading up to 2018, Coca Cola increased the
number of single use plastic bottles by about a third
accounting for almost 70% of Coke's packaging globally. While
Coca Cola is not the only multinational corporation that
relies on plastic packaging, the company's size illustrates the
scale of the problem. Other top polluters according to Break
Free From Plastic include PepsiCo, Nestle, Unilever,
Mondelez International, and Mars. According to a report by
the World Economic Forum, at least 8 million tonnes of
plastic enters the ocean each year, the equivalent of dumping
the contents of an entire garbage truck into the ocean
every minute, plastic packaging makes it the largest share of
this problem. To do its part in 2018, Coca Cola announced it
would use at least 50% recycled material in its bottles and cans
by 2030. And by the same date, collect or recycle a bottle or
can for each one it sells. The company also launched a plastic
bottle made up of 30% plant based materials in 2009. And in
2020, Coca Cola partnered with Danish startup Pabaco to develop
an 100% paper bottle, that project is in its infancy, But
critics argue that due to the high costs associated with
recycling, and with less than 30% of plastic bottles in the US
recycled, those efforts might not be enough. Another criticism Coca Cola is
faced is over its water use about a third of Coca Cola
bottling plants operate in water stressed areas and more than 73%
of the water used by the company goes to growing ingredients like
cane sugar, oranges, and apples. To improve water efficiency, the
company reduced or removed water using its manufacturing process.
In 2004, Coke was using 2.7 liters of water to make one
liter of product. By 2018, it was using 1.92 liters of water
to make one liter of product. The company also announced in
2016, that by replenishing watersheds and partnering with
organizations, it was returning 100% of the water used in its
drinks back to the environment and to local communities. With the pandemic slowing down
its North American fountain business and its western Europe
away from home channels, Coke saw 4% decline in the sale of
sparkling soft drinks in 2020. Clearly the consumers have
adapted and the ones that I think are very likely to stick
are clearly a big uptick in e commerce. And obviously e
commerce is much more important to a number of other sectors
it's really started to accelerate in terms of grocery
in terms of beverages, I think that will endure and I don't
mean ecommerce just in terms of what you buy, to have delivered
to the house but also in the away from home channels. The
amount of takeaway the amount of delivery, But it may be new product
offerings that have the biggest impact for the soft drink maker.
Roughly 25% of Coca Cola's revenue was generated from new
or reformulated products like Coke Zero and Coke Energy in
2020 compared with roughly 15% two years ago, according to
Morningstar. In 2021, Cok launched Topo Chico hard seltze
the company's first move int alcoholic beverages on its hom
turf in almost four decades. I 2019, hard seltzers volume mor
than tripled Bery early days for Topo Chico
hard seltzer in certain countries in Latin America and
also Europe, but we're very exciting. Good consumer
reaction, good customer action, good rates of sale, very early
days and coming very soon to the US. The company is investing other
categories too. In 2018, Coca Cola acquired a minority
ownership stake in sports drink maker Body Armor and in 2019,
Coca Cola completed its $4.9 billion acquisition for Costa.
Costa has over 4000 coffee shops in Europe, Asia, and the Middle
East, and offers everything from vending machines to ready to
drink products. The coffee segment globally is
growing 6% annually. And with health and wellness concerns at
the top of most people's agenda, it could be innovations in the
soft drink makers traditional soda business that brings in
some of the biggest gains. There are consumers shifting
towards lower calorie beverages and we're certainly behind that
trend Coke Zero Sugar not just is growing in 2021 in the first
quarter, but actually grew in 2020. And while Coke might not recover
as quickly as its peers, because much of its business is outside
of the US where vaccine rollout and economic conditions remain
uncertain, analysts say the company can expect a strong
recovery. Globally, the rate of
vaccination, the rate of reopening all that is going to
vary by country it'll very much translate into Coke's business
and so it definitely will not be a linear recovery for Coca Cola,
but a strong recovery nonetheless, we expect in 2021.
