Case study: Coca-Cola

The story
Coca-Cola is the world’s best-known beverage company. It traditionally manufactured concentrates, syrups and powders and sold them to authorised bottling partners, who converted them to finished products and sold them to distributors, wholesalers and retailers. Its core product offering is sparkling beverages but also includes still beverages such as water, juice and energy drinks.

From its inception, the company was based on a franchise model – the “Coca-Cola System” – whereby Coca-Cola would sell concentrate to its many bottling partners worldwide. While Coca-Cola managed the overall brand strategy, concentrate production and some large multinational customers such as McDonald’s, the bottlers manufactured the final branded products, handled merchandising and distribution, and worked closely with local customers.

The challenge
In developed markets, the growth of the sparkling drinks industry from the 1970s to the 1990s came to a halt.

At the same time, competition was intensifying from beverage companies that produced still and health-oriented drinks, as consumers became more health-conscious. Many of the challengers were small businesses, enabling them to be more nimble and innovative than multinational organisations like Coca-Cola.

The company’s franchise business model was also under pressure. The bottlers’ incentive was to use the precious concentrate in low-volume, high-margin products, whereas Coca-Cola’s profits were linked solely to the volume of concentrate sold to bottlers, rather than the price paid by customers. This was creating increased friction in the relationship between Coca-Cola and the partners on whom it relied.

An additional challenge was responding to the environmental impact of transportation and packaging.

The response
First, Coca-Cola focused on rejuvenating its core product line. The successful launch of Coke Zero, a diet variation of the drink pitched at men (Diet Coke or Coke Light is principally aimed at women) added volume and revenue growth.

Second, the company made key acquisitions in the non-carbonated drinks sector to expand its presence in the growing market. These included a deal for Glaceau, maker of Vitaminwater, and a stake in Honest Tea, the organic iced tea producer.

Third, the company co-operated more closely with its partners. Coca-Cola recognised that many of the bottling companies had become big businesses in their own right, with independent shareholders to worry about, and tried to find new ways of working together to the advantage of both sides.

For example, an “incidence” approach to pricing was used more often, whereby both Coca-Cola and the bottler shared in the profit made by the combined system, rather than a fixed price per unit for concentrate.

Fourth, Coca-Cola acquired the bottling operations of CCE, its US bottler. This was significant because it signalled that the company was moving away from a one-size-fits-all-markets business model. The franchise system might have worked when the company produced just one product, but as its output expanded to include every non-alcoholic beverage category, it had to evolve.

Finally, Coca-Cola embraced sustainability with initiatives to conserve water in its manufacturing, materials in its packaging and even electricity in the millions of coolers it has dotted around the world.

Key lessons
First, growth can be found in mature or stable categories. The success of Coke Zero underlines that. Rather than focus exclusively on categories where other companies are growing fast, companies should consider how they can rejuvenate core businesses.

Second, companies should be flexible with regard to their business model. To drive innovation in the US, Coke needed to change the way its products were manufactured and distributed.
- Financial Times, 19 Jan 2011