Rapidly changing consumer tastes and buying habits are forcing Coca-Cola to quicken its pace of innovation both within its existing brands and through the acquisition of smaller, "bolt on" companies, the head of the world's largest non-alcoholic beverage maker said Thursday.
James Quincey, Coca-Cola's CEO who took the helm of the beverage giant in May, told participants at the company's investor day that the move away from sugary drinks to better-for-you teas, waters, coffees and other products shows no sign of abating. At the same time, Coca-Cola is facing growth of shopping through e-commerce — prompting the 131-year old business known for its iconic soda to overhaul the breadth of products it offers and the way in which it goes about delivering them.
"We must be much more agile, get things to market quicker, maybe smaller, test, learn; if it don't work, it don't work, move on. ... Speed and not waiting for everything is one of the things we've been trying to do."
Chief executive officer, Coca-Cola
The most glaring example has come in product development. In the past, Coca-Cola and other CPG companies would spend a long time developing a new item, try to perfect it and then roll it out to consumers, the 52-year old said.
"It took a long time and you did relatively few of them, and you bet big on whether it would work or not," Quincey noted during his presentation at Coca-Cola's headquarters in Atlanta. "The future is not going to work like that. We must be much more agile, get things to market quicker, maybe smaller, test, learn; if it don't work, it don't work, move on. ... Speed and not waiting for everything is one of the things we've been trying to do."
Opportunities for M&A
Coca-Cola, founded in 1886 by Atlanta pharmacist John Pemberton, has a long track-record of innovation — many of its 21 brands with more than $1 billion dollars in sales have been developed internally — but it has looked outside for growth recently, mostly on a smaller scale. In early October, Coca-Cola acquired the Topo Chico premium sparkling mineral water brand for $220 million. It also announced in September that it was teaming up with McDonald’s to introduce a line of ready-to-drink McCafe Frappes in grocery stores in early 2018.
More deals are likely on the horizon, Quincey said — without addressing the possibility of an imminent blockbuster transaction. Coca-Cola, which paid $2.15 billion for a 16.7% stake in energy-drink maker Monster Beverage three years ago, has long-been rumored by Wall Street to be a logical acquirer of the rest of the company. In an interview with CNBC on the sidelines of the event, he declined to comment on the possibility of a takeover of Monster. The soda giant's last megadeal was Glaceau, the maker of Vitaminwater, for $4.2 billion in 2007.
"We absolutely continue to believe there are opportunities to pick up some of the smaller companies, great brands, great companies, make them bigger where they are and certainly make them bigger by taking them globally," Quincey noted. "Bolt-on M&A will continue to play a role for us."
Coca-Cola and its chief competitors, PepsiCo and Dr Pepper Snapple, have watched as the carbonated soft drink market — which has fallen for 12 consecutive years — was surpassed by bottled water in 2016 as the largest beverage category in the U.S. Quincey has vowed to turn Coca-Cola into a “total beverage company” and move it beyond just its namesake brands; a point he and other top executives repeatedly stressed Thursday.
"It's not a journey that started this year ... but I think we are being very decisive and assertive in saying we want to go for total beverages," he said.
'Strong innovation engine'
To do that, Coca-Cola is focusing its attention on improving its existing portfolio and adding healthier products to the mix. The company, whose roster of brands include Honest Tea, Dasani water, Minute Maid juice and Powerade sports drink, also is reducing the amount of added sugar in its products, and expects to reformulate more than 500 this year. Its Coca-Cola Zero Sugar, which launched in the U.S. in August, has proven to be an early hit, posting double-digit growth during the most recent quarter compared to a year ago.
Efforts to diversify beyond soda so far appear to be paying off. The Atlanta company gained or maintained share in sparkling soft drinks, juices, sports drinks, and ready-to-drink tea during its most recent quarter. It posted 1% volume growth in both its juice and dairy products as well as its tea and coffee beverages even while soda growth was even. Revenue topped analysts forecasts, a sign its push toward value products and changes in its portfolio are paying early dividends.
Still, despite these efforts, soda is still responsible for about 70% of sales and remains a lucrative part of the company's business.
"It’s show time for Quincey and his management team. We think [Coca-Cola] has the right playbook in place and now management must execute to deliver value for shareholders."
Analyst at Wells Fargo
Bonnie Herzog, an analyst at Wells Fargo who upgraded the stock earlier this week, said Coca-Cola was well-positioned for growth because of positive momentum in North America, improvements overseas, "a strong innovation engine" and "a strengthened portfolio driven by KO’s total beverage approach."
"We continue to believe KO’s best-in-class distribution and strong brand portfolio will allow it to retain its premium valuation and believe that investments in productivity and marketing today will pay off in years to come," she said in a separate report following the investor day. "It’s show time for Quincey and his management team. We think [Coca-Cola] has the right playbook in place and now management must execute to deliver value for shareholders."
During his remarks, Quincey also was quick to criticize soda taxes put in place across the country including Berkeley, California and Philadelphia to raise revenue and encourage consumers to embrace healthier, less sugary drinks that are not tied to obesity and other medical ailments.
"We're clear that we need to be part of the solution," he said. "We obviously have a clear view on narrow taxation not being effective" in solving the obesity problem.
Focus on e-commerce
A theme that frequently was mentioned by Coca-Cola executives at Thursday's investor day, the company's first since 2009, was e-commerce — a presence virtually nonexistent eight years ago that has morphed today into everything from meal-kits and direct-to-consumer shipments to voice activation and the growing presence of Amazon.
Coca-Cola has a tried a few experiments going straight to the shopper, but for now sees a future where it will predominately continue to sell to its retail or foodservice customers, who then offer the beverages with their services — such as a traditional supermarket with online operations or a meal-kit or storage locker provider that suggests pairing a drink with the order.
"We're really focused on e-commerce," said Jim Dinkins, Coca-Cola's incoming president for its North American operations. "The consumer's in charge and the marketplace is evolving, and we're going to continue to evolve in North America to make sure that we're capturing all the opportunities."