COMMENT: Is Coke losing its fizz?

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Coca-Cola recently reported 2001 earnings up 82%, but the company has suffered badly on Wall Street in the last year as confidence in its future runs uncharacteristically low. As carbonate sales fall and its marketing gets slammed, Chris Brook-Carter looks for evidence of Coke's returning bubble.

Any CEO able to report a rise in yearly earnings of 82% and an almost three-fold increase in fourth quarter earnings should be feeling pretty good about himself, or so you would think. However Coca-Cola's CEO, Douglas Daft, is coming under increasing pressure, so much so in fact that the well-known business magazine Forbes ran an article on its website this week entitled, Would another CEO go better with Coke?

On the face of it Daft should have noting to worry about. Coke reported net income of US$3.97 billion for the year last week, compared to US$2.18 billion in 2000 and earnings per share totalled US$1.60, the first reported increase in four years.

And yet, the results announcement was greeted by a 2.7% decline in Coke's share price and dissatisfied rumblings from analysts and the press, as investors latched onto sluggish sales volumes and a warning that volume growth is likely to be at the lower end of expectations in 2002.

The problem is threefold. Despite Daft's successes in non-carbonates and an ongoing dispute with bottler Coca-Cola Enterprises, since he took charge of the company, sales growth has slowed, the company's marketing has faltered and the market for its flagship cola brand appears to be in terminal decline.

To make matters worse, Coke's 2001 earnings are not all they are cracked up to be and the earnings leap in 2001 relies in part on 2000 results that were dragged down by one-off costs related to a racial law suit the company faced and a major restructuring process.

It is difficult to see how Coke might turn round its volumes problems, particularly for its cola brand. Coke says it expects growth of 4-5% worldwide for 2002, but Daft has already admitted that the figures will probably fall towards the lower end of that range. "We are living in a very challenging economic environment," he said.

Volume growth is seen as such a key indicator of health in the beverage industry that these figures are deeply worrying for Coke and its investors. And to make matters worse the biggest cause for concern is the US, Coke's largest market. For 2001 North American volumes rose only 2% - flat compared to last year - and Coke lowered 2001 targets largely in anticipation of this fall.

Furthermore, Coke has not done itself any favours on Wall Street by failing to meet its initial sales estimates. In December Coke said it would produce between 4 and 5% volume growth, it actually achieved only 4%. However, this included volumes gained by the Cosmos acquisition. And, many analysts are predicting that volumes for 2002 may be as low as 4%, below Coke's targets.

And yet Daft may not yet be drinking in last chance saloon. Non carbonates grew 22% in 2001 and Coke is finally waking up to the fact that it must try and keep up with rival PepsiCo in diversifying away from cola and carbonates.

"Coke must continue diversifying, especially in the North American market. The Odwalla purchase in October and a planned 'nutraceutical' extension for the Dasani bottled water brand are indications that Coke is heading in the right direction," industry analysts from Datamonitor said in a recent research note.

There are also signs that Coke is finally getting its act together with its marketing, traditionally one of the company's fortes but criticised recently for failing to connect with consumers or drive sales growth.

Since Daft took over the Coke reins, he has increased marketing spend significantly, including a "Life tastes good" campaign and a US$150m sponsorship of the Harry Potter movie. But the "Life tastes good" advertising failed to resonate with consumers, while the Harry Potter campaign has come in for criticism as expensive and ineffective.

Expert Analysis

Growth Strategies in Soft Drinks to 2006
Analysis of new product launches between July 2000 and July 2001. Evaluation of the markets of Canada, France, Germany, Italy, Japan, Mexico, UK and USA, plus top level data and trends for emerging countries. Includes current and forecast growth data for each country.

The Soft Drinks Market - Global Trends and Developments
Over 250 pages of analysis, 218 data tables and 12 charts on the major soft drinks markets. Review of the key trends & market overview for Carbonates, Fruit juices and drinks, Bottled water and Other soft drinks. Company profiles also included.


Chief rival Pepsi, meanwhile, has stolen a march on Coke in the marketing stakes, securing the talents of pop queen Britney Spears for its latest executions. Pepsi saw its North American beverage sales rise around 20% during the first 36 weeks of 2001, a gain analysts are placing at the door of good marketing and new products.

But Coke may be about to turn things round. Steve Heyer, Coke's head of new business ventures, said marketing is improving in the US. In an article in the Atlanta Journal he said: "We lost our way a little bit. The campaigns you saw were a little too cerebral…they just weren't as much fun as they needed to be."

And, indeed the company announced last week that it was confident that a new series of ads to be aired from the 2002 Winter Olympics onwards would be successful, where recent campaigns had faltered. "We went into it wanting to make people smile and I think those ads clearly do that," a spokesman recently said. "There is an inherent message of pride and nationalism in those ads, but the point is all about connection and people of different backgrounds connecting through Coke and through the Olympics."

Coke also refutes the claim that the Harry Potter ads have been unsuccessful and plans to continue sponsoring the film franchise. And there is logic in its argument that not all advertising success can be measured in volume sales increases. A campaign like this one has a fantastic "brand association" effect, building good will for Coke.

The truth is that this has been a mixed year for Daft and Coke. But despite the poor carbonate market it is still in a position to score well with investors by diverging into faster growing beverage sectors, such as water, and returning to its former marketing glory.

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