By Christian Price
In a time and place where the possibilities for growth are endless, it is slightly jarring when one is confronted by the possibility that, in the end, there is only so much that is truly left to one's control. Even something as pivotal as one’s own legacy is sometimes left in the hands of others. Of course, that can often be due to negligence, but it is mostly the result of the shifting winds of change that blow in all directions and take no prisoners. In a day and age where social trends and demographics are shifting, some American consumer markets may begin to struggle with holding onto competitive advantages.
A glaring example can be found in the carbonated beverage industry, which is finding it more difficult than ever to maintain market viability and stable consumer demand. From 2014-2016, carbonated beverage manufacturers as a whole posted declines hovering around an average of 1%. These declines were especially magnified in the most prominent soda manufacturers. Diet Pepsi’s market share fell 9.2% in 2016 while Diet Coke’s fell 4.3% in that same time period. While both of these brands remain in the top ten among all carbonated beverages and that may sound like encouraging news, it does not eliminate the negative industry trend described above. This is emphasized further when one considers that, in 2017, carbonated beverage sales dropped for the 12th consecutive year, a trend further exacerbated by increased taxes and regulations on soda products. Even if Coke retains industry dominance, declining sales are still declining sales.
There could be several different reasons for the decline in carbonated beverages, but there is one definitive cause that truly stands out. In our increasingly health-conscious society, more consumers are opting out of regular consumption of sugary drinks and are instead turning to bottled water and other alternatives as bottled water sales edged out soda sales last year for the first time ever, with 39.3 gallons of water consumed in comparison to 38.5 gallons of soft drinks. Now, in this instance, a company has many key strategic decisions to make. For one thing, one must decide if the market segment has any chance of returning. Of course, industry leaders can assess past instances of market share decline in carbonated beverages to analyze these trends but the sustained pattern of loss over the last several years is more than a little concerning.
Thus, it would be highly understandable if companies like Coke and Pepsi are hesitant to rely on these past indicators to make future decisions, especially with long term growth at stake. Because of these factors, it becomes pivotal to hedge one’s risks in seeking out a new competitive advantage. This is a strategy that Coke appears to be attempting in an effort to maintain profitable growth. In Japan, Coke will soon be coming out with a line of diversified alcoholic beverages that will be offered in a wide range of flavors. It may seem like a desperate attempt at survival, but the segmentation and the international scope are not accidents. Canned alcoholic drinks have grown in Japan by nearly nine percent over the last few years, and Coke has been readily present in the Japanese market through products like teas and laxative solutions.
Of course, if one wants to focus solely on alcohol, one could do that. Perhaps Coke is simply testing the waters in Japan as a means to prepare for widespread market expansion. After all, the liquor market isn’t exactly slumping in domestic circles. Compound annual growth has consistently risen over the past few years in the U.S. for liquor products, with spirits in particular actually gaining market share. Now, of course, Coke can become successful by expanding its market segment to alcoholic beverages, and it should seriously consider that option. However, in the end, this issue is really about Coke finding ways to imprint its brand and its portfolio in new ways as a means of surviving the potentially consistent onslaught against carbonated beverages. It is an issue that Coke’s new CEO James Quincey has taken to heart. Since his appointment last May, he has taken steps to promote Coke as a “total beverage” company while enacting initiatives that reduce the company’s capital expenditures for soda manufacturing. For example, he has sold bottling plants back to independent owners and then subsequently marketed it as a social branding initiative.
However, this article is not a referendum on Coke as an individual market player. This is an entire industry that could be in decline, but it is interesting to focus on Coke because it is, for all intents and purposes, a legacy brand in the international marketplace.
Of course, one knows that Pepsi is the other huge market player in this situation. This is interesting because the addition of Pepsi into this equation highlights a really important fact about both companies that should provide an obvious remedy, but instead invites more questions about strategy. Both Coke and Pepsi are not wholly defined by carbonated beverages to begin with. Coke owns other brands such as the bottled water company Dasani while Pepsi has its own diversified market portfolio that also consists of bottled water company Aquafina as well as Tropicana, Doritos, Lays, and Quaker Foods. Of course, possessing such a diverse market portfolio allows Pepsi some flexibility in formulating strategic initiatives. For example, the company’s latest initiative entitled “Performance with Purpose” is concerned with shaping the company’s portfolio in a way that is both sustainable and maximizes long-term growth. For example, the movement involves emphasizing a healthier product line by cutting sugars, saturated fat, and salt while lowering carbon emissions and waste by 2025. Thus, given Pepsi’s own steep declines in the carbonated beverage market, perhaps it is not out of the realm of possibility that, in the long-term, Pepsi could minimize its own share in carbonated beverages with very little impact on the bottom line.
One could guess that Coke has probably thought about that outcome as it is not a totally insane prospect to consider. At the very least, one could argue that the trends are implying that kind of direction. However, in the end, one cannot make that kind of assumption for sure. The only thing that a company can control is the course of action taken to hedge those risks as the market winds continue to shift. Coke’s foray into alcoholic beverages is an interesting portfolio shift, and it just might work because it diversifies them enough from Pepsi’s portfolio while taking advantage of a growing market. In fact, one might even have to consider the possibility that the Coke-Pepsi rivalry will not even remotely look like it does now in ten to twenty years’ time. As tastes change, the market changes with it and we could be looking at a future where, in the future, carbonated beverages are niche products that serve the purpose of providing occasional enjoyment instead of consistent consumption.
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