---
title: "Coca-Cola's Transformation: What Outcome Will It Lead To?"
description: "Coca-Cola is also pursuing a \"total beverage company\" strategy in China. Its brand recognition and mature sales network can serve as a springboard for new brands in their early stages, but they will then face more complex market challenges."
author: "王怡"
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published: "2018-06-18"
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# Coca-Cola's Transformation: What Outcome Will It Lead To?

> Coca-Cola is also pursuing a "total beverage company" strategy in China. Its brand recognition and mature sales network can serve as a springboard for new brands in their early stages, but they will then face more complex market challenges.

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Coca-Cola is also pursuing a "total beverage company" strategy in China. Its brand recognition and mature sales network can serve as a springboard for new brands in their early stages, but they will then face more complex market challenges.
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In Coca-Cola's annual review, a group photo of board members is typically included. Usually, the executives hold up classic Coca-Cola and other carbonated soft drinks. However, in the 2017 photo, for the first time, the people in the photo held SmartWater bottled water, Honest Tea, and ZICO coconut water... These are all "new members" of the Coca-Cola family.
This group photo may once again demonstrate Coca-Cola's determination to develop into a "total beverage company," a strategy proposed in 2016. The CEO standing in the front row, holding a bottle of Topo Chico sparkling water, is James Quincey, the main driver of this strategy.
Coca-Cola board members
In May 2017, James Quincey officially succeeded former CEO Muhtar Kent as the new head of Coca-Cola. Quincey, who joined the company in 1996, had previously succeeded in expanding the market share of non-carbonated beverage products while managing Coca-Cola's European business, which was a key reason the board favored him.
Coca-Cola realized that to continue consolidating its market share and industry position, it could no longer rely solely on soda.
Although soda still contributed 70% of Coca-Cola's sales volume, its growth was becoming increasingly sluggish. From 2015 to 2017, the unit sales of carbonated soft drinks saw negative growth of 0%, -1%, and -1%.
Consumers seem to be gradually losing interest in these fizzy carbonated drinks.
Once, in the largest U.S. market, per capita Coca-Cola consumption surpassed beer in the early 1960s and overtook coffee and milk in the late 1970s. In 1986, on the centennial of Coca-Cola, then-CEO Roberto Goizueta painted a bright future for bottlers: "In the end, the world's number one beverage will not be tea, coffee, wine, or beer, but soft drinks—our soft drinks."
Unfortunately, according to data from Beverage Marketing, a U.S. beverage industry market research firm, within a decade, the average annual carbonated soft drink consumption per American dropped from 190 liters to 146 liters, and in 2016 it was overtaken by bottled water (149 liters). Global per capita carbonated soft drink consumption has also fallen to its lowest level in the past 30 years.
Coca-Cola's financial figures sensed this trend earlier than some consumers. Starting in 2012, the company's annual revenue declined year after year, reaching a 10-year low of $35.41 billion in 2017. Moreover, net profit in 2017 plummeted by 81% year-on-year to $1.283 billion.
Although the sale of bottling operations and U.S. tax reform were the main reasons for the sharp profit decline, Coca-Cola was fully aware that the situation was not optimistic.
### **The Transformation of "Happiness Water"**
Previously, there was a joke on social media about Coca-Cola: cola's role now is more as a toilet cleaner and an ingredient for making cola chicken wings.
People regard it as "happiness water" for couch potatoes, but at the same time, they keep their distance from it.
In fact, obesity and related health issues are important reasons that Coca-Cola repeatedly emphasizes in its annual reports as hindering sales growth.
Coca-Cola has always been surrounded by various reasonable or bizarre health concerns. Its Chinese official website even has a "Beverage Encyclopedia" page dedicated to explaining why Coca-Cola does not corrode teeth, kill sperm, cause kidney stones in adults, or trigger ADHD in children. But simple numbers tell the whole story: a 500ml bottle of Coca-Cola contains 53 grams of sugar, while the World Health Organization recommends that adults should ideally consume less than 25 grams of sugar per day.
While trying to reduce sugar and shrink packaging for carbonated drinks like Coke and Sprite, Coca-Cola has turned its attention beyond carbonated beverages.
More beverage brands and products continue to appear in Coca-Cola's global markets. Since Muhtar Kent became CEO in 2008, the number of Coca-Cola products globally increased from over 2,800 to 3,800 by the time he retired. Now, Coca-Cola encompasses more than 500 brands and 4,100 products.
In its 2016 annual review, Coca-Cola further proposed that it would become a "total beverage company" in the future, accelerating the global development of organic tea drinks, coconut water, dairy products, coffee, juices, and bottled drinking water beyond carbonated drinks.
Coca-Cola proposes to become a "total beverage company."
In recent years, Coca-Cola has been aggressively expanding in the beverage market, adding Honest Tea organic tea, ZICO coconut water, Fairlife milk, and Topo Chico sparkling water to its brand portfolio. Additionally, Coca-Cola has become a shareholder in Monster energy drinks and Green Mountain Coffee, both of which have a strong presence in North America.
Although the 2017 financial report was not particularly impressive, it is worth noting that Coca-Cola's gross margin rose from 60.7% in 2016 to 62.6%. By selling its bottling plants in North America and China, Coca-Cola no longer directly participates in the production of bottled beverages in these markets, focusing instead on supplying cola concentrate and syrup to partner bottlers, as this is a more profitable business than producing bottled drinks and does not require significant capital investment.
While reducing its burden, Coca-Cola also appointed a Chief Growth Officer, placing greater emphasis on brand building and profit growth.
### **New Members in the Chinese Market**
In China, from a sales perspective, the decline in the carbonated beverage market is not as pronounced as in North America, and its impact on Coca-Cola's performance, which holds nearly 70% of that market, is not severe.
In fact, in the first quarter of 2018, unit sales of carbonated soft drinks in Greater China and South Korea grew by 7%. According to Coca-Cola, the Chinese market achieved double-digit sales growth in the carbonated beverage category during that quarter.
But in the long run, Coca-Cola faces the same transformation pressures as in the international market. "The main business (CSD) has a negative image in consumers' minds, and healthy categories are not within their business scope," Zhou Wei, an analyst at Euromonitor, told Jiemian News.
From the perspective of beverage consumption structure, consumers in the Asia-Pacific market seem to make healthier choices. In Coca-Cola's Asia-Pacific sales data, carbonated soft drinks account for 59% of total sales, significantly lower than North America (65%) and the global market (70%), while the proportions of tea, coffee, bottled water, and sports drinks are slightly higher.
"China's per capita beverage consumption is still very low, so there are many opportunities," Feng Guangsheng, President of Coca-Cola Greater China and South Korea, said in an interview with the Financial Times at the end of 2017. "We don't look much at market share; we focus more on value. Are we creating real value? Is the stock price growing?"
In the long run, Coca-Cola faces the same transformation pressures as in the international market. (Image source: Visual China)
Coca-Cola China's strategy is also consistent with the international market.
In China, they sold their bottling plants to two partners, Swire and COFCO, shedding heavy assets while concentrating on developing businesses beyond carbonated drinks.
A former employee of Coca-Cola's southern market told Jiemian News that to boost performance, the company's main measures would be developing new products, including introducing new carbonated beverage brands as well as tea drinks, nutritional supplements, juices, drinking water, and other categories. During their tenure from 2012 to 2014, Coca-Cola launched products such as Schweppes+C, Pure Water, and Aquarius in China.
In an email response to Jiemian News, Coca-Cola stated that Coca-Cola China has already moved into multiple categories. Currently, Coca-Cola has more than 20 brands in China.
From the end of last year to the first half of this year, consumers will notice blue-packaged Sprite Zero and white-green packaged Sprite Fiber+ appearing on supermarket and convenience store shelves. Consumers in provinces such as Shanghai, Zhejiang, Guangdong, and Fujian will gradually see the sugar-free tea series "Chun Cha She" (Pure Tea House), which was already launched in Hong Kong. In convenience stores in Beijing, Coca-Cola's "Yo! Tea" fruit tea series has already appeared.
In addition, the Ice Dew Pure Water brand has launched "Pure Water Shenxian" with added dietary fiber in two flavors. Last year, the Minute Maid brand extended into dairy and plant protein drinks, launching Minute Maid Plantation Newcomer. Some curious consumers may discover ZICO coconut water and Swiss Valser natural mineral water, both acquired by Coca-Cola, on e-commerce platforms.
Sprite Zero with Avengers packaging
ZICO coconut water
Feng Guangsheng told the Financial Times: "We also need to satisfy consumer needs like France's Zodiac (inflatable boat brand), otherwise other brands will come and satisfy them."
In the Chinese market, Coca-Cola's investments and acquisitions have not lagged.
In 2015, Coca-Cola acquired Xiamen Culiangwang for $400 million in cash. Currently, Culiangwang focuses on operations in second- and third-tier cities, and at the end of last year, it launched two new products: original soy milk and black bean soy milk. Recently, Coca-Cola announced a strategic investment in Chinese yogurt startup Le Chun, stating that the two parties will explore strategic cooperation in product innovation, digital innovation, and innovative brand incubation.
Before deciding to bring a brand to market, Coca-Cola conducts thorough preparation, especially in-depth insights into consumer needs. Additionally, strong product R&D capabilities and localized commercialization strength are guarantees for the success of new products.
Coca-Cola stated that even for existing brands, before introducing them to China, they will evaluate brand positioning, product taste, and tailor marketing methods from the perspective of Chinese consumers, not simply copy.
The former Coca-Cola employee also told Jiemian News that before launching a new brand, Coca-Cola makes comprehensive preparations in all aspects: hiring research firms to conduct large-scale market research on product taste and packaging, adjusting product formulas or packaging based on research reports, and formulating annual production targets, product launch plans, and channel distribution plans.
"The categories Coca-Cola introduces and acquires, such as plant-based herbal drinks, packaged water, sugar-free tea, and energy drinks, are all under healthy sub-categories and have greater growth potential compared to traditional beverage categories," Zhou Wei said. "Especially with the support of the Coca-Cola brand and broad consumer awareness, the probability of success is higher."
These measures, at least for now, seem to be a good start for Coca-Cola. But no one can confidently predict how things will develop next.
### **Sprint and Caution**
"Culiangwang? I don't know."
Lin Xunqiong, who lives in Beijing, is a die-hard Coca-Cola fan. She works in marketing, has high daily stress, and drinks more and more cola. She usually tries new products, and at home, she has collected more than 100 aluminum Coca-Cola bottles. However, Lin Xunqiong really didn't know that Coca-Cola had acquired a brand called "Culiangwang."
Coca-Cola has launched and acquired multiple new brands in recent years, but the development speed and display occasions of these brands are not on the same front.
Whether you glance at a supermarket or convenience store shelf, the Coca-Cola products on the shelves are still the ones consumers can name with their eyes closed: Coke (including Zero and Diet), Sprite (Zero and Fiber+), Fanta, Minute Maid, Ice Dew, Pure Water, and independently operated Monster energy drinks are usually placed next to Coke and Sprite, while Aquarius and Georgia Coffee appear less frequently. Some convenience stores have already seen "Yo! Tea," and the newly launched "Chun Cha She" has not had many opportunities to appear. Culiangwang is almost invisible in first-tier cities.
Classic products are still more common in the cola section of supermarket shelves. (Image source: Visual China)
In terms of company performance, Coke and Sprite still carry the bulk. Can any of these new brands give birth to the next "billion-dollar club" brand like Ice Dew? Perhaps Coca-Cola itself cannot predict.
Objectively speaking, every beverage category currently has its own established brand landscape, making breakthroughs very difficult.
Moreover, the beverage market is in fierce competition with new products emerging one after another. How to make new products leave a deep impression on consumers as much as possible may be a question Coca-Cola needs to carefully consider in terms of category positioning, product positioning, packaging, and marketing.
Even Lin Xunqiong, an absolute supporter of Coca-Cola, cannot guarantee that she will unconditionally like every product Coca-Cola launches. "I'll try all their products, but what I buy every day is still original Coke... For other drinks, without knowing them, I generally reflexively buy Coca-Cola products, but I still look at the taste," she told Jiemian News. "There's definitely a curiosity to try new things, but forming a habit is not easy."
Li Meng, Associate Research Director of Mintel China's Food and Drink report, believes that launching new brands is beneficial for increasing the company's profit income and also helps consolidate the brand image. However, the current market changes too quickly, and the life cycle of some new products is very short, so it is necessary to avoid new products being only short-term bestsellers.
Coca-Cola's brand recognition and mature sales network may serve as a springboard for new brands in their early stages, but how high each brand can rise may depend on the product itself, packaging, and marketing.
For example, Culiangwang, in Zhou Wei's view, has not achieved the expected results due to insufficient product positioning and consumer awareness. The positioning of plant protein drinks in the Chinese market has always been slightly low-end, unlike foreign consumers' perception of this category as a milk substitute.
According to Mintel's report on plant protein drinks, sales of plant protein drinks grew slightly in 2017, reaching 62.2 billion RMB with a year-on-year growth rate of 5.1%. Premiumization is the main growth driver, and Culiangwang's strategy of targeting second- and third-tier cities may run counter to this trend.
For independently operated Monster, according to a research report by CICC, sales in the first year of entering China were less than HK$50 million. The immature development of energy drinks in China and the fact that Monster has only one SKU both constrain the progress of this energy drink, which is popular in North America, in China.
Large companies are usually more cautious when facing market changes, while small enterprises have the advantage of being nimble. Coca-Cola now faces not only its old rival Pepsi but also various small brands. "In recent years, the Chinese beverage industry has shown a phenomenon of 'small brands dominating,' with small enterprises leading the industry's innovation direction, while large enterprises are steady but with a slowing trend," Zhou Wei said.
The potential of the Chinese market is undeniable, but large companies are not flexible enough.
Mexico, China, Brazil, and Japan are Coca-Cola's four largest overseas markets by unit sales outside the U.S., contributing 31% of global sales.
Japan is the top performer. In Coca-Cola's 2016 annual summary, James Quincey, who had not yet become CEO, specifically praised Japan: "I hope more of our markets can emulate Japan, where product development cycles are not measured in years but in weeks, and products can be quickly tested, innovated, and scaled. In the future, Japan's development will not be an exception but the standard we strive for."
In 2016, Coca-Cola added more than 100 new products and packaging in Japan, including the famous "sleep water," and two-thirds of sales growth in Japan came from low-calorie and zero-calorie beverages.
Coca-Cola launched white "Coca-Cola Plus" in Japan, which contains dietary fiber.
"Japanese consumers have a high acceptance of beverages, and Japanese companies' production lines are smaller and have lower loads, allowing flexible product changes, and they use these changes as selling points (such as seasonal limited editions)," Zhou Wei said. "In the Chinese market, large beverage companies involve large production lines and cannot flexibly change product designs."
Moreover, in recent years, the popularity of street drink shops and coffee shops in the Chinese market has made it convenient for consumers to choose freshly made products, impacting the packaged beverage industry, and product diversity changes have been relatively slower.
In fact, since its founding, Coca-Cola has made several attempts in categories, with both successes and failures.
In the 1960s, under the leadership of then-President Lee Talley, Coca-Cola added orange-flavored Fanta and lemon-flavored Sprite sales in the U.S., bought Minute Maid for $72.5 million, and acquired Tenco, a coffee and tea producer. Such large-scale expansion even prompted BusinessWeek to question in a 1960 headline article: "Is this Coca-Cola?" Of course, Fanta, Sprite, and Minute Maid later achieved great success.
In 1985, an ambitious Roberto Goizueta changed Coca-Cola's formula and launched New Coke. This equally bold innovation, however, attracted 8,000 protest calls and over 40,000 protest letters daily, ultimately leading to the failure of New Coke and the return of Classic Coke.
This time, what outcome will Coca-Cola's business innovation lead to? (At the request of the interviewee, Lin Xunqiong is a pseudonym)
Source: Jiemian
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