Why Coca-Cola has lost its fizz

Unwillingness to innovate is blamed for Coke’s weakened position in the cola war

he 1980s and 1990s were Coca-Cola’s glory years. Under legendary CEO Roberto

T C. Goizueta Coke stock soared 3,500 percent over 16 years, with little real threat
suggested from chief rival PepsiCo. Since Goizuata’s death in 1997, however, the
drinks giant’s cup has not been quite so bountiful. In 2003, Coca-Cola’s value fell by 4
percent to $67.3bn (£37.7bn), sales of Coke Original in the UK fell by 5 percent, trust in the
brand fell by 3 percent to 52 percent and shares plummeted. By contrast, Pepsi’s sales and
earnings have increased notably and it is putting more pressure on its nemesis than ever
before. But why this shift of fortunes in the so-called cola war?

Paralysis where others move

Coca-Cola analysts have pinpointed a variety of reasons why the company has lost its fizz,
the most common being a suggestion of paralysis. Since Goizueta there have been no real
changes to the company’s strategy at senior management level. This is partly, it is thought,
because the former CEO was so successful that any alternative approach seems risky.
‘‘They’ve been their own worst enemy, a casualty of their own success’’, explains long-term
Coke analyst Emanual Goldman. What once worked so well for them no longer reflects
constantly changing market conditions, namely increased competition from other key
players and a more health-aware consumer base. Hence, Coca-Cola is frequently criticized
for failing to innovate.
Yet carbonated soda drinks still bring in 86 percent of the firm’s turnover, and so Coca-Cola
remains committed to this strategy. Pepsi, on the other hand, has successfully moved into
snacks, energy drinks and bottled water – an admission, perhaps, that it is cola was failing
to compete with Coke, but also demonstration of a strategy that was flexible to demands of
the market. Sales of Diet Coke, now higher than Coke Original in the UK, are just one
indication of the change in health-awareness of the average consumer, who are increasingly
turning to low calorie, non-carbonated drinks. With sports drink Gatorade, Aquafina water
and Tropicana fruit juices in its portfolio, PepsiCo has most bases covered. Further, it takes
advantage of its move into snacks with its Frito-Lay product by arguing it can offer better
margin and profit potential to large supermarkets, thereby demanding more shelf-space.
Though it is resolutely a drinks-only company, Coca-Cola has in fact attempted some
diversification into different products. For the most part, however, this success has arguably
cannibalised some of the company’s own sales: there are now 11 types of Coke on sale,
including vanilla, lemon and lime flavours, but these often achieve only more choice for the
same consumers. Coca-Cola’s attempt to launch a bottled water brand into the UK, which
would have attracted a different demographic, was a disaster. The firm claimed that Dasini
had the technology at its fingertips to transform tap water into a more preferable option than
spring water. The discovery of illegal levels of the carcinogenic chemical bromate in 500,000

DOI 10.1108/02580540610635898 VOL. 22 NO. 1 2006, pp. 19-21, Q Emerald Group Publishing Limited, ISSN 0258-0543 j STRATEGIC DIRECTION j PAGE 19
 bottles of the water, which was actually tap water from Kent, though, soon destroyed the
brand’s credibility. In a slightly more successful launch, Coca-Cola introduced Powerade, to
rival PepsiCo’s Gatorade, but it has claimed only 7.9 percent of the market.
If the company still remains convinced that diversifying into new areas is not the answer, then
what is? According to current CEO Neville Isdell, ‘‘We are not talking about a radical change
in strategy. We are talking about a dramatic change in execution.’’ Yet what exactly he
means by this remains somewhat hazy. Among Coke’s commentators are many who have
attacked inconsistent strategies, the most visible of which being marketing.

Unclear marketing strategy

Since the 1970s, the most memorable of Coca-Cola’s campaigns have been the sugary I’d
Like to Teach the World to Sing commercial, the ‘‘Real’’ campaign, which featured Courtney
Cox Arquette and Penelope Cruz and the UK I wish commercial, with singer Sharlene Hector,
both of which came in 2003. For some, the great contrast between the messages Coca-Cola
appears to be giving about its product with different campaigns illustrates a lack of
confidence and good communication at the top. Whether this is a fair judgement or not, what
it surely does show is that Coca-Cola is grappling with the difficulty of keeping the attentions
of its increasingly sophisticated and fickle core market – the teenager.
It is a problem that cannot be ignored. Between these two seminal advertising campaigns
was a time of little marketing, following a decision to concentration on distribution through as
many channels as possible. It was thought that brand awareness of Coke was so strong that
the product could sell itself.

Market focus: Brazil

Nowhere was it clearer that this belief was a mistake than in Brazil, Coca-Cola’s third biggest
potential market. Despite availability in over a million outlets and knowledge of the brand, the
firm has found it harder and harder to stave off competition from locally produced
soft-drinks, which are collectively referred to as tubainas.
Research has shown that although the number of liters of non-alcoholic beverage each
Brazilian consumes has risen consistently and considerably over the past decade, Coke’s
sales figures have not grown at the same rate. Figures suggest that this is because the
biggest market for carbonated drinks falls in group C of the five socio-economic divisions.
For this group, quality and price is more important than branding, and with locally produced
drinks often selling at under half the price of Coca-Cola, they will happily go with the
tubainas. Coke’s retaliation on this point is that their competition can produce to such low
prices because they are avoiding having to pay the taxes they should, but this situation has
not prevented PepsiCo growing in Brazil.
In another demonstration of their willingness to innovate, PepsiCo formed an alliance in 1997
with Coca-Cola’s strongest competition in Brazil – AmBev. AmBev was contacted to
produce and distribute Pepsi products in Brazil, and as a result Pepsi has reached
thousands of new points of sale and increased its share. Another positive statistic for
PepsiCo show that although soft drink sales shrank 2 percent in Brazil in 2003, Pepsi sales
grew by 28 percent. In light of these figures, Coca-Cola’s argument that unfair trading
practice of tubainas in Brazil is infringing on their market share can only go so far.

Goizueta’s legacy: a too-sugared pill?

The overwhelming message seems to be that Coke’s problem keeps coming back to its
unwillingness to diversify or innovate as the market changes. In one way or another, all of the
Foust, Simms and Gertner, Gertner and Guthery articles make exactly this point, and Tom
Pirko, president of a California consulting firm adds, ‘‘The whole Coke model needs to be
rethought. The carbonated soft-drink model is 30 years old and out of date.’’ Yet it is worth
mentioning also, that an ongoing consequence of Goizueta’s legendary reign stems from the
1986 decision to spin off Coke’s bottling operations into a new company in which it had a 49
percent stake. Although this instantly erased billions of pounds of debt, it also created false
promises of continued large profits, the beginning of a difficult financial relationship between

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 Coca-Cola and its bottlers, Coca-Cola Enterprises Inc. and expectations that every
subsequent CEO has found it hard to meet. Because of this, Goizueta’s successes in
hindsight may look over-inflated and Coke’s current difficulties over-emphasised through an
unfair comparison. The business is, after all, still worth a staggering $67bn and has a global
presence that most large companies can only dream of. The point is, then, that in no way is
Coca-Cola about to disappear – it is not even under threat. But complacency is something to
be fearful of in Atlanta, as is an unwillingness to move with the times. A new, focused and
well-communicated strategy, which learns from the advancements of competitors all over
the world is what is needed to ensure one of the globe’s most recognised sodas does not go
flat.

Comment
This is a review of ‘‘Gone flat (Coca-Cola)’’ by D. Foust, ‘‘Coca-Cola’s Marketing challenges
in Brazil: the Tubainas war’’ by D. Gernter, R. Gertner and D. Guthery and ‘‘Always
Cola-Cola’’ by J. Simms.
‘‘Gone flat (Coca-Cola) discusses the decline in the beverage giant’s fortunes since the days
of hugely-successful CEO Roberto C. Goizueta in the 1980s and 1990s. Concentrating on
the firm’s reluctance to innovate or diversify, ongoing problems with bottlers, an inconsistent
marketing strategy and interference from the board, Foust analyses why no CEO since
Goizueta has been able to bring Coca-Cola success. By comparison, the author shows how
rival Pepsi has innovated with success.
Gertner, Gertner and Guthery’s article describes recent moves by Coca-Cola in Brazil in an
attempt to compete against local soft drink brands known as ‘‘tubainas’’. It provides a
quantified history of Coca-Cola’s position in the Brazilian drinks market, monitoring increases
in demand, threats from other companies and Coca-Cola’s retaliation. It finishes by showing
that although the firm has managed to improve its position, for the most part the winners are
the consumers, who enjoy increased choice at more competitive prices.
‘‘Always Coca-Cola’’ considers how Coca-Cola is trying to win over consumers and boost
Keywords: sales following increasing competition and loss of market share. Simms points out
Brands, weaknesses in top management’s business approach, which have reduced innovation and
Innovation, led to declining profits. In terms of success, he discusses the marketing strategy of former
Marketing, CEO Steve Heyer, but questions whether this will be enough to maintain the interest of the
Organizational change increasingly fickle teenage market.

References
Foust, D. (2004), ‘‘Gone flat (Cola-Cola)’’, Business Week, December 20, pp. 46-52, ISSN: 0007-7135.

Gertner, D., Gertner, R. and Guthery, D. (2005), ‘‘Coca-Cola’s marketing challenges in Brazil: the
Tubainas war’’, Thunderbird International Business Review, Vol. 47 No. 2, pp. 231-54, ISSN: 1096-4762.
Simms, J. (2004), ‘‘Always Coca-Cola’’, Marketing, 20 October, pp. 28-30, ISSN 0025-3650.

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