Coke Confronts Its Big Fat Problem

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By Claire Suddath,

from Bloomberg Businessweek,

It’s strange to think about now, but Coca-Cola actually started in response to a health trend. In 1886 an Atlanta pharmacist named John Pemberton, reacting to the local temperance movement, removed the alcohol from his medicinal French Wine Coca tonic and refashioned it as Coca-Cola. Today it’s the world’s largest beverage company.

Coca-Cola Chairman and Chief Executive Officer Muhtar Kent gave Sandy Douglas the North America job in January, essentially asking him to turn around a decade-long decline in American soda sales. Douglas believes Coca-Cola needs to refocus on the one thing it does best: sell bottles of Coke. This is the beginning, he says, of “what I might call the phased relaunch of Coca-Cola in the U.S.”

Given all the choices out there, people just aren’t drinking as much Coke. Douglas has watched this happen from his perch at headquarters, checking numbers reports and meeting with the company’s vast network of bottlers. And you don’t need inside access to the data to detect the trend.

A few years ago Anna Antonova gave up her two-liter-a-week Coca-Cola habit and dropped seven pounds. She’s never returned to soda. Coca-Cola desperately needs to get her back, and everyone like her. “But soda is so bad for me, I feel so much better without it,” Antonova says.

Americans may not have figured out the answer to the obesity epidemic, but for years they’ve pointed to Coca-Cola and other soda as one of the causes. Coke has tried fighting against this. It’s tried ignoring it. Now it accepts this as a reality. This is the problem Douglas has to confront. He has to persuade people to drink Coca-Cola again, even if they don’t guzzle it like water the way they did before.

For decades, soft-drink companies saw consumption rise. During the 1970s, the average person doubled the amount of soda they drank; by the 1980s it had overtaken tap water. In 1998, Americans were downing 56 gallons of the stuff every year—that’s 1.3 oil barrels’ worth of soda for every person in the country.

And then we weren’t as thirsty for soda anymore, and there were so many new drink options that we could easily swap it out for something else. Soft-drink sales stabilized for a few years; in 2005 they started dropping, and they haven’t stopped. Americans are now drinking about 450 cans of soda a year, according to Beverage Digest, roughly the same amount they did in 1986.

“We actually believe that if you let this go too long, another three or five years, the consumer will walk away from carbonated soft drinks,” Indra Nooyi, the CEO of PepsiCo (PEP), told investors last year, in a shockingly blunt assessment of soda’s future.

Soda still makes up 74 percent of [Coke’s] business worldwide and about 68 percent in the U.S. Sales of Coca-Cola’s carbonated sodas fell 2 percent in the U.S. last year, according to Beverage Digest, the ninth straight year of decline. Diet Coke tumbled especially hard, dropping 7 percent, almost entirely the result of the growing unpopularity of aspartame amid persistent rumors that it’s a health risk. Coca-Cola made $46.8 billion last year, down from $48 billion in 2012. That’s what Douglas is worried about.

Ask anyone in the soda industry to explain the consumption decline, and they’ll point to the 1980s. That’s when Coke and Pepsi, during the height of the soda wars, started selling the stuff in bigger and bigger sizes to get people to drink more—which meant they sold more product.

[Did] Coca-Cola … make a mistake by selling its drinks in such aggressive sizes[?]

While this was happening, rates of obesity, diabetes, and other weight-related health issues in the U.S. soared. By 1999, according to the Centers for Disease Control and Prevention, a fifth of all U.S. adults were obese; today that number is 35 percent. Obesity rates among children have tripled since the 1970s. The scientific community quickly zeroed in on fast food and sodas as a major cause.

In the seven years since, Coca-Cola has invested in at least five smaller companies and bought three.

According to former Coke employees, there’s a feeling within the company that it’s been unfairly targeted. “I don’t know how we [Snapple] escaped it, because Snapple is essentially soda without carbonation,” says Weinstein. “We had all the same stuff in there—sugar, flavoring—but we never had the heat put on us the way Coke did.”

The health community’s criticisms have also tainted its new ventures. In 2009, the CSPI filed a lawsuit on behalf of Vitaminwater drinkers in New York and California, alleging that Coca-Cola, which had purchased Vitaminwater parent Glacéau in 2007 for $4.1 billion, had deceptively marketed the drink as healthy when it had almost as much sugar as a regular 12-ounce can of Coke. Coke denied any deception, and the suit is ongoing.

For its relaunch to succeed, Coca-Cola first has to reposition itself so that people stop feeling guilty when they drink it, or, ideally, come to see a Coke as a treat. That’s why Douglas is so intent on pushing Coca-Cola away from the supersize drinks and back to the older, smaller sizes. A few years ago the company renegotiated its bottler contracts to charge them based on total revenue rather than sales volume.

Douglas points to the minicans and glass bottles as proof that “we don’t need gluttony to grow.”

Coca-Cola can’t solve its image crisis by distracting everyone with a new machine and tiny bottles. It also has to address the consumer anxiety plaguing Diet Coke. Douglas likes to say that the company will make and sell whatever people want it to. He calls these moves “following the consumer.”

Coca-Cola’s other challenge doesn’t have anything to do with nutrition. It has to do with choice. There are 4,200 beverages out there today, thousands more than existed just a few years before.

There’s one weapon left in Douglas’s arsenal that might ultimately save Coca-Cola: its gift for advertising. The company is masterful at selling emotion along with its drinks. Almost anyone who was alive at the time remembers I’d Like to Teach the World to Sing, which was originally a 1971 commercial jingle called I’d Like to Buy the World a Coke. Douglas thinks of the company’s iconic ads the way he thinks about Christmas, which is greater in myth and memory than it is on the actual day.

This summer the company printed the 250 most common names of U.S. teens on Coke bottles, hoping that millions of kids will want to buy drinks with their names on them. So far it seems to be working: In the last three months, sales of Coca-Cola have inched up 1 percent in North America.

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