Necessity and Invention - Coca-Cola Co., PepsiCo, and Cadbury-Schweppes strategies

Brandweek, Feb 19, 2001 by Kenneth Hein

First Snapple, then SoBe and Gatorade. While soda giants Pepsi and Cadbury have acquired some of the hottest beverage brands in the business, Coke is hatching a home-grown strategy of its own. Where will it all lead?

For one day in December, Coca-Cola Co. played the role of Willy Wonka, throwing open the doors to its beverage factory for a peek at the company's latest concoctions. At the relentlessly upbeat "Lifehouse" workshop, robots cruised around distributing Coke products, vintage commercials streamed on movie screens and a chorus of aspiring actors sang songs about love, family and, naturally Coca-Cola.

Coke's next great beverage invention? How about a tonic with a dropper that can regulate the amount of energy drinkers consume? Short of an ever lasting gobstopper, Coke's lab is kicking around a ready-to-drink cup of coffee that can be heated in a microwave, plus a purple carbonated soft drink made from ripe, unroasted coffee beans.

Elsewhere in the development pipeline: a fruit drink dubbed Beginit that is said to have the nutritional equivalent of a balanced breakfast, and a state-of-the art vending machine (eye-balled for Latin American markets) that will allow consumers to buy assorted, custom six-packs.

All this mad-scientist maneuvering is indicative of the soft-drink giants trying mightily to capture their own versions of lightning in a bottle. While cola sales have flattened in recent years, alternative drinks such as water, teas, fruit juices and sports drinks have exploded with double-digit growth. As a result, the Big Three beverage giants--Coca-Cola, PepsiCo and Cadbury-Schweppes--are scrambling to develop more powerhouse brands in the non-carbonated arena through acquisition or home-grown invention.

Pepsi and Cadbury are hard at work integrating their newly-acquired superstars--Gatorade and SoBe (Pepsi); Snapple and Mistic (Cadbury)--into their respective portfolios. Coke, the losing bidder in last year's deal that saw Gatorade dealt to Pepsi for $13.8 billion, is turning its attention back to its internal R&D unit, at least for now.

Unfortunately the cola giants haven't had a great track record of developing their own non-carbonated standouts. Speaking to visiting analysts and the media at the uncharacteristically open Lifehouse session, Coke chief marketing officer Steve Jones said the company's failure to react quickly to changes in the market over the past four to five years caused it to "underperform" and miss important targets. "We weren't creating growth," he said simply.

As it shakes off a wrenching restructuring that saw it shed thousands of jobs and put many fresh faces at its Atlanta headquarters, Coke is ready to refocus on the business at hand. It may have lost the battle for Gatorade, but Coke is now exploring "a bigger universe" beyond its own Dasani water and Nesteaiced tea brands into new coffee, milk and energy products. That last group includes KMX, a new energy drink that Coke hopes can make a dent in the category created and dominated by European upstart Red Bull.

Many observers, however, are hedging their bets on the potential of Coke's efforts outside its core bubbly business whose nameplates include Diet Coke, Sprite, Mello-Yello, Barq's and Minute Maid. "It's not just Coke," said Gary Hemphill, vp-marketing for consultancy Beverage Marketing Corp. in New York. "Look at the new-product successes period. There is certainly far more failure than success."

Others are at least willing to credit Coke for trying. "They are increasing volume overall by getting into the non-carb side of business. They're laying the groundwork for the future," said Jim Jackson, category manager for non-carbonated beverages at retailer 7-Eleven, based in Dallas.

"They are trying to be more forward-thinking and risk-taking," added Jennifer Solomon, analyst for Salomon Smith Barney "They need to try radical things to change the culture of the company."

Part of the problem is that the giants have to balance the often competing concerns of their tiered constituencies. In the past, compromises between, say, headquarters and distributors have caused "concept drift" on new ideas. As a result, consumers have had little interest in the final product.

Take Coke's Fruitopia. Marketers initially branded the drink with fanciful names under its Minute Maid umbrella, but soon realized the juice moniker was associated with something mom would buy. Fruitopia stagnated, and Coke removed the Minute Maid name. A subsequent change in manufacturing from a "hot-fill" drink to a more cheaply produced "cold-fill" one, helped turn Fruitopia into more than a blip on consumers' radar. But without much advertising support, Fruitopia has been relegated to a virtual non-player.

Coke does not want these and other missteps to dissuade marketers from pushing the envelope on new products. "It's not easy to innovate," said Jan Hall, svp-consumer marketing for Coca-Cola North America. "We have to be nimble and not be afraid to make some mistakes."