Now, Coke Is No Longer "It"

New CEO Daft promises a fundamental shift of focus as consumers flock to bottled water, juice, and tea

Jill Friedman, a 21-year-old college student in Atlanta, says she used to sip Diet Cokes all day long but now prefers bottled water. "As I've gotten older, I've realized that drinking five Diet Cokes a day isn't good for you," she says. Walking away from caffeine and aspartame may have been a smart choice for Friedman, but it's bad news for Coca-Cola Co.

Coke's problem is the countless number of people out there who, like Friedman, have cut way back on their soda consumption. For years, consumers have been moving in droves toward juice, bottled water, tea, and other noncarbonated beverages. Now, after decades of focusing almost exclusively on selling the world a Coke, the company has a new chief executive, Douglas N. Daft, who is gearing up to take on the nonsoda market in a big way.

Coke has a lot of catching up to do. Competitors such as The Perrier Group and Quaker Oats Co., maker of Gatorade, have already made big strides in noncarbonated drinks, weakening Coke's soda sales. After nearly two decades of 7% annual gains in unit volume sales, Coke's global volume grew just 1% last year, while its operating profits plunged 20%, to $3.98 billion. Says Tom Pirko, president of New York consultant Bevmark: "If Coke wants to succeed, [it has] now got to embrace other beverages."

Given Coke's long tradition of focusing most of its marketing clout on its cola brands, that's a tall order. Over the years, Coke has tended to treat its noncarbonated offerings as second-class beverages, giving them far less aggressive marketing than the flagship product. Indeed, one Coke insider acknowledges that in noncarbonated categories, the company has been content to produce what he terms "me-too" or "second-in-the-market" products that have produced small-but-easy profits. "I don't think we've gone at [alternative categories] with our heart and soul," says the executive.

BRIBERY. Making matters worse has been Coke's long-term strategy of subsidizing its noncarbonated beverages to keep competitors off store shelves. In return for cash payments that run into thousands of dollars per store, many stores agree to hand over shelf space to Coca-Cola products, including less popular drinks, such as juice-flavored Fruitopia. Invariably, the practice has left little room on store shelves for rivals such as New Age SoBe and Veryfine juices.

But that strategy may soon wear out its welcome. Some retailers have begun to revolt, scaling back on Coke subsidies in favor of stocking more popular brands. Now, on the shelves of many 7-Eleven Stores, Coke's Nestea, for instance, has had to make more room not just for the better-selling Pepsi brand Lipton but also for Snapple and Arizona Iced Tea. Other Coke products, including its newly launched Dasani bottled water and its Powerade sports drink, are getting squeezed by more popular brands, such as Poland Springs water and Gatorade. Says Jim Jackson, beverage manager for 7-Eleven: "In stores where they're competing on a level playing field, consumers usually choose competitors' products."

That's going to change if Daft has anything to say about it. Departing from years of Coke-centric tradition, Daft says he's ready to give beverage drinkers the variety of products they crave. His goal is to remake Coke into "a leader of the beverage sector, as opposed to a soft-drink company."

Daft and his team agree with analysts that to get back to those halcyon days of 7% annual growth in volume and 15%-or-better annual increases in profits, Coke will have to generate as much as 30% of its future growth from noncarbonated categories. "For us to achieve the growth rate that people are expecting, we have to become more diversified," says Steve Jones, Coke's new chief marketing officer. "We have to move beyond Coke and the carbs."

To that end, Daft, Jones, and other top Coca-Cola executives are pushing hard to shake up the company's culture. In the less than three months since Daft has been in the top job, he has shuffled his management team to promote executives with a track record in noncarbonated products. What's more, Daft hopes that his bombshell move on Jan. 26 to lay off roughly 20% of Coke's workforce will help reduce bureaucracy and allow more new ideas to bubble up from the field.

Next on Daft's agenda is laying out basic guidelines for new products, packaging, and marketing. Then he intends to cut his local managers loose to develop products tailored to local tastes. While Coca-Cola already sells some 300 diverse beverage products around the globe, Daft envisions a day when Coke will offer 2,000 or more, many of which will be new juices, teas, and hybrid products, such as carbonated tea. "We will be trend-setting," he vows.

That would surely mark a dramatic shift from Coke's predicament today. And Daft has a fighting chance. For starters, Coke's vast global network of independent bottlers, valued by some analysts at $100 billion, gives it a reach that no other beverage company can match. Even so, analysts believe that those bottlers, many of which are financially stretched from costly expansions of the past two decades, may be reluctant to plunge into the nonsoda market. Generating the volume needed "to provide profitsis going to be a challenge," says Scott Wilkins, an analyst at Deutsche Banc Alex. Brown Inc.

Now, Coke Is No Longer "It"

Even if Coke persuades bottlers to carry its new drinks, some question whether the company will enjoy the same brand equity in, say, mango juice in Latin America or rice-based drinks for Asia as it does with Coke. "Without the Coke name, they're just another brand on the shelf," says Brown Brothers Harriman & Co. analyst Roy D. Burry.

Still, beverage experts say Daft is on the right track. With consumers voting convincingly for new noncarbonated beverages, it would be suicide to cling to cola alone, they say. Just ask Jill Friedman and the many others like her. They're not drinking as much Diet Coke, but they are drinking something. And whether it's juice, tea, or water, Doug Daft is determined that they'll soon start buying it from Coca-Cola Co.

    Before it's here, it's on the Bloomberg Terminal.