The Coca-Cola Co. and PepsiCo embraced expansive and ambitious changes to their product portfolios during presentations to market analysts at the 47th annual Consumer Analyst Group of New York (CAGNY) conference at the Boca Raton Resort & Club in Boca Raton, Fla., which was held from February 20-24.
All eyes were on Coca-Cola CEO-in-waiting James Quincey, a two-decade company veteran who was roundly praised by industry analysts when announced as Muhtar Kent’s successor in December, 2016. He will officially take command of the world’s largest beverage company on May 1, 2017.
At the time of his appointment, financial services firm Cowen and Company said it was encouraged by “Mr. Quincey’s more transparent approach to communicating the challenges and opportunities for the company.” In his comments at the CAGNY conference, the incoming was open in saying Coke needs to accelerate product developments outside of soda and become a “total beverage company” that is responsive to changing consumer preferences and is “bigger than the core brand.”
Part of that re-definition includes a concerted effort to broaden the company’s spectrum of low and no-sugar beverage options. Quincey said Coke is planning to introduce over 500 new products in 2017 and reformulate another 500-plus existing items to be more in line with shifting consumer tastes and dietary preferences.
“We’ve been very clear that for us to drive sustainable, profitable growth of our brands, we also need to encourage and enable our consumers to control added sugar consumption,” he said, noting his support for the World Health Organization’s (WHO) recommendations to keep added sugars under 10 percent of daily caloric intake.
In seeking to expand its portfolio, Quincey said that Coke will be focusing attention on five “category clusters” — sparkling soft drinks, energy drinks, juices, dairy & plant based, waters & sports drinks and ready-to-drink tea & coffee.
In terms of M&A activity, Quincey said the company will look for internal brand and product development to be one of the primary drivers of company growth, “while also continuing to invest in smaller companies and make acquisitions to bring more billion-dollar brands into the pipeline.”
In line with global efforts to reduce sugar consumption, consumers are also looking for more single-serve options, Quincey said. He said that the company will continue to increase the availability of small package formats.
The packages aren’t the only things getting smaller either; Quincey said Coke plans to revamp its corporate culture to be leaner and more responsive to the marketplace, comparing it to “more of a tech company modus operandi” where speed of action is more highly valued than getting everything right the first time.
“We need to get out there faster and take more risks,” he said.
Reacting to Coke’s presentation, industry analysts have been mostly cautiously optimistic that Quincey will be able to execute the company’s proposed strategic overhaul. In Wells Fargo Securities’ “Beverage Buzz” report, Bonnie Herzog, the investment bank’s managing director of equity research,, wrote that she was “encouraged by [Coke’s] long-term opportunities under incoming CEO James Quincey, but remain cautious on near-term upside as we have been over the last several months.”
Jeremy Bowman, a writer with the website The Motley Fool, was more skeptical over the effect of reduced size packaging in the long term. Comparing the move to McDonald’s launch of all-day breakfast, a decision demanded by consumers that has had diminishing returns after initial success, Bowman called it a temporary fix that does not address the sagging demand for carbonated soft drinks. “The smaller packages may provide a nice bump for Coke for the meantime, but it won’t change the company’s long-term trajectory,” he wrote.
PepsiCo took a similar position to its historic rival during its presentation at the CAGNY conference; the company is seeking to continue developing better-for-you products and single-serve packaging formats in 2017.
The beverage giant signaled its intention to stake out a strong position in the changing market with the acquisition of probiotic drink company KeVita in November, 2016 for an undisclosed sum thought to be around $200-$300 million. Al Carey, CEO of PepsiCo North America, said that transforming its portfolio with “innovative products and packages” and “making R&D investments in new products into the marketplace” was a priority for the company, citing as examples the launch of LIFE WTR, an electrolyte-enhanced bottled water, and Tropicana Essentials Probiotics, as well as the KeVita acquisition.
Carey noted that Pepsi has already begun emphasizing its better-for-you brands in marketing efforts, noting that the company has traditionally reserved its annual Super Bowl advertising buys for its full-sugar products. This year, in addition to Pepsi Zero Sugar’s sponsorship of Lady Gaga’s halftime show performance, the company ran a splashy television spot for LIFE WTR featuring Grammy-winning singer John Legend’s single “Love Me Now.” The same ad also featured during the broadcast of this year’s Grammy Awards on February 12.
Merchandising was the third and final component of Pepsi’s portfolio growth strategy as outlined at the CAGNY conference. Carey praised the company’s “good progress” with its “Hello Goodness” vending machines, which exclusively carry its better-for-you items.
Carey also applauded Pepsi’s recent achievements in customer service, noting that the company was recently awarded “Vendor of the Year” with three of its largest customers and that, for the first time, it ranked number one in consumer insights firm Kantar Retail’s annual U.S. PoweRanking survey of manufacturers after a broad improvement across various strategic and operational metrics.
Carey concluded his remarks with a few words on Pepsi’s third major priority — improving the efficiency of its DSD operations. Although the company’s Naked Juice brand is primarily distributed via its own chilled DSD system, he said that PepsiCo has had success in trial markets in Florida and Texas with transporting certain chilled DSD products — such as Naked, Tropicana and KeVita — in a refrigerated bay of its trucks. Calling it “something we’re likely to do more of,” Carey said it “allows us to get deeper penetration into the small format, which we don’t normally do with those chilled products.”
Herzog wrote in “Beverage Buzz” that she “came away from [the] presentation still believing that PEP has the right strategy and focus in place to address the current macro challenges it is facing.”
CAMPBELL SOUP & DANONE
Presenting an audience of industry analysts with four emerging growth platforms that the company plans to employ, Campbell Soup CEO Denise Morrison emphasized the power of “strategic foresight” in her talk at the CAGNY conference.
Morrison was bullish about the potential of e-commerce to transform the food industry in similar ways to how it changed the businesses of apparel and entertainment. In order to have a more flexible distribution system, she said Campbell will develop a network of four distribution centers separate from its current warehouses.
“This constitutes a new architecture—an always-on shopping environment that provides consumers with instant and omnipresent gratification and will be free of inconvenience and delays,” Morrison said.
Other growth platforms include Limitless Local, an initiative aimed at embracing regional farming and food production, and Habit, a startup company funded by Campbell’s and led by Neil Grimmer, the founder of Plum Organics. Habit’s focus is “personalizing diets for each consumer’s physiology, lifestyle and health goals.” Morrison said the company will also look towards creating better-for-you snack options that deliver specific health benefits to consumers.
Finally, in his presentation to analysts, Danone CEO Emmanuel Faber recognized the U.S. as a major platform to reinforce the company’s growth resilience. As consumers turn towards healthier alternatives to soft drinks, the Evian brand is positioned in the fast-growing (18 percent) premium water segment. In the U.S., Faber noted, the brand is leveraging its unique attributes — its natural sourcing, for example — and its sales partnerships to deliver strong results, asserting a leading position in selected key markets like Miami.
Faber also looked towards the future, with his gaze fixed on the impending completion of Danone’s $10 billion deal, announced last year, to acquire WhiteWave Foods, a leading U.S. manufacturer of non-dairy milk, yogurt and ice cream. Highlighting gains in the company’s plant-based beverage and coffee creamer & beverage categories, Faber’s presentation stated that the purchase would help Danone “combine world-class research on Dairy and Plant-based fermentation” and “improve nutritional density” of its global portfolio.