Trouble bubbles for Coke

A lawsuit and a probe over the cola maker's fountain business leaves a bitter aftertaste in the wake of Vanilla Coke's success

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For his part, Heyer in a July conference call vowed the allegations wouldn't be ignored but they wouldn't distract Coke either. "We take all allegations of any inappropriate conduct very, very seriously," he said. "We feel strongly that our financial statements properly reflect the financial performance of our company, and we do not believe based on exhaustive internal analysis that there are any material misstatements in our [financial] results [Coca-Cola did identify several small items related to Whitley's allegations, resulting in a $9 million write-off] We have always prided ourselves on the quality of our people and our actions. As we go about our daily activities, we will always act with integrityAlso, let me assure you that we are very focused on running our business and we will ensure that our senior operating officers remain focused on running each of their operations around the world to continue satisfying more and more consumers every day. Our associates in food service are focused and motivated."

The fundamentals

Coke's bigger problem may be addressing fundamental challenges in the beverage business. Thomas Weisel analyst Skip Carpenter downgraded his outlook on Coke in September based on concerns about global beverage volume.

 

"We believe there is mounting evidence that Coke's objectives of 5 percent to 6 percent unit case growth and 10 to 12 percent earnings growth may be unrealistic on a sustainable basis," Carpenter recently wrote in a report. Coke benefited in the short term earlier this year from Europe's heat wave, though not from a summer that was colder and wetter than usual in much of the U.S.

 

Though Coke increasingly has focused on bottled water, fruit juices and sports and energy drinks in recent years, carbonated soft drinks still account for about 85 percent of its worldwide beverage volume. He believes that CSDs are on a "long-term secular decline" not only in established markets such as the U.S. and Germany but even emerging ones, such as Mexico and Brazil.

 

He believes that in addition to cost cutting and price increases, Coke will have to focus more on marketing and innovation , a tall order indeed.

 

For its part, Coke sees itself moving ahead in most of those areas. A 52-week analysis completed in July showed more U.S. households have tried Vanilla Coke than any other CSD brand. And they liked it when they did, with 90 percent of volume coming from repeat customers. Sprite Remix, a tropical flavored variant launched in the spring, helped boost Sprite sales 12 percent in the second quarter in retail, despite a major push by PepsiCo's Sierra Mist.

 

Sales of Powerade were up 15 percent year to date through June, Heyer said. And Coke is continuing its expansion of its Simply Orange juice brand in the second half of 2003. With the signing of high-school-to-NBA sensation LeBron James to a long-term promotional contract, Coke is hoping the athlete will do for Powerade and Sprite what Michael Jordan did for Gatorade.

 

"We have confidence in what we are doing," Heyer said. "Throughout our system, our execution is solid and it continues to improve."

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