Coca-Cola: Right Stock, Wrong Reason

By James Brumley | November 26, 2009 AAA

As details of Coca-Cola's (NYSE: KO) investor and analyst conference last week start to spur enthusiasm, I'm compelled to offer the "reality check" regarding the company's 2010 growth strategy. Despite some snazzy slogans, the few details that could be gleaned from the conference indicated a company still a little out of touch with what makes consumers tick. (Learn to pick out your investments on your next trip to the mall in our related article, Analyzing Retail Stocks.)

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Three-Point Attack For 2010
Coca-Cola's marketing and product focus is being overhauled for next year and beyond, with three keys in the limelight:
1) Beverages other than carbonated drinks - milk, water and juice in particular - will be developed;

2) A one-on-one marketing approach will be implemented with specific customer segmentation (moms, teens, ethnicities, etc.), making use of social networking mediums;

3) Advertising will have more local relevancy, which means fewer global-oriented messages (and fewer ad agencies).

It All Makes Sense At First Glance
Coke already owns 51% of the carbonated beverage market, while next-best Pepsico (NYSE: PEP) is trailing with a 22% market share. So, there's not much more to squeeze out there. The company is No.2 in sports drinks, though, and No.3 in packaged water, meaning there's a bigger piece of pie to hunt.

As for the advertising and marketing tactics, those too sound exciting. After all, we are living in a digital, "me, me, me" age - why not refit the message for a new kind of consumer? That, however, is where I start to see too many red flags.

Buzzwords Abound
Nobody loves a clever catch phrase more than I do, but a few too many of them repeated over and over again make me wonder if an organization is trying to conceal something. Or in Coke's case, perhaps the worry is that the company hasn't quite connected "marketing ideas" with "sales conversions".

Stemming from two of the three points in the three-pronged marketing plan, Coke intends to "scale [advertising] globally while being locally relevant" and "improve connections with consumers".

Good ideas, right? Read them again, though, and let them simmer.

Ideas Too Predictable
Now - and be honest - is there any part of those two ideas that every other company out there isn't also trying to do? It's not unique. In fact, it's quite predictable. Yes, fewer ad agencies means better margins. If it was a possible and plausible idea, though, why wasn't it done years ago?

Oh, and the only real "one-on-one" specific offered at the conference was the use of Twitter and Facebook as a way to utilize social media to garner business. The touted upside to this effort was that followers, page views and fans could be objectified, and therefore assigned an ROI.

I applaud the willingness to embrace social networking, but I have to wonder why Coke hasn't figured out what most Facebook and Twitter users already know - the larger the following, the less one-on-one and personal the medium becomes.

In-Store Control Overestimated
Coke representatives also specifically mentioned "operational marketing" like in-store marketing as essential to helping foster a personal connection, but even here it appears the company is hoping more than laying a real foundation.

Wal-Mart (NYSE: WMT), for instance, as the world's largest retailer is clearly an important venue for Coke. In Wal-Mart stores, though, vendors do as Wal-Mart says. One of the more intense examples of this was Wal-Mart's decision a couple of years ago to sell a gallon of Vlasic pickles at a price less than most grocers sell a quart size. The deep-discounting hurt Vlasic's premium image that took years to build. Wal-Mart's take? Too bad.

Or, things could go the other direction with Coke's retailers. Costco (Nasdaq: COST) recently dropped Coke products altogether over a nasty price dispute. Costco wants to offer Coca-Cola products at rock-bottom prices, while Coke wants to maintain its status as a premium brand that deserves premium pricing.

Not that Costco is Wal-Mart, nor Coke is Vlasic, but the idea is the same - large retailers call the shots in their stores. Any connection marketing Coca-Cola wants to do will be done outside the stores through other advertising mediums.

Outlook
Even though the marketing and growth strategy is flimsy, none of this is to say Coke's a weak investment. It's not. The bulk of its success is apt to lie in the company's sheer size and deep pockets, though, rather than a brilliant growth strategy.

Bottom line? KO is an adequate investment with plenty of stability. It is not, however, a "must have". If you're expecting red-hot growth following last week's analyst and investor conference, it's time to rein in the enthusiasm.

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