Sector News

Coca-Cola, Carbonated Drinks Giant, To Enter The Milk Market

December 1, 2014
Food & Drink
The world’s largest carbonated soft drinks company, The Coca-Cola Company, is now set to expand its beverage portfolio beyond the liquid refreshment beverage space and enter the fluid milk market. The beverage giant, in partnership with Select Milk Producers, will roll-out its “Fairlife” fluid milk in the U.S. next month, and ramp up distribution and marketing behind this brand by early next year. According to Coca-Cola, Fairlife will contain 50% more protein and calcium, and 30% less sugar than ordinary milk, and contain no lactose.   At the same time, this more nutritious fluid milk product will be sold for twice the price of regular milk. The launch of Coca-Cola’s premium milk is coming at a time when milk sales in the U.S. are falling. In fact, fluid milk sales in the country have declined by roughly 8% in the last decade. Entering a new market will add incremental sales to Coca-Cola’s top line, but Fairlife could be more than just another brand in the company’s long list of over 1,000 drink brands sold worldwide. Despite falling levels of milk consumption in the U.S., Coca-Cola, with its strong brand recognition and marketing muscle might be able to draw customers to its premium milk, and even boost overall fluid milk sales in the long run.
 
We estimate a $42 stock price for Coca-Cola, which is around 5% below the current market price.
 
Coca-Cola is known for selling carbonated drinks, which account for almost two-thirds of the company’s value, by our estimates. The company has long been in the firing line of health activists, who discourage consumption of beverages with high amounts of sugars, calories, and artificial substances — all of which are attributes of sodas such as Diet Coke and Coca-Cola. Growing health and wellness concerns are the main reason for the soda slowdown in the last decade or so in the U.S. On the other hand, the fluid milk market is also in decline in the domestic market, despite the fact that health concerns support milk intake. Traditional milk is faced with growing competition from non-dairy milk alternatives and other healthy foods such as yogurt and energy bars. Consumption of milk is also falling as more and more customers skip breakfast altogether. In fact, half of the U.S. population above 18 years of age doesn’t drink milk. This telling statistic supports why per capita consumption in the country is estimated to drop 6% by 2025 to 86.6 kilograms, down from approximately 92 kilograms currently.
 
Despite low levels of fluid milk consumption in the U.S. at present, Coca-Cola’s Fairlife could be able to derive meaningful growth from this segment, and here’s why:
 
Healthy Product, Strong Branding-
Coca-Cola is one of the most valued brands around the world, and strong branding and marketing initiatives could drive sales for Fairlife. Perception is one factor which impacts customers’ decision in choosing foods and beverages. Although studies argue how there is little to no meaningful difference between conventional and organic milk, the latter has seen a steep rise in sales in recent times, despite the overall decline in milk consumption. In 2013, while conventional milk volumes, which formed 95% of the net volumes, decreased 2.6% year-over-year, volumes for organic milk rose over 5%. [3] Words like “organic” and “sustainable” appeal to customers, and Coca-Cola’s Fairlife, which comes from sustainable family farms and is marketed as more nutritious, could also attract much attention, enough for customers to pay double the price of regular milk. Coca-Cola is looking to shake-up the U.S. fluid milk market through innovative advertising and marketing, and strategic packaging — Fairlife comes in bottles akin to juice bottles. In Denver’s test market, where Fairlife was introduced earlier in the year, the fluid milk brand showed a sales rise of 4%. Given Coca-Cola’s marketing muscle and strong brand appeal, Fairlife could garner meaningful sales following the nation-wide launch next month.
 
Premium Milk Could Boost Profitability
 
If Coca-Cola manages to achieve high volume sales of Fairlife in the future, the product’s high prices and economies of scale could boost the company’s net profitability. Bottled water is another high volume market, but Coca-Cola and other beverage makers such as PepsiCo don’t derive meaningful profits from this category mainly due to competitive pricing. In addition, Coca-Cola has been criticized for selling “bottled tap water,” which forced the company to withdraw its water brand Dasani from the U.K. in 2004. However, enhancing the quality of regular milk might not meet the same fate.
 
Coca-Cola’s Simply brand of juice and juice drinks grew 7% in North America last year (94% U.S., 6% Canada), despite the 1.9% decline in the overall fruit beverage segment in the domestic market. Even though the high amounts of sugars and calories have dissuaded consumers from juice consumption, especially orange juices, the Simply brand enjoys strong sales as it is marketed as healthier, all-natural, and contains no added sugar or preservatives. Fairlife could be another Simply for Coca-Cola, and in addition to boosting the company’s beverage portfolio and sales, this premium milk could very well shake-up the overall U.S. fluid milk market.
 
Source: Forbes

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