Coca-Cola’s decision to upscale marketing spend won’t show its true return on investment until 2016 but chief executive Muhtar Kent is adamant the discipline is key to the business emerging from a transitional 2015.
Halfway through its transitional year and the company is pleased with improving sales but knows there is still much work to do. Charging more for smaller packages in its developed markets has helped stabilise revenues as the company waits for marketing and cost cuts to bear fruit.
Greenshoots of recovery were evident in its second quarter when despite a sales decline Coke’s performance beat analysts’ expectations. Sales slipped 3.3 per cent year-on-year to $12.2bn in the three weeks to July, compared to the average estimate of $12.1bn. The period was always going to struggle to match last year for Coke, which received a boost as a result of the World Cup, though Kent stressed momentum was beginning to return to the business.
Coke reported its first quarterly sales lift in two years in April yet chief financial officer Kathy Waller was quick to play down a full upturn in results. However, a leaner structure that brings local marketers closer to global teams, stricter cost-control measures for advertising through zero-based budgeting and a double-digit increase in its marketing budget this year are gaining traction.
“It takes anywhere from 12 months to 18 months to realise the full value in terms of a return on investments [on advertising],” said Kent. “We’ve found that disciplined and quality marketing investments drive growth better than any other strategy or action.”
Although not surprising, given Coke’s status as one of the world’s largest advertisers, Kent’s belief that marketing can lead the company’s turnaround flies in the face of the more quantitative view of the discipline held by other FMCG bosses. It’s a gripe long-held by Sir Martin Sorrell, chief executive of the world’s largest advertising network WPP, who believes that companies are cutting their way to growth due to being too focused on the short term in order to appease shareholders.
Kent said: “We're seeing good initial results in markets that have received the incremental media investment and also have improved the quality of marketing in our case, and the marketing investments in North America is a great point, which is a clear contributing factor in the strong performance in the quarter.”
Coke’s revenue in North America rocketed 3.5 per cent in the period to $5.92bn thanks to a marketing model geared to sell smaller smaller-size products more often. It's an approach the business is using better balance its price mix and volumes in other developed markets amid people leading healthier lifestyles.
“Our marketing model is about more people enjoying more Cokes more often for a little bit more money, and that's what we seek to accomplish in the marketing and execution of our brands. And what you can see by the mid-teen growth of the smaller packages is, they're driving that transaction growth and transaction performance positive, so the net effect of it is that it's positive in net-net,” said Coke’s president of its North America business Sandy Douglas.
Elsewhere, Diet Coke continued to be a drag on the company’s total sales. Sales plummeted 7 per cent in the quarter, driven mainly from the US where the brand is suffering from a wider shift from frozen diet branded goods to fresh produce. While Diet Coke slump is being offset by gains from Coke Zero, the company is working on a plan of action to reframe the ailing brand. New brand building initiatives combined with innovations are being worked on to spur flat revenues so that Diet Coke can grow again.
“We are looking at multiple programs to not only strengthen Diet Coke, but to offer consumers adjacent innovation in the Diet Coke franchise and we're excited about the long-term future. But, as we say around here, it's a work in progress and a lot more work to do, but we still are very optimistic about the long-term,” said Douglas.
Marketing experts interviewed by The Drum earlier this year believe Diet Coke’s problems are a product issue rather than a marketing one.