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1.7.4 The decline of Coca Cola

Introduction

As Coca-Cola grew to become one of the most recognized brands globally, the company began to face a series of challenges in the 1970s and 1980s. These issues included legal troubles, internal conflicts, failed diversification attempts, and fierce competition from Pepsi. This section delves into these challenges and their implications for Coca-Cola's future growth.

Competitive Practices

  • Coca-Cola encountered legal issues due to complaints regarding restrictive practices among its bottlers.
  • Bottlers were required to sell only Coca-Cola products and were restricted from bottling competitor brands like Pepsi. This exclusivity led to legal scrutiny and complaints regarding anti-competitive behavior.
  • Top executives found themselves focusing more on resolving these legal problems rather than steering the company toward future growth and innovation.

2. Internal Struggles

Rapid Growth and Administration Issues

  • The rapid expansion of Coca-Cola created administrative and control challenges. The company grew too quickly, leading to difficulties in managing operations effectively.
  • Conflicts arose among bottlers regarding pricing, with some agreeing to price increases while others resisted, forcing the company to mediate these disputes.
  • There was also a struggle to maintain control over the franchisee model, as many third-generation franchisees were reportedly not investing enough into their Coca-Cola businesses.

Understanding the Franchisee Model

  • The franchisee model involves a franchisor (e.g., Coca-Cola) providing a brand name, products, and business support to franchisees who invest in infrastructure and resources.
  • Franchisees benefit from an established customer base and operational support, but Coca-Cola struggled with franchisees who were not fully committed to the brand, undermining its market position.

3. Failed Diversification Attempts

Diversification Efforts

  • Coca-Cola attempted to diversify its business by venturing into non-core areas, such as water treatment equipment, plastic bags, and wine. These ventures included:
  • Aqua Chem: Water treatment equipment and boilers.
  • Presto Products: Manufacturer of plastic bags.
  • Wine Spectrum: Owner of Taylor California wines.
  • However, these diversification efforts did not yield the expected results, as they were far removed from Coca-Cola's core business of beverages.

The Need for Growth

  • The company's leadership believed that diversification was essential to hedge against market risks and achieve sustained growth. Yet, the attempts to expand into unrelated sectors strained resources and diluted focus on the core beverage business.

4. Market Competition and Share Decline

Increased Competition from Pepsi

  • By the early 1980s, Coca-Cola's growth rate had slowed to 1-2%, significantly lower than the historical average of 15%.
  • The compounded return on investment (ROI) dropped to just 1%, indicating declining financial performance.
  • Coca-Cola faced stiff competition from Pepsi, which claimed 29.3% market share compared to Coca-Cola's 29% for the first time in history in one of the distribution channels.

Internal Management Issues

  • Internal management issues compounded Coca-Cola's struggles, as the board of directors faced fragmentation with multiple vice presidents, many of whom were nearing retirement age, averaging around 70 years.
  • The company's traditional strength in fountain sales began to falter, leading to losses in that segment.
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