Coca-Cola North America Energy Drink Failures – Hard
Seltzer & Sports Drinks Focus – 3 June 2021
Disclaimer
The information, material and content contained in this transcript (“Content”) is for information purposes only and
does not constitute advice of any type or a trade recommendation and should not form the basis of any investment
decision. This transcript has been edited by Third Bridge and may differ from the audio recording of the Interview.
Third Bridge Group Limited and its affiliates (together “Third Bridge”) make no representation and accept no liability
for the Content or for any errors, omissions or inaccuracies in respect of it. The views of the specialist expressed in the
Content are those of the specialist and they are not endorsed by, nor do they represent the opinion of, Third Bridge.
Third Bridge reserves all copyright, intellectual and other property rights in the Content. Any modification,
reformatting, copying, displaying, distributing, transmitting, publishing, licensing, creating derivative works from,
transferring or selling any Content is strictly prohibited.
Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Damian Marano (DM)
Former VP, National Sales at The Coca-Cola Co
Agenda:
1. Monster (NASDAQ: MNST) and Coca-Cola's (NYSE: KO) ongoing partnership – distribution and
competitive dynamics
2. Coca-Cola energy drink brand development challenges
3. Health and wellness consumer preferences
4. Hard seltzer and sports drinks outlook
Contents
Q: Could you give an overview of the energy and sports drink industry, including its evolution over the years,
4
any key drivers and the top players?
Q: Could you expand on some of the industry drivers and how Gatorade has become so successful, given the
lack of the health halo? Was it the strength of the marketing campaign and the bottling system?
5
Q: Could you discuss the sales split across the away-from-home and at-home distribution channels in the
sports drinks industry?
Q: Can you assess the power of the distribution channel that Coca-Cola and Pepsi control and how that has
come to be, given the convenience channel is so fragmented?
Q: Could you give an overview of the market share and drivers of the energy drink industry?
5
6
6
Q: Can you expand on the Coca-Cola-Monster relationship and their approach to international distribution?
I know they have a part partnership.
7
Q: Why do you think Coca-Cola continually fails at successfully leveraging its brand with innovation?
8
Q: What are your thoughts on the global landscape of Coca-Cola’s energy drink? My impression is that the
company made it very specific to and in the US.
Q: How is Coca-Cola dealing with the increasing number of smarter and health conscious consumers? How
might it approach this in the longer term? You mentioned the many ways it tries to compete with Gatorade,
but its main product is Coke, which is high in sugar.
8
8
Q: Why do you think Coca-Cola has had a lack of investment in coffee in the US? Is this to do with tastes and
9
targets?
Q: Why do you think Coca-Cola has never made a big attempt to get into alcoholic beverages such as hard
seltzers?
Q: Do you think most players are playing catch-up in the hard seltzer market, given the market is already
getting so crowded?
9
10
Q: Do you think there is anything that differentiates Topo Chico from others, whether its positioning, target
consumer or price point?
10
Q: You touched on Coca-Cola’s lack of innovation. Which competitors do you think are taking a lead in
innovation? What challenges will some upstart brands face, whether the barriers to entry got higher or
lower?
10
Q: Could you expand on the complexity of the distribution network and relationships between competitors
and Coca-Cola, including how competitors may try to leverage Coca-Cola’s distribution network while also
competing with the company directly?
Q: How much control do the huge players have over the distribution network, because it strikes me as
somewhat anti-trust behaviour?
11
11
Q: How serious is the industry getting about sustainability issues? What sustainability issues face big bottle
packaging companies?
12
Q: Many companies share sustainability reports and make it sound very serious. Do you think there’s a lot of
12
industry-changing action behind some large commitments and statements?
Q: What do you think it is going to take for industry-changing sustainable packaging to come to fruition? 12
Q: What cost pressures have big beverage companies and Coca-Cola specifically faced due to the pandemic,
whether freight or other costs?
12
Q: Could you touch on players’ power to continuously pass on price increases?
Q: Could you give an overview of how the digital marketing landscape has evolved, highlighting related
challenges and opportunities to get in front of consumers digitally?
Q: Could you discuss the supplier/retailer relationships for beverages and non-alcoholic products? You
mentioned Coke and Pepsi dominate in grocery stores. There has been a lot of pushback from big chains
across other categories, with Target and Walmart aiming to pass on more costs to branded players.
13
13
13
Q: Can you discuss brand affinity and how Coca-Cola and Pepsi have maintained brand strength, given that
CPG retailers want to pass on more costs to suppliers in other categories and are launching private label
brands very quickly to compete with their clients? Why is private label not prevalent in the beverages
segment? Can you assess the consumer preference for strong brands?
14
Q: Could you expand on the impact of e-commerce and the D2C approach, which you seem more pessimistic
14
about?
Q: Some players such as Dr Pepper are having significant distribution trouble. The company acquired and
inherited many poor distribution contracts with that. Could you discuss competitors scaling their
distribution?
Q: Is there anything relating to Coca-Cola’s ongoing initiatives that you think investors should pay more
attention to?
14
15
Coca-Cola North America Energy Drink Failures – Hard
Seltzer & Sports Drinks Focus
Transcription begins at 00:00:00 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled Coca-Cola North America Energy Drink Failures –
Hard Seltzer & Sports Drinks Focus. I’m Nyree Hinton and I will be facilitating today’s Interview with Mr
Damian Marano, former VP, National Sales at The Coca-Cola Co.
Damian, before we get started, please state I agree or I disagree to the following statement: You understand
the definition of material non-public information and agree not to disclose any such information, or any other
information which is confidential, during this Interview.
DM: I agree.
NH: Thanks, Damian. Could you start by giving an overview of your background and roles in the industry?
DM: Yes, thanks, everybody. Damian Marano, currently CEO of Docklight Brands. Docklight Brands is a
consumer products goods company focused on developing, among other things, beverages, ready-to-drink
beverages in shops in the cannabinoid, so CBD and cannabis marketplace. I’ve been in that role since leaving
Coke, for about three years. Prior to that, I spent 12-plus years at the Coke Company in progressive roles of
various experience, calling on customers of all different types and sizes across North America, multichannel,
multi-customer. Then just a little fun background on me, I grew up in the beverage business. My dad actually
did 10 years at Pepsi and 10 years at Coke, so I’ve been around the big soda space for close to 32 years and
seen it ebb and flow pretty interestingly over that time.
[00:01:42]
Q: Could you give an overview of the energy and sports drink industry, including its evolution over the years,
any key drivers and the top players?
DM: Yes, it’s a lot. Let’s unpack that a little bit at a time. Why don’t we start with sports drinks first and then
move into energy drinks, because I think energy drinks will be a little bit more succinct, at least relative to the
conversation around sports drinks? The sports drink category was dominated historically, for a long time, by
Gatorade. Gatorade was originally part of the Quaker Company and famously, I’m not sure how many people
realise this, Coke actually was supposed to buy Quaker, not Pepsi, and Warren Buffett famously did not give
board consent for that transaction. What that led to for the Coke Company was, call it, a dramatic loss of share
in the sports drink segment, sports drink category, and convenience retail. I’m not sure how many people on
the phone go into C-stores, but for a long time you saw a huge penetration by Gatorade into convenience retail.
In the US at retail, from an outlet count, convenience retail is the highest number of total stores. There are
over today, call it, about 160,000 convenience stores in America and Gatorade and the Pepsi bottling system
really did well driving those cases for well over a decade, at the expense of Coke, so an interesting
conversation. It forced Coke to make Powerade. Coke spent a ton of money pushing Powerade with the
bottling system and trying to get it into a strong number two position, but they just never really made it work
the way Gatorade organically worked in the marketplace with consumers and sponsorships and engagement.
You look a little bit further down the line, and when I was at Coke what was interesting is actually when Coke
bought Glacéau and Vitaminwater. What you saw was, when that transaction went through, Coke was actually,
effectively, able to use Vitaminwater as a weapon more like a hydration sports drink, or better-for-you
Private and confidential 4
product, against Gatorade, and they really were able to in the late ’00s, I think, when that transaction went
through, really able to successfully grow the Vitaminwater base and use that to combat Gatorade very, very
effectively. Vitaminwater now gained supremacy over Gatorade, and things go in phases. Coke then took
Vitaminwater into dispense business in the restaurant and on-premise side. That went really well. They lost a
little bit of focus, didn’t have a lot of good innovation on continuing to grow Vitaminwater. It got a bit
stagnant.
Then recently, when you look at that sports drink category, Coke made the acquisition of Bodyarmor and
Bodyarmor, that acquisition went down probably just about three years ago this summer, the first equity
investment, then they converted it over into, I think, recently, a more comprehensive ownership structure.
What’s interesting is when you look at what Bodyarmor gave Coke, in my opinion, it gave them a wellness
platform, which Vitaminwater didn’t have. It didn’t have that health halo. Given the sugar content in some of
their products, and even Gatorade to a certain extent, had to do a mass amount of reformulation to take the
calorie count down, so that these beverages were actually healthful for athletes and not just loaded with sugar.
Now you’ve seen Coke really effectively scale Bodyarmor across retail and continue to advance their leadership
in the sports drink position. It’s a bit of ebb and flow. The pendulum swings back. Gatorade has done a bunch
of retooling on their formulations now. They’ve cut calorie content. They’ve really tried to re-engage with the
next generation of consumers, millennials, Gen Z, and I wouldn’t be surprised to see Gatorade get on the
uptick here, as Pepsi continues to pour resources into their lead horse in that sports drink hydration category.
That was a little bit of a lot.
[00:06:41]
Q: Could you expand on some of the industry drivers and how Gatorade has become so successful, given the
lack of the health halo? Was it the strength of the marketing campaign and the bottling system?
DM: Yes, it was the strength of the marketing campaign, and remember it’s also a function of time. When this
deal went through with Gatorade, it was probably the late ’80s, so the world was vastly different then that it is
today, if that makes sense. It was a function of the time and Gatorade being this neat, better-for-you beverage,
when in reality Gatorade probably had more or the same amount of sugar in it on an eight-ounce serving basis
as a can of Coke. It’s the exact same thing that happened with Vitaminwater. Vitaminwater hit, everybody said,
“Vitaminwater, check out the name. It’s healthy and it’s good for me.” If you read the nutritional panel and you
drank a 20-ounce Vitaminwater, you actually consumed a measurably significant larger increase of sugar,
because you were drinking 2.5 servings instead of a 12-ounce serving or 1.5 servings on an eight-ounce basis, if
that makes sense. What happened is, generally consumers don’t read labels. I think about 50% of US
consumers, if memory serves correctly, don’t generally read nutritional labels, but as people become more
aware of consumption patterns and especially looking to eliminate incremental sugar intake, that’s one of, I
think, the consumer drivers that have been a headwind against the success of these companies and why
they’ve had to go so far forward into reformulation.
[00:08:29]
Q: Could you discuss the sales split across the away-from-home and at-home distribution channels in the
sports drinks industry?
DM: Yes, we would call it, speaking from the Coke company perspective, the way we talked about it was off-
premise consumption and on-premise consumption. Off-premise consumption was generally stuff you bought
to take with you and on-premise was stuff you drank when you were on the premises. One of the biggest
drivers of on-premise consumption is restaurants. The Coca-Cola Company in the US has 80% share of
restaurants. What’s interesting is they never really effectively turned that huge dominant market share
position to an advantage for Powerade. Also, correspondingly, you never really saw a penetration into non-
exclusive accounts of Gatorade. Where you really saw the battle be won and lost was in convenience retail,
with the focus on single-serve beverages. In Coke speak, we call it immediate consumption, meaning, “I’m
Private and confidential 5
going to buy it and drink it today,” vs future consumption, “I’m going to buy a pack and take it home with me.”
The reason convenience retail is so important is it drives a huge amount of single-serve beverage sales and and
if you look at all the other, call it, sports drinks, hydration beverages that have come and grown, they’ve all
been born in convenience retail.
Vitaminwater, by brand, Bodyarmor, because there are so many stores you’re able to drive a really solid
margin per transaction for the retailer and for the client, and if you can make it work in convenience retail on
single-serve then, over time, you’re able to transition into your traditional grocery stores, your Safeways, your
Publix, your Walmarts, with a future consumption, ie a case like a 12-pack or a 24-pack. Really there is
distribution and when you’re on the Coke or Pepsi truck, you have great distribution. The key is winning the
channel and really winning in convenience retail for those sports drinks or what they would call an isotonic or
hydration beverage occasion. Then part of what drives that is the underlying composition of the constituent
consumer segment that frequents convenience retail is blue-collar males, generally 18-35, so it’s construction
workers who are coming in and buying two or three to drink while they’re at work in the hot sun.
[00:11:22]
Q: Can you assess the power of the distribution channel that Coca-Cola and Pepsi control and how that has
come to be, given the convenience channel is so fragmented?
DM: The convenience channel is not really fragmented. There are 160,000 stores. The top chains, 7-Eleven
has, now that they’ve closed the Speedway transaction, north of probably 14,000 stores. Circle K is just under
10,000. You’ve got number one and number two representing 25,000 of the stores, so roughly 15%. What’s
interesting is it starts to fall off pretty quickly from there. Speedway used to be right underneath Circle K and
now they’re part of 7-Eleven. When you get outside, say, the top 100 chains, you start to see convenience retail
disaggregate into a lot of single-unit operators or, call it, non-multi-unit, so people who have less than, say, 10
stores that they operate themselves, so non-chain. Where you get the benefit of distribution is not in the truck
driving to the store, but in the person who manages that relationship, ie the direct store distribution partner,
so the Coke person who goes in and takes the order, or the Coke telesale, or the Pepsi telesale person who
phones the outlet to take the order every week. I’m not sure if I answered your question effectively, but it’s
really about how you service the account, because there are trucks that go there. If you look at what’s
developing now with, say, Molson, the beer company, saying, “We’re going to be a beverage company, not an
alcohol company,” and they’ve recently moved, and this is a little foreshadowing, into an energy drink with
Dwayne Johnson, The Rock, they probably did the analysis and said, “Our trucks are going to these stores once
or twice a week. We might as well increase the draught, because there’s one cost to stop the truck, and the
more I can sell it just helps me spread the cost to stop the truck and pay the gentlemen to get off and unload
it.”
[00:13:43]
Q: Could you give an overview of the market share and drivers of the energy drink industry?
DM: It’s interesting. I had a first-hand look at energy drink, because I was at Coke when they first hit, and
what was interesting was the two leaders today, and the beverage world loves, in my opinion, to dissolve down
to duopolistic competition, Coke and Pepsi, what we were talking about, Gatorade and Powerade, Red Bull and
Monster, essentially. If you look at where energy drinks started, you would think that Coke and Pepsi would
have been the market leaders, given their distribution, infrastructure, their reach, customer relationships, etc.
What happened, and I saw it first-hand at Coke, is Coke really didn’t want to get into energy drinks. I think
they stuck their head into the sand. They missed seeing the trend. Again, a lot of it started in convenience
retail. Monster really came to the fore and built out a big footprint in convenience retail. That was their moat.
They owned that channel. Monster used third-party distribution. If you look at what Red Bull did, Red Bull
went on-premise and they really built out first this huge moat in bars and nightclubs and restaurants where
you mix Red Bull with vodka, and they had their own DSD system. It was a different strategy and both
Private and confidential 6
afforded them different ways to grow. You fast forward now and now Monster is in the grocery store and so is
Red Bull and they’re the market leaders and the multibillion-dollar energy business, but how they got there, in
my opinion, is pretty different.
It was interesting seeing Coke for the time I was there, struggle with energy drinks. First, they dealt with issues
around, “What happens if you drink too much of them?” health and safety issues, because Coke and Pepsi,
being responsible companies, are highly concerned about what they put into the marketplace, and there was a
bit of uncertainty over how much caffeine you should consume. Then once they got there, even though they
had the distribution reach and the customer relationships, they couldn’t hook the consumer. Full Throttle was
a failure. Coke discontinued it and then they made their equity investment into Monster and put Monster into
the global Coke distribution system. I think from where I sat, that was a really shrewd move for Coke, because
the Coke system is great at distribution, probably not that great at innovation. If you take a good product that
has kind of a zeitgeist with consumers and you can run it through the red truck, they can execute it pretty
much better than darn near everybody, maybe only other than Pepsi, and they can build and continue to build
on that foundation across multiple channels. I’m less familiar with Red Bull, because we saw them as a
competitor, so we were all about Monster and we had a lot of insights into how Monster as growing and how
the teams were selling it and gaining share. Interestingly, Monster was never able to translate the relationship
with Coke into any real measurable success in the on-premise and restaurant channel, despite Coke’s huge
market share.
NH: Why do you think that?
DM: It’s a good question. I think part of it is just the consumption occasion. The majority of Coke’s business
in the restaurant space is quick-service restaurants, so McDonald’s, Burger Kings, those kinds of chains, and a
lot of the volume, the sales in those restaurants, 50-70% of sales at a quick-service restaurant usually go
through the drive-through. Packaged beverages, maybe other than bottled water, never really sell because
they’re not bundled in with the meals. If you go to McDonald’s and you order, whatever, In-N-Out was my
customer, you order a number one, it’s fries, a Coke and a cheeseburger and it’s always been the number one
and it will always be a number one. A lot of times the customers, if it’s not broken, why fix it? On a margin
perspective, the margin for a dispensed beverage is 80% for the operator, 80% profit. A packaged product is
probably 50%, so why are they going to trade out margin when they don’t have to?
[00:18:33]
Q: Can you expand on the Coca-Cola-Monster relationship and their approach to international distribution? I
know they have a part partnership.
DM: For Coke and Monster, it’s a bit of mutually assured destruction, or prisoner’s dilemma. Monster is a
monster, pun intended, in the energy category. Unfortunately, or fortunately for Monster, they shackled
themselves to the ship of Coke bottling distribution, both here in the US and outside the US. Let’s not talk
about the US for now. Outside the US, Coke’s distribution network is incredible. Pepsi is good in the States,
not nearly as strong globally. If Coke’s distribution got a cold in the US and internationally, Monster is going
to get the flu, because it’s going to be really hard for them to recreate the reach, especially outside the US, that
the Coke system affords them.
NH: In some case, they’re stuck?
DM: Yes, and that’s what I mean. It’s a bit of a détente. Coke has made the equity investing in Monster and
Monster has done well for them. I’m sure Monster may or may not agree with all of the things Coke wants to
do. It’s like any kind of positive relationship. There’s probably some tension inherent in it, let’s just put it that
way, keeping it nice. At the end of the day, if Coke loses Monster, you would be giving up the best energy brand
you’ve got, by a country mile, and if Monster gives up Coke, your stock is going to crater, because how are you
going to recreate the delivery system?
Private and confidential 7
NH: Coca-Cola attempted to create its own energy drink and seemed to invest a lot of time and money into
that. Why do you think it decided to withdraw so quickly in the US?
DM: Because it failed. That’s my opinion. I read it and I was, “Why would any consumer want Coke energy
drink?” Coke’s whole campaign is open happiness. It’s this fun, effervescent, bubbly product. It’d be like Coke
putting their name on chewing tobacco. Why would you do that? It’s a bit of the hubris that exists within the
Coke brand. It’s like, “If I put the Coke brand on anything and I put it in my distribution system, it’s going to
sell,” but I think it misses a key point, which is what do consumers want from your brand, and do they really,
really want Coke energy? Years ago when I was at the company, they had this product called Coke BlāK and it
was a coffee, carbonated beverage. It was really strange and it was a spectacular failure, and it was just one of
these things where how did this get through the innovation pipeline and get forced into the bottling system in
North America? It got on the shelf and then it was a spectacular failure.
[00:22:25]
Q: Why do you think Coca-Cola continually fails at successfully leveraging its brand with innovation?
DM: In my opinion, Coke is not good at innovation. They’re not. They’re not good at it. What they’re good at is
execution and the bottling system, in my opinion, is as much an asset as a liability. The company itself, they do
not do a good job at innovation and they don’t do the best job at incubation of baby brands. There is a long-
storied history at Coca-Cola of cool, niche brands that they brought into big red that died on the vine, because
the joke was they’ll never be as big as Coke, and you can’t, in my opinion, incubate a brand but hold it to the
same standard as something like Coca-Cola. The Coke brand is both a blessing and a curse. It’s really, really
hard for the company to have this wildly successful brand and then try and grow it. In other categories, the
company has done really well. If you look at chilled juice and what Coke did with Simply to head off Tropicana
and put Tropicana between Simply and Minute Maid, that was brilliant. That was a grocery store strategy that
they executed to perfection. Then you look at Coke invested in Odwalla, they shut it down. Coke had a cold-
pressed juice company, they exited that investment. I think the rub for Coke is if they can’t take it and
immediately scale it, they’re not great at fighting the ground war and going through and being scrappy, and
building a really strong consumer proposition, market at a time. That’s what the Glacéau guys did. They
literally hopped, skipped, from market to market and picked up a DSD independent in each one of those
markets, and only grew as fast as they could grow their distribution infrastructure.
[00:24:48]
Q: What are your thoughts on the global landscape of Coca-Cola’s energy drink? My impression is that the
company made it very specific to and in the US.
DM: I just don’t know what the global energy consumer is. It seems like, especially with Monster, it’s custom-
tailored for a US consumer. Again, that male 18-35, it’s built for it. I think Red Bull with the on-prem and the
mix with alcohol might have a little bit more of a universal reach, because it’s a different occasion, but I don’t
know if the energy companies are going to build the same moats in non-US markets vs what they’ve built in
the US market. Maybe some other places like Australia, the United Kingdom, but I think Africa is going to be a
challenge, Asia and the Middle East, and broader parts of the European Union.
[00:25:58]
Q: How is Coca-Cola dealing with the increasing number of smarter and health conscious consumers? How
might it approach this in the longer term? You mentioned the many ways it tries to compete with Gatorade,
but its main product is Coke, which is high in sugar.
Private and confidential 8
DM: I think that’s where they’re trying to make bets and look at future trends and consumption patterns, and
Coke did a great job, a masterful job of Honest Tea. That was a home run. It’s a great product. Health- and
wellness-focused. They brought it in through a venture with an emerging brand as a packaged product, scaled
it, grew it. Had a minority stake. Converted it to full ownership and then they did a great job, because we took
it to on-premise, because brewed tea really translated well from a single-serve to a three- to five-gallon tea urn,
and it’s done really well. I think Coke is searching for the next Honest Tea. Another interesting one is Coke
bought Glacéau Vitaminwater, got Smartwater as an afterthought. Smartwater is one of their leading water
brands and they’ve done a really good job with Smartwater. I think for them, it depends. Then when you go
outside the US and you look at some of the largest brands, they’ve really been more health-halo-focused. Coke
bought Innocent, which is that juice and smoothie company in the UK. Fantastic product. In Japan, they have
Georgia Coffee, which is a massive brand of ready-to-drink coffee. They’ve got a couple of tea brands across
Asia that do really well. I think what’s interesting is in other non-US markets, they’ve gone into other formats
and done really well. What’s interesting to me is they’ve never brought really Georgia Coffee, effectively, back
to the US in a ready-to-drink format. In Japan, they probably have a 100 different stripes and variations of
Georgia Coffee that do really, really well, yet in the US, Coke basically has no ready-to-drink coffee.
[00:28:18]
Q: Why do you think Coca-Cola has had a lack of investment in coffee in the US? Is this to do with tastes and
targets?
DM: I don’t know. In Japan, Georgia Coffee sells more than Coke, so that’s a pretty good metric. I think it’s
fascinating, because coffee could be an energy substitute. It’s a big market, well-established, well-known. Pepsi
did the distribution deal with Starbucks on the Frapp and the Doubleshot and Coke was never really able to get
it. I lived in Japan, I studied Japanese, and I was amazed at the innovation and the capability that exists
within the Coke system on coffee. I think Coke is the fourth- or fifth-largest purchaser of coffee beans in the
world.
[00:29:15]
Q: Why do you think Coca-Cola has never made a big attempt to get into alcoholic beverages such as hard
seltzers?
DM: That’s a great question. In my opinion, and, like I said, I grew up in the Coke system, I met some pretty,
actually some really, really senior people. I think for a long time, Coke is a very conservative company. There’s
been this bright line that permeated the organisation against [sic] staying out of alcohol.
NH: Do you think that attitude is shifting?
DM: This is my opinion, I think what you’re seeing is the line is blurring, if that makes sense. Let’s look at
what Molson is doing, where they’ve said, “We’re not a beer company. We’re a non-alcoholic company.”
Molson is the partner that’s distributing Topo Chico hard seltzer. I think what you see, at least from a Molson
perspective, is, “Beer, kind of like soft drinks, is declining and what we need to look at is what are our
competitive advantages? We’ve got reach in the distribution system. We’ve got commercial relationships.
We’ve got consumer relationships. How do we translate that into future growth?” If you’re in the beer
segment, the natural place to go look as non-alc, just like if you’re a non-alc and you want to stay on beverage
pure play, where are you going to go? Alc. I think that’s where it becomes really, really interesting to see the
blurring of these lines and do these companies start to tie up in alliances, so that they can drive their collective
revenue numbers more effectively, maybe through account management, maybe through distribution, maybe
through product development? I think you’re only beginning to see the start of this, because, in general, most
of the large beverage companies, when you look at beverage growth, most of Pepsi’s growth comes from Frito-
Lay, not really from the namesake of the company. Beer has generally been declining. You look at what’s gone
on with Budweiser, you look at what’s gone on with Molson Coors and I think, in my opinion, it seems more a
Private and confidential 9
question of when, not if, some sort of more formal tie-up or collaborative relationship gets established.
[00:32:09]
Q: Do you think most players are playing catch-up in the hard seltzer market, given the market is already
getting so crowded?
DM: I think so. The hard seltzer thing came out of left field and now everybody and their mother is trying to
get into it. I don’t know how much room there is for all these, essentially, line extensions of legacy brands into
hard seltzer.
[00:32:36]
Q: Do you think there is anything that differentiates Topo Chico from others, whether its positioning, target
consumer or price point?
DM: I think it’s more around credibility the brand has with consumers. It’s a really popular product, or it’s
very, very popular, so I think it’ll lend itself. It’s a good fit for the category, because a hard seltzer, it’s kind of
this new format, so I think it’s pretty shrewd on Coke and Molson’s part to team up and take this product. A lot
of Topo Chico sales we see happening on-premise. It’s very popular in restaurants. People add it to the menu
as a sparkling water occasion or opportunity for sales. I think that’s smart. I know one of the questions was,
“When you look at consumption trends?” During COVID what you saw was the on-premise occasions going to
zero and it was all off-prem, so I’ll be curious to see what the sales look like on Topo Chico whenever Molson
reports them out, and what the split looks like between is this going to convenience stores and grocery stores,
or is this going to restaurants and bars?
[00:33:56]
Q: You touched on Coca-Cola’s lack of innovation. Which competitors do you think are taking a lead in
innovation? What challenges will some upstart brands face, whether the barriers to entry got higher or lower?
DM: I’m living it now. I’m commercialising CBD beverages across the US and getting distribution, if you don’t
understand, distribution is really hard and really your distribution footprint drives availability, meaning the
more means you have to get product to the shelf, means the more consumers can go find your product and
sample it and enjoy it. I think what’s interesting is a lot of people say, “I’m omnichannel,” and they’ve got some
distribution, but they really focus on e-commerce. I just don’t think e-commerce is great for beverages. For me
personally, in my opinion, I think it’s bad to ship water. It’s heavy. It’s bad for the environment. I think that’s
interesting. I think Bodyarmor really did a good job. They came up and then recently, who else has transacted
out? Bai Brands did a really good job of building their footprint. I think Dr Pepper Snapple transacted them a
little while ago. Here in San Francisco where I live, you see Hint Water. They’ve got those lightly sweetened or
flavour-infused waters and they’ve really grown really, really strongly over the past five years. I’ve watched
them grow from local independent grocery into chain and CR. I wouldn’t be surprised to see Hint get
transacted out to a major company. Then I’ve seen other brands that I’ve seen here go into other systems and
fail. Budweiser bought a non-alcoholic energy company called Hiball that started here in San Francisco. They
put it into the Bud system and they were never able to get the traction they wanted with customers, because
the Budweiser system really didn’t do a good job of executing a non-alcoholic energy programme. Probably the
same thing we saw at Coke, where it’s, “It’s not as big as Bud or Bud Light, so why am I going to spend any
time on it when I’m the Walmart key account team?”
Private and confidential 10
[00:36:25]
Q: Could you expand on the complexity of the distribution network and relationships between competitors
and Coca-Cola, including how competitors may try to leverage Coca-Cola’s distribution network while also
competing with the company directly?
DM: They’re not going to get on the truck. Let me tell you a little story, and your audience. Do you remember
AriZona Iced Tea?
NH: Sure do.
DM: The fact that you needed a crane to lift. Weren’t they selling 32-ounce cans of that stuff eventually? It
was crazy.
NH: I believe so.
DM: Anyway, years ago, when AriZona Iced Tea really first hit the market, Coca-Cola did not have a strong
ready-to-drink tea. They had Nestea with the Beverage Partners Worldwide partnership, but that was really
more on the fountain, on the machine. They had a very strong dispense programme and they didn’t have a
good ready-to-drink tea programme, so the bottlers kept asking Coke corporate for a ready-to-drink iced tea
and Coke corporate just didn’t listen, didn’t do the development, didn’t pay attention to it, took their eye off
the ball. What Coca-Cola Enterprises did is they signed a distribution agreement with AriZona Iced Tea, and it
started doing really, really well for the bottling system. maybe a year or two into it, and I probably have my
timeline off, but I’m telling a tale and so it’s fine, Coke in Atlanta said, “We want you to carry Nestea in a bottle
or a can.” The bottling system said, “No, thanks. We’ve got AriZona Iced Tea. We’re great. We love this stuff,”
and it really got the company at loggerheads with their distribution network. There was a hold-up problem
from an economics perspective. When Coke then bought their bottlers, when they bought CCE, turned into
CCR and then re-franchised it, they made sure that all their new bottling agreements were amended such that
a bottler could not bring in a product unless it was approved by Atlanta first.
[00:38:47]
Q: How much control do the huge players have over the distribution network, because it strikes me as
somewhat anti-trust behaviour?
DM: It’s not anti-trust. What’s interesting about Coke is generally with their bottlers, they own a decent
proportion of equity in almost all the bottlers, especially outside the US. The company, and when I say the
company, I mean The Coca-Cola Company, ticker symbol KO, will arrange for bottling systems to combine.
They did it in Japan. There was a Japanese bottler for eastern Japan, western Japan, they had a little bit of a
shotgun wedding. They did it in Europe. They took together three or four independent bottlers, turned it into
one Pan-European bottler. They have literally one bottler, Amatil, that covers Australia. I think another bottler
just bought them. At the end of the day, from the Coke Company’s perspective, the bottlers are the biggest
customers of the company, because that’s who buys the majority of the syrup. The Coke Company itself is a
syrup company. Its revenues are derived from the sales of concentrate syrup to customers in restaurants and
to the bottling system. When you look at the Coke Company’s revenues, as stated today in the Wall Street
Journal, or in their financial statements, those are concentrate revenues and they’re probably to the tune of, I
don’t know, between USD 42bn and USD 48bn per year, so it’s a lot of sugary syrup and diet-sugar syrup.
When you look at the total dollar value of the finished goods, ie after the water is added, it’s probably closer to
USD 130bn of product sales worldwide, and that’s one of the things most people don’t realise, when they look
at the Coke Company. Yes, they do have a lot of leverage. That’s my long-winded way of saying they’ve got
some juice, or some syrup.
Private and confidential 11
[00:41:03]
Q: How serious is the industry getting about sustainability issues? What sustainability issues face big bottle
packaging companies?
DM: That’s a great question. Again, this is my opinion. I think you saw, was it yesterday or the day before,
Coca-Cola is participating in that Ocean Clean-Up initiative to try and remove plastics from waterways,
oceans, rivers, etc? I think it’s a good first step. I think that the company needs to have a better impetus to
action and to me that reads a little hollow and it’s kind of greenwashing, I think. The company a while ago,
when I was there, did that Dasani plant bottle where they were using plant-based materials in their bottle. I
think the company could push themselves, they could push the suppliers, they could push the industry to
adopt a more environmentally-friendly form of packaging. Most of the stuff you see in the ocean is Coke and
Pepsi stuff.
[00:42:34]
Q: Many companies share sustainability reports and make it sound very serious. Do you think there’s a lot of
industry-changing action behind some large commitments and statements?
DM: In my opinion, they always rang hollow to me when I was inside the machine. If you really wanted to do
it, with how big you are and your reach and your influence, you could probably force more market change if
you were really committed to it, if that makes sense. I would put it this way. It’s like when you read about a
large employer, a large retailer, committed to living wage, but then you see them not really practising what
they preach, if that makes sense.
[00:43:35]
Q: What do you think it is going to take for industry-changing sustainable packaging to come to fruition?
DM: I think it has to come from the consumer. All these companies are consumer packaged goods, consumer
products goods companies and when the consumer demands it, and by consumer it also could be customer,
when the retailers start to put in more stringent requirements, I think that’s when the companies take it
seriously. Up until the point where consumers demand it or consumers petition their legislators to draft laws
that are more enforceable with more teeth, I don’t think they’re going to change very much.
[00:44:27]
Q: What cost pressures have big beverage companies and Coca-Cola specifically faced due to the pandemic,
whether freight or other costs?
DM: The whole global supply chain is a bit out of whack. Freight costs are up, container costs are up. I just
read, it was a large beverage company and I apologise, I can’t remember which one it was, but even getting
cans and primary packaging, the supply chain is in a bit of disarray right now, as we get back to the new
normal. I remember being at Coke when energy prices spiked and it really caused Coke to put through a pretty
large price increase. The other expense is consumer marketing. These consumers are now all evaluating their
marketing, especially in the wake of the efficacy of digital marketing vs, say, the Coke billboard on Times
Square or things like that, asset-based marketing. Then you also just have people costs are up. Healthcare
costs are up. It’s really expensive to run these big systems. That’s why Coke doesn’t own their bottling system.
A distribution-based business is a little bit low-margin business. There’s a lot of cost pressure. Coke just went
through a massive restructuring in North America and they really cut deep in headcount, in my opinion,
probably to the disadvantage of the business in the long run. They’re managing Wall Street in the short run,
Private and confidential 12
but it’s not going to take too many customers to be lost quickly for them to realise, “We probably shouldn’t
have cut as deep as we did.” It was a cost-savings initiative. They’re just trying to do more with less.
[00:46:31]
Q: Could you touch on players’ power to continuously pass on price increases?
DM: You’re able to do it with something like Coke. It becomes harder to do it with other products, but it is a
fascinating thing that Coke has one price, at least where I worked in the restaurant business, and it went up
like clockwork on 1 January of every year. I think the bottle, canned stuff was pretty much priced there and
there was a variety of reasons stated why it went up. In my opinion, they weren’t correlated with the CPI, let’s
just leave it at that.
[00:47:29]
Q: Could you give an overview of how the digital marketing landscape has evolved, highlighting related
challenges and opportunities to get in front of consumers digitally?
DM: What’s interesting about Coke is, with Coke and Pepsi the best advantage they had was they had all these
assets, and I mean physical assets, like Coke has a million vending machines around the world with the Coke
logo on it. Pepsi has probably got not that many less. I live in San Francisco. You’ve got the big Coke bottle in
Giants’ field. Everywhere you went, you saw a Coke umbrella or a Coke clock, a Coke cooler, and so this is for
100 years before really the advent of social media and digital advertising, and so that brand availability, plus if
you walk down the soda aisle in a grocery store, it’s, basically, all Coke and Pepsi stuff. You constantly saw
those ads, and what this new tech has afforded Coke is a way to evaluate. “Am I shifting from physical assets
and things like this into this more B2C e-comm-driven world, where I’ve got a much lower cost per
impression?” if that makes sense. You’re seeing Coke, and Coke has done it, it started when I was there, you
saw them start to reevaluate their investment in what they call assets, so amusement parks, even sports
sponsorships, sponsorships of sports teams, stadiums and the like, because I think what they started to realise
is that the payback on the impression value created in the mind of the consumer, you could get a greater reach
much cheaper going through a digital platform than sponsoring the Colorado Rockies.
[00:49:34]
Q: Could you discuss the supplier/retailer relationships for beverages and non-alcoholic products? You
mentioned Coke and Pepsi dominate in grocery stores. There has been a lot of pushback from big chains
across other categories, with Target and Walmart aiming to pass on more costs to branded players.
DM: It’s interesting. In restaurants, Coke is usually the leader and category captain. Again, looking at the
margin per transaction, what you’ve seen is, and let me talk to restaurants historically, is quick-service
restaurants used beverages with price increases as a way to offset other cost pressures in their system. Paper
product increases, protein product increases, etc. Quick maths, a fountain Coke probably has north of 80%
gross margin on it, so if you’re selling it for USD 2.25 you’re making USD 1.80 per drink. In a restaurant that
doesn’t sell alcohol, it’s probably one of the most profitable items you can sell. It affords Coke a big seat at the
table and if Coke does their job well and helps a 3,000-outlet chain sell a couple of more drinks per day, you’re
talking millions and millions of dollars of incremental gross profit that flows through their system. It’s kind of
the labour camp that keeps the system going. If you look at the fact that a 2.5% or 3% price increase on that
works out to USD 0.001 on that transaction base, because again, we sell them concentrate, soda is 20% syrup
and 80% water. In restaurants, that’s why they have such huge scale, because even if you pass through a price
increase, it’s almost de minimis on a per-transaction serving, because of basic (talking over each other 52.02).
Private and confidential 13
[00:52:06]
Q: Can you discuss brand affinity and how Coca-Cola and Pepsi have maintained brand strength, given that
CPG retailers want to pass on more costs to suppliers in other categories and are launching private label
brands very quickly to compete with their clients? Why is private label not prevalent in the beverages
segment? Can you assess the consumer preference for strong brands?
DM: It’s a good question. If you look at water, water is, basically, unbranded. The big sellers in water are
usually Nestlé or Crystal Geyser or somebody like on future consumption. Coke and Pepsi do really well on
single-serve, Aquafina, Dasani, Smartwater. In beverage, I’ll offer you a counterpoint, if you look at what the
big CR chains are doing, convenience retail chains, are doing, 7-Eleven, I think when you look at their cooler,
probably 30-50% of it is private label stuff. You’re really seeing them make a big push in the private label. They
still have the Cokes and the Pepsis and the Gatorades, but anywhere there’s a neo-nascent category, they’ll
bring in something and if they see a contraction they’ll bring out, for 7-Eleven it’s called 7Star. They’ll bring
out a 7Star version of it and put it in their coolers. I think also, it becomes challenging for new brands to gain
scale, because now the retailers differentiated into there. That also makes it hard for Coke to grow new brands,
because now you’re fighting with the retailer’s house brand, which is really an interesting dynamic. That’s
convenience retail. In grocery stores, you don’t see that same differentiation into contract manufacturing,
because the grocery retailers just aren’t built that way, but if you look at somebody like an Amazon, now that
becomes really, really interesting.
[00:54:30]
Q: Could you expand on the impact of e-commerce and the D2C approach, which you seem more pessimistic
about?
DM: I just think that if Coke really wants to work well in e-comm, they’d have to fully embrace Amazon as a
part of their distribution infrastructure, which, in my opinion, that seems almost like a third-rail politicised
conversation. The reason I say that is history is on my side. When Coke was pushing Powerade and Walmart
wanted it, I don’t know, this is years ago, probably 20-plus years ago, Walmart came to Coke and said, “Coke,
we’re a distribution company.” Walmart is awesome at distribution. No one is going to argue with you that
Walmart is probably, other than Amazon, one of the best distribution companies in the world. They said, “We
don’t want your bottlers delivering Powerade. Deliver it to us and we’re going to redistribute it through our
system,” and Coke started doing it and the bottlers sued Coke to stop them. That’s what I mean where the
bottling system is both an asset and a liability. It’s an asset until somebody better comes along and then the
bottlers get upset that you’re infringing on their bottling rights. Now Coke is stuck between Walmart and their
bottlers. It’s a no-win situation, right?
NH: I definitely see the issue and I guess that brings me back to the complexity around the bottling system.
[00:56:17]
Q: Some players such as Dr Pepper are having significant distribution trouble. The company acquired and
inherited many poor distribution contracts with that. Could you discuss competitors scaling their distribution?
DM: It’s going to be interesting and it’s going to be situational. Probably the biggest competitor that a Coke or
a Pepsi faces is a beer distributor, because in the US I think Budweiser has 200 distributors and Molson Coors
has 120. In the Molson system, because I’m learning that one now, there are a lot of Molson distributors that
have a really strong non-beer, like I said, beverage business. They’re selling Fiji Water. You look at a company
like National Beverage, which is La Croix, and they’ve cobbled together a national network of independent
DSD distributors to give them the same size, scale and reach as, say, a Coke. There are some other interesting
Private and confidential 14
paths one could traverse that are both fraught with opportunity and challenge, I would say.
[00:57:59]
Q: Is there anything relating to Coca-Cola’s ongoing initiatives that you think investors should pay more
attention to?
DM: I think the restructuring in North America is probably the thing that needs to get the most looked at. Has
the company right-sized the business from a headcount perspective, or have they cut too deep and are they
going to be too reliant on a fractured bottling community that can’t really execute well, and there’s a high level
of coordination required now? That’s my opinion. It’s part of why I left the company, because I couldn’t toe the
company line on the bottlers. It’s a very different dynamic in the US. There are too many bottlers. It’s very
fractured. It’s a very competitive market vs, say, Mexico, Australia or Africa, where there are big bottlers that,
in a lot of cases, deliver a total beverage, non-alc, beer, other products. It’s a very different dynamic and, in my
opinion, I think the way they’ve painted North America in trying to turn it into a non-US market, I don’t think
it’s going to succeed, but that’s my opinion.
[00:59:34]
NH: We will now end the Interview. Let me close by saying thank you, Damian, for your input today. A really
great Interview and tons of colour you gave us on the different parts of the market. Thank you, clients, for
joining Third Bridge Forum’s Interview today. If you would like to speak to Damian in a private call or
meeting, please let your relationship manager know. Goodbye.
DM: Thanks. Bye-bye.
Transcription ends at 00:59:50 of the recorded material
Private and confidential 15