How Coca-Cola Is Spending $2.

5 Billion to
Solve Its Problems
Coca-Cola looks to new products and new partnerships to
spark growth.
Ted Cooper
(twcooper)
Nov 3, 2014 at 8:52AM
The past year has been a rough one for Coca-Cola (NYSE:KO). Carbonated soft
drinks are under fire from consumer health advocates in countries around the world,
putting pressure on sales of Coca-Cola's primary beverage product. The long-term
impact of changes in consumer awareness and policy action designed to curb the
consumption of sugary beverages is yet to be known, but the market is already starting
to give up on the company. Coca-Cola's stock has returned less than 4% year-to-date,
compared to nearly 11% for the broader market.

Coca-Cola data by YCharts

Of course, the company hasn't given up on itself. Coca-Cola expects to spend $2.5
billion in 2014 to maintain and grow its business. It isn't enough just to spend the
money; Coca-Cola needs to invest wisely to navigate a hostile future. Let's break
down how the company is investing its cash flow.
A looming problem
Now that tobacco is on its way out, public health advocates are turning their attention
to sugary beverages. With public pressure mounting against Coca-Cola and other
sellers of unhealthy beverages, the company must adapt its product mix to changing
consumer desires.
The dire circumstances of the carbonated soft drink market are evident in Coca-Cola's
recent earnings reports. Per-capita consumption of all Coca-Cola beverages grew by
4.6% per year from 1992 through 2002 and 2.7% from 2002 through 2012. Actual
beverage volume grew even faster over those time periods because the worldwide
population was growing (thus creating a headwind for per-capita consumption).
However, global volume grew by just 2% in 2013 and per-capita consumption was
even lower. The company is on pace for 2% volume growth through the first three
quarters of 2014. Coca-Cola desperately needs to find a way to boost growth.

Coke Life is a reimagined reduced-calorie cola.

New carbonated products
Coca-Cola is expanding its soft drink offerings to help boost sales. While the
company's overall beverage volume is growing by 2% per year, its carbonated soft
drink volume is growing at 1% per year creating an anchor on overall growth.
Introducing new and exciting beverages could boost this growth rate.
For instance, Coca-Cola introduced Coke Life to limited U.S. markets earlier this
year. The U.S. launch comes after success in South American test markets. The drink
is marketed as a reduced-calorie, low-sugar cola sweetened with stevia and cane sugar
instead of high fructose corn syrup. The move looks more like a rebranding effort than

a reinvented product. With 22 grams of sugar per 330ml serving, Coca-Cola Life is
still a sugary beverage. However, Coca-Cola's success in the industry is largely due to
savvy and relentless marketing, so a reimaging effort could ease consumers'
consciences and draw people back to soft drinks.
Investing in new channels
Coca-Cola is taking a multi-pronged approach to reigniting consumer interest in soft
drinks. In addition to introducing new soft drinks, the company is investing in new
channels through which it can distribute the beverages. Coca-Cola's investment
in Keurig Green Mountain is part of an effort to deliver carbonated beverages
directly to consumers via the Keurig Cold. Keurig's new system is due out sometime
before fall 2015. Keurig's CEO says the company is "working closely with Coca-Cola
Company to develop and perfect some of their brands for our system." A successful
launch of Keurig Cold could be the spark needed to reignite interest in soft drinks,
offsetting health concerns in the process.
Diversifying product mix
Finally, Coca-Cola understands that it needs to diversify beyond soft drinks in order to
maintain adequate long-term growth. The company purchased a 16.7% stake
in Monster Energy earlier this year and expanded its distribution agreement with the
company, thereby boosting Coca-Cola's presence in the burgeoning energy drink
market. As part of the deal, Coke transferred its energy drink business, including
NOS, Full Throttle, Burn, Mother, Power Play, and Relentless, to Monster and
Monster transferred its non-energy business, including Hansens Natural Sodas, Peace
Tea, Huberts Lemonade, and Hansens Juice Products, to Coke.
Moreover, Coca-Cola is acquiring beverages deemed healthier -- like Zico coconut
water -- to add to its growing portfolio of non-carbonated beverages, including wellknown brands such as Minute Maid, Vitamin Water, Odwalla, and Powerade.
The Wall Street Journal estimates that 40% of Coca-Cola's U.S. revenue comes from
still beverages, making these products an important part of the company's growth
going forward.
Takeaway
There are no easy solutions to Coca-Cola's growth problem, but the company is taking
sensible steps to find an answer. Coca-Cola's investments in new carbonated soft
drinks, new distribution channels, and new product categories are the company's best
shot at reigniting growth in its beverage portfolio. Given enough time, shareholders
may be rewarded for their patience.
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Kentucky Fried Chicken (KFC) is a fast food restaurant chain that specializes in fried chicken and
is headquartered in Louisville, Kentucky, in the United States. It is the world's second largest
restaurant chain (as measured by sales) after McDonald's, with 18,875 outlets in 118 countries and
territories as of December 2013. The company is a subsidiary of Yum! Brands, a restaurant
company that also owns the Pizza Hut and Taco Bell chains.
KFC was founded by Harland Sanders, an entrepreneur who began selling fried chicken from his
roadside restaurant in Corbin, Kentucky, during theGreat Depression. Sanders identified the
potential of the restaurant franchisingconcept, and the first "Kentucky Fried Chicken" franchise
opened in Utah in 1952. KFC popularized chicken in the fast food industry, diversifying the market by
challenging the established dominance of the hamburger. By branding himself as "Colonel Sanders",
Harland became a prominent figure of American cultural history, and his image remains widely used
in KFC advertising. However, the company's rapid expansion overwhelmed the aging Sanders and,
in 1964, he sold it to a group of investors led by John Y. Brown, Jr. and Jack C. Massey.
KFC was one of the first fast food chains to expand internationally, opening outlets in Canada,
the United Kingdom, Mexico, and Jamaica by the mid-1960s. Throughout the 1970s and 1980s, KFC
experienced mixed fortunes domestically, as it went through a series of changes in corporate
ownership with little or no experience in the restaurant business. In the early 1970s, KFC was sold to
the spirits distributor Heublein, who were taken over by the R.J. Reynolds food
and tobacco conglomerate, who sold the chain to PepsiCo. The chain continued to expand overseas
however, and in 1987 KFC became the first Western restaurant chain to open in China. The chain
has since expanded rapidly in China, which is now the company's single largest market.
PepsiCospun off its restaurants division as Tricon Global Restaurants, which later changed its name
to Yum! Brands.
KFC's original product is pressure fried chicken pieces, seasoned with Sanders' recipe of 11 herbs
and spices. The constituents of the recipe represent a notable trade secret. Larger portions of fried
chicken are served in a cardboard "bucket", which has become a well known feature of the chain
since it was first introduced by franchisee Pete Harman in 1957. Since the early 1990s, KFC has
expanded its menu to offer other chicken products such as chicken fillet burgers and wraps, as well
as salads and side dishes, such asFrench fries and coleslaw, desserts, and soft drinks, the latter

often supplied by PepsiCo. KFC is known for its former and current slogan "Finger Lickin' Good",
which was replaced by "Nobody does chicken like KFC" and "So good" in the interim.