Hadley Malcolm published an article yesterday for USA Today titled “5 ways Coke is battling fizzing soda sales”. I learned something interesting about Coke’s evolving strategy from the article: the company established its own venture capital firm for investing in beverages startups.
Coke’s venture capital play
Coke calls this element of their business Venturing & Emerging Brands (VEB). It has been around since 2007. It’s an interesting development, though it seems obvious. Coke has so much money (over $15 billion in cash and cash equivalents, according to their 2015 annual report) that they can buy startups that might disrupt their business.
A bulletproof defense, right? Any company that will disrupt them has to start small. If Coke can identify those companies that are most likely to succeed, they can buy them and integrate them into their portfolio.
One challenge is that venture capital is not one of Coke’s traditional competencies. They’re a beverage manufacturer. Yes, they have tons of cash on hand. So they can invest in ways that many other investors can’t. But there’s still an art to picking an investment portfolio: large enough to capture the winners, but small enough to manage such that important bits don’t fall through the cracks.
The quick response is, well, Coke will just hire venture experts. And presumably they did. Again, with the resources they have, they should be able to choose nearly anyone they’d like to run their VEB business. You run into another challenge, though: culture.
The culture challenge of venture capital
Since Apple examples resonate so much, let’s use one. Ron Johnson was a senior vice president at Apple, where he led the Apple retail store effort. J.C. Penny, the struggling department store chain, saw Johnson’s success and brought him on as CEO in June 2011.
Johnson clearly knew a ton about retail stores. He knew how to build them from scratch and use them to enhance a company’s brand. It was one more way to engage and delight customers. His fit with J.C. Penney seemed clear.
Less than two years later, in April 2013, J.C. Penney fired Johnson. I skipped one detail earlier that’s important. One specific person pushed hard for Johnson to become J.C. Penney’s CEO: Bill Ackman, a highly-regarded activist investor.
In a sense, you had two high-powered, successful business minds, Ackman and Johnson, trying to turn around a struggling J.C. Penney. And it didn’t work. The stock price dropped 50%. Patience evaporated.
What does that story have to do with Coke? Hiring high-powered, successful business minds doesn’t guarantee success. Culture matters. Organizational competence matters.
Johnson’s approach was hugely successful in luxury electronics. It failed in department retail.
Coke seems to have an advantage, in the sense that it’s asking venture capital experts to remain venture capital experts. Instead of investing private money, they’d invest Coke’s money. You don’t have something like the transition from luxury electronics to department retail.
The challenge still exists, though. The venture group reports into a management team that is most familiar with the beverage company business model. At least implicitly, the venture group looks for companies that could disrupt Coke’s business. That’s a focused view, and focus can hurt in the venture capital world, where your biggest successes can come out of thin air.
Plus, you have the challenge of nurturing these businesses, helping them evolve into larger, even more successful companies. Coke itself hasn’t done that in decades. It’s a two hundred billion dollar behemoth. And now it’s supposed to help tiny businesses scale from startup to something that could eventually move Coke’s earnings needle?
Like I said, this kind of move seems obvious. It’s smart for Coke to have a team that looks out into the market, and searches for emerging competitors. It’s smart to stay in front of the curve, to try to suppress unwanted disruption (a la The Innovator’s Dilemma).
Smart move, but will it work?
I know why Coke gets positive press for its VEB effort. It looks like a great way to co-opt unwanted disruption, and use the resulting innovation to grow its largely stagnant business.
Will it work? Is this kind of effort enough to protect Coke in the long term?
I doubt it. I admit the venture capital play is a smart move. Don’t get me wrong. But it only mitigates one type of risk, namely the risk of a new player disrupting Coke’s existing business.
When I think of existential risks to Coke, I don’t think of a new beverage maker. Coke is so large, and has so many resources, that a conventional death looks unlikely. When Coke fails (it’s not an “if”; every company eventually fails), I think it’ll be because of a profound change in the beverage sales game.
What could kill Coca-Cola?
Hypothetical scenario 1: Coke dies by a health scare
Let’s start with a freakish scenario. Say Coke has a health scare like Chipotle. I know, Coke is a different beast. It’s not preparing its products in real time, as a customer places an order. Coke has more time for quality assurance checks than any restaurant does.
Still, any company in the food and beverage business is at risk of a health catastrophe. Maybe one of Coke’s vendors screws up its quality assurance check. Maybe there’s an undetectable contaminant. Maybe Coke’s specific recipe is shown to cause a particular problem.
This scenario is crazy to think about. It falls into the realm of The Black Swan (the book by Nassim Taleb, which I’m reading, and has totally consumed me). This kind of outcome isn’t foreseeable, but seems more likely to derail Coke than another conventional beverage maker taking over.
Hypothetical scenario 2: Coke dies through marketing disruption
What else could kill Coke? The death of its marketing program. At its heart, Coke is a marketing company that makes beverages. It’s just carbonated sugar water. Plenty of other companies make carbonated sugar water. The difference is Coke’s incumbency, combined with its marketing prowess.
But the marketing game is changing. We’ve seen what’s happened to newspapers. We’ve seen Google, Facebook, Twitter, LinkedIn, and the new tech players competing for online and mobile advertising dollars. We’re still learning this new game.
Coke has mastered the traditional marketing channels: television, radio, and print. Can they master the new channels? Can they stay in front of emerging trends, like Snapchat, knowing how important it is to enroll young people? Coke relies on building lifelong customers. If they can’t reach the young people of today or tomorrow, they could crater, regardless of how many beverage startups they invest in.
Hypothetical scenario 3: Coke dies through commoditization
I already mentioned that Coke makes carbonated sugar water. A lot of other beverage companies make the same thing. Sure, the recipe, and thus the taste, is different. But is that enough to guarantee perpetual success?
Coke has sustained its lead to this point. Pepsi has been trying, and failing, for decades to push Coke aside. Coke has an impressive track record here.
But the beverage game is changing. We’re moving away from the sugary sodas that define Coke. Yes, their venture effort will help them find emerging companies, but what if the profits for the whole industry are compressing? What if the days of differentiated bottle beverages are over?
As Hadley Malcolm writes in her article, Coke sees risk with bottled water sales. Consumers have less brand loyalty with water than they do with soda. What if consumers have less loyalty with teas, or energy drinks, or any other category?
This is one of the many reasons it’s so difficult to sustain success in the food and beverage industry. Cereal manufacturers are seeing this effect, as breakfast tastes today steer more toward oatmeal and granola bars.
The VEB effort can help Coke mitigate against the risk of changing tastes. It can’t, however, help Coke mitigate against the commoditization of beverages generally.
What’s our takeaway?
This article may sound like a bummer for Coke. I don’t mean it to be. I like Coke as a company. I think they’re doing interesting things. And they have unmatched marketing muscle.
I hadn’t heard of Coke’s venture effort before yesterday. I wanted to dive into it a little bit, and think about what kind of protection it actually offers. That’s when I realized that, while it does help Coke in important ways, it leaves other important risks unaddressed.
This is a huge challenge with strategy generally. What are the most important risks? How do you mitigate against those risks?
It’s easy to have tunnel vision, to zoom in on one particular risk that seems obvious. It’s worth zooming out, and considering the totality of the threat. What might cause your company to die? What can you propose as a defense?
It’s a fun game to play. And given that strategic thinking is in short supply, you’ll do yourself a favor by diving into this topic every now and then.