CASE STUDIES

Coca Cola Blak case study

Boosting the carbonates sector through innovative offerings
Reference Code: CSCM0103
Publication Date: September 2006

DATAMONITOR VIEW

CATALYST

Falling demand for carbonated soft drinks, due to increased consumer concerns for their health, has led soft drinks
manufacturers such as Coca Cola to attempt to boost sales by developing innovative product offerings, both within and
outside the carbonates category. Coca Cola's new offering, Coca Cola Blak, is described as a new category of soft drink,
which could do well by exploiting the popularity of both the energy drink and coffee markets.

SUMMARY

• Coca Cola Blak has helped rescue Coca Cola from a period of decline, regenerating interest in the
stagnating carbonates market through its positioning as a caffeine-rich soft drink for adults;

• High growth in both ready-to-drink coffee and coffee sold in the foodservice sector has led Coca Cola to
enter the coffee market through the release of Blak and other coffee offerings, benefiting from the higher
margins generated by a premium positioned beverage;

• Blak is targeted at 30-50 year olds, an age range that is not traditionally the focus of energy drinks
makers, allowing the company to gain an edge in this growing niche drinks sector.

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ANALYSIS

Blak launch was designed to boost sales and brand value

Poor growth in carbonates market leads to creation of Coca Cola Blak

The Coca Cola Company launched Coca Cola Blak in France in January 2006, beginning US sales a few months later in
April 2006 before global roll out. This ready-to-drink (RTD) carbonated caffeine beverage, which has twice the caffeine
content of regular Coke but contains only 45 calories, was designed to reignite interest in the Coca Cola brand and help it
overcome the stagnating growth of the carbonates market.

The carbonates market has experienced poor growth over a number of years, compared to other drinks categories, due to
enhanced consumer interest in health issues and the resulting backlash against products with a high sugar content.
Between 2001-2005, carbonates only grew by a compound annual growth rate (CAGR) of 0.2% in the US, and 3.2% in
Europe.

In contrast, less established and more niche drinks categories such as functional drinks and RTD coffee, performed better
in this timeframe: the functional drinks and RTD coffee markets grew by a respective CAGR of 11.7% and 8.5% in the US,
and 8.2% and 6.1% in Europe, benefiting from the growing health trend and a desire for more innovative drinks products.

Despite this poor growth rate, Coca Cola has rarely veered from its carbonate-heavy portfolio, in contrast to rival PepsiCo
which has heavily diversified into snack products, a factor which has been criticized by some. William Grobel, consultant
at brand valuation consultancy Intangible Business, commented that Coke was concentrating on a "dying market" (The
Grocer, 2006). However, Coca Cola's policy of staying within its carbonates mainstay and developing innovative products
within this category appears to be paying off - the company reported net earnings in the first quarter of 2006 of
$1.11billion, compared to $1billion in the same period last year, and achieved a 3% expansion in carbonated soft drink
volume, up from 2% in the same period in 2005.

Company chairman Neville Isdell, who was called out of retirement in 2004 to rescue the company from declining growth,
noted this enhanced performance was down to its recent innovative soft drink offerings, including Coca Cola Blak: "Since
the end of 2005, we have introduced significant new products, including Coca-Cola Blak in France and the US, Coca-Cola
Zero in Australia and Tab Energy, Vault, Dasani Sensations, and Simply Lemonade in the US. This strong pipeline of
innovation in both our carbonated and noncarbonated beverage brands should drive sustained growth and value," (The
Publican, 2006).

A 'new soft drink category'

Coca Cola describes Blak as 'a new category of soft drink', aimed at attracting 30-50 year old consumers, an older age
range than is traditionally targeted by carbonate manufacturers. This tactic followed company research which found an
untapped market - adults aged 30 to 50 wanting an energy booster. The company is adamant that it is not a brand
extension to tag onto its 20 plus Coke branded beverage line, presenting Blak as an innovative new offering for a more
sophisticated, older consumer.

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"Coca-Cola Blak is not just a flavor extension. It is a blend of unique Coke refreshment with the true essence of coffee and
has a rich smooth texture and a coffee-like froth when poured. We believe we have created a new category of soft drink
an adult product in a carbonated beverage."
Marc Mathieu, vice president, Global Core Brands The Coca-Cola Company

Coca Cola's strategy of capturing an older consumer with Blak is interesting in that the popularity of soft drinks has been
shown to decline with age, as shown in Figure 1, confirming that this is a market with growth potential. Blak tempts mid-
lifers back to the carbonated soft drinks market through its 'mature' coffee taste. In addition, the company aims to capture
this older age group through Blak's packaging, a sophisticated mix of traditional Coca-Cola bottle shape with new art
work, along with experimental taglines such as ‘Every sip is an experience’ and ‘Come find your muse’.

Figure 1: Per capita consumption of soft drinks declines with age

500
Per capita consumption (US$) of soft drinks

Europe
450
US
400

350

300

250

200

150

100

50

18-24 25-34 35-49 50+

Age Group

Source: Datamonitor report: "Profiting from new trends in

midlifers' lives" DATAMONITOR

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Figure 2: Coca Cola Blak website showing its 'sophisticated' image

Source: Datamonitor; coca-colablak.com DATAMONITOR

Coca Cola exploits growth in coffee sector with launch of Blak and a further coffee
introduction

Blak aims to attract coffee drinkers through retail positioning and premium price point

The release of Coca Cola Blak exploits the coffee house culture that has boomed throughout the 1990s and 2000s in both
the US and Europe, and seen coffee sales in chains such as Starbucks become part of everyday culture. In the US, the
company is emphasizing Blak's link with coffee by placing it on shelves next to ready-to-drink coffees, a positioning that
helps to justify the product's premium price point as coffee profit margins tend to be higher – the beverage is priced at
between $1.59 and $1.89 for a single bottle.

However, some consumers have complained that this premium price point was not justified; in June 2006 the company
said it was reviewing the price of Blak after comments that the drink was too expensive. For example, a survey carried out
by Morgan Stanley analyst Bill Pecoriello indicated about one-third of consumers who tried the beverage found it to be too
expensive (Dow Jones, 2006). A price review will enhance Blak's image as an everyday indulgence, allowing the
company to position it as an upscale Coke product with a more reasonable mark up.

Coca Cola moves further into coffee market with fresh brew launch

Coca Cola has shown a commitment to the coffee market with the development of further coffee products, emphasizing its
desire to become a leading player in the lucrative market for coffee in the foodservice sector. The market for coffee in the
foodservice sector in the US was worth over $16 billion in 2005 and is forecast to rise by a CAGR of 12% from 2005-2010,
demonstrating the buoyancy of the market.

In September 2006, Coca Cola announced the launch of two on-trade freshly brewed hot coffee products - Far Coast and
Chaqwa – after five years in development. The coffee, trialed in 50 outlets in Canada, is brewed using a patented system

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developed by Coca Cola that uses pods, so that one cup can be freshly brewed at a time. Far Coast is aimed at the higher
end of the market and will be launched in restaurants and movie theaters, while Chaqwa – the word is a combination of
cha, a Mandarin name for tea, and "qawah," an Arabic name for coffee - will feature in more down-market locations, such
as gas stations.

Udaiyan Jatar, who is in charge of developing Coca Cola's fresh coffee range, noted the company had struggled to get the
coffee off the ground, after problems developing the pod system. However, Jatar emphasized the company's belief that
the market is worth entering: "It has had its challenges. But, overall, the opportunity was so big, we were able to
persevere,"

Blak could be an attractive energy drink

Blak's format makes it ideal to exploit growing energy drink market

Coca Cola states that it is not marketing Blak as an energy drink, despite its high caffeine content, a viewpoint confirmed
by Scott Williamson, director of brand and business communication at Coca-Cola Company North America: "This is not
considered an energy drink at all. An eight-ounce serving of Blak has less caffeine than coffee or an energy drink. We
created Blak with more of an interest in offering consumers a unique flavor."

Despite this claim, the beverage could make an attractive energy drink and exploit the strong growth of this niche market.
The US energy drinks market was worth $1.8 billion in 2005 and is forecast to grow by a CAGR of 12.1% from 2005-2009.

Blak's sophisticated image and coffee flavoring, coupled with its on-the-go format, could in particular appeal to older
consumers desiring energy drinks. Other highly-caffeinated energy drinks on the market, such as Red Bull and Tab
Energy, are marketed towards a younger demographic, namely young men, and so have little appeal to Blak's target 30-
50 year old consumer group. However, changing lifestyle patterns within this age group, resulting from pressures to
maintain the work/life balance, could enable Blak to tap into an unmet need for energy giving drinks in this age range.

Coke has risen fast to become 2nd largest energy drink player in less than a year

Coca Cola has acknowledged the growing potential of the energy drinks market through other launches, such as Tab
Energy and Vault. This provides the company with an opportunity to enhance its profits in weakened developed markets
like the US and UK that have experienced poor overall soft drink growth, benefiting from the higher margins of this niche
area.

The company has risen fast to become a leading player in the energy drinks market - according to its own figures, Coca
Cola had less than 1% of the energy drink market in 2005, but is now the second-biggest player in the sector. Neville
Isdell said at the announcement of the company's first quarter results: 'We have launched a number of higher-margin,
lower-volume products. Developing these market niches is an element of our strategy in developed markets.'

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APPENDIX

Case study series

This report forms part of Datamonitor's case studies series, which explores business practices across a variety of
disciplines and business sectors. The series covers a range of markets including food and drink, retail, banking and
insurance, pharmaceuticals and software.

Each case study provides a concise evaluation of a company that stands out in some area of its strategic operations,
highlighting the ways in which the company has become one of the best in its field or how it deals with different problems
encountered within that sector.

Methodology

A variety of primary and secondary research was carried out for this case study. This included researching the coffee and
soft drinks market on Datamonitor's Interactive Consumer Database and on the Productscan Online Database of new
products, alongside an extensive review of secondary literature and other in-house sources of information.

Secondary sources

• Is Coca-Cola's bubble about to burst?; The Grocer (August 2006)

• Co. Adjusting Price For Cola-Cola Blak; Dow Jones Newswires (June 2006)

• Innovation puts the fizz back in Coca-Cola; The Publican (April 2006)

Further reading

Profiting from Changing Snacking and Beverage Occasions (Datamonitor, DMCM2979, August 2006)

How To Exploit New Wellness Trends in Drinks (Datamonitor, DMCM2410, June 2006)

Profiting From Consumers' Desires For Healthy Indulgences (Datamonitor, DMCM2362, December 2005)

Ask the analyst

The Consumer Knowledge Center Writing team

askcm@datamonitor.com

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