I'm stuck on a case study question.

What are the key factors you would recommend CCA to consider when evaluating the attractiveness of the emerging Non-Alcoholic Ready to Drink (NARTD) market?

Case study:

In December 2019, Group Managing Director, Alison Watkins of Coca-Cola Amatil (CCA) Australia based in NSW, faced a serious problem. General marketing research indicators suggested that the competitive landscape had changed: Consumer preferences had shifted and more specifically, the developed world appeared to have decided that things go better without Coca-Cola1 . Consumer demand for alternative sparkling and still beverages had increased while demand for sugary carbonated ones had decreased by 4% in 20172 . CCA's own net profit after tax results had declined sharply by 37.3% from 2017 to 2018 3 . In Australia, overall, industry revenue was expected to decrease at an annualized 1.7% over the five years through 2019-204 . CCA had responded to the decline by focusing on cost cutting to mitigate losses5 , expanding to adjacent developing countries to find growth in new markets6 , and diversifying in existing markets with alternative beverages such as water and ready-to-drink (RTD) tea, as well as strengthening its spirits portfolio7 . Would this be enough? What path should Alison Watkins take to secure long term growth and prosperity of CCA? ABOUT COCA COLA AMATIL (CCA) Coca-Cola Amatil (CCA), was the Australian distributor of Coca Cola, and one of the world's five major Coca-Cola bottlers, operating in six countries8 . The company introduced the slogan "things go better with Coke" to the Australian market in 19649 . Fueled by both its marketing and global success as the biggest selling soft drink in history10 , Coke products dominated supermarket shelf space (see Exhibit 1). The brand climbed from strength to strength with ever increasing sales and consumer readiness to buy11 . CCA, a publicly listed company (ASX code CCL), manufactured carbonated and still beverages as well as coffee and alcohol products12 . Some brands in its portfolio included Coca-Cola, Diet Coke, CocaCola Zero, Fanta, Sprite, Sprite Zero, Lift, Lift Zero, Kirks, Deep Spring, Mother, Monster, Mount Franklin Spring Water, Nestea, Powerade, Pump, Glaceau Vitaminwater, Cascade, Appletiser, Zico, Goulburn Valley, Peats Ridge, Neverfail, Fuze (see Exhibit 2). AUSTRALIAN BEVERAGE MARKET BACKGROUND CCA had established itself as a powerful force in the fast-moving consumer goods market in Australia with 62% market share in 2014, however recent challenges had seen this decline more recently to 37.1% in 2019 (See Exhibit 3). The next closest competitor to CCA was Japanese-owned, Asahi Holdings (Australia) Pty Ltd. with a market share of 25.5%13 . Brands in its portfolio include Pepsi, Schweppes, Solo, Mountain Dew, Gatorade, Passiona, and Sunkist14 . CCA operates in an industry that is in the mature phase of its life cycle15 . The industry is moderately concentrated with CCA and Asahi Holdings making up over half of the industry, accounting for an estimated 51.6% of industry revenue in 2019-2016 . No other players hold over 5% of industry revenue17 . Overall, the industry has suffered a decline in growth of -1.7% between 2015-2020, attributed mainly to rising health consciousness, changing consumer lifestyles, weak retail conditions and the rise in private label competition18 . Soft drink sales are often considered a discretionary purchase and with large numbers of substitute products in existence, so to attract consumers, soft drink manufacturers have undertaken aggressive discounting strategies, particularly among cola varieties to boost sales volumes19 . Based on geography, New South Wales accounted for the largest market share of 23.5% in 2017, followed by Victoria, Western Australia and Queensland20 . Smaller states such as South Australia, Northern Territory had low market share, but are expected to grow at 3% annually on the back of strengthening distribution and rising per capita income21 . In the beverage industry at large, the non-alcoholic ready to drink (NARTD) market had grown; driven by an uplift in demand for sports, energy, RTD tea and water22 . At the same time, carbonated soft drinks (CSD) had entered a steady decline phase23 . For CCA, this trend is particularly concerning because of its strong presence in the Australian CSD segment, where even though sales are dropping, CSD sales still represented over 40% of the NARDT market24 . Within the emerging NARTD categories, the projected retail volume for bottled water and RTD tea over the next few years is anticipated to be about 6%25 . Within these categories, there are many suppliers, little differentiation among products and large players seeking to grow their market shares have driven price competition26 . Furthermore, within these marketsthere is no clear driver that is pivotal for attracting consumers. For example, over the past 5 years the bottled water category has experienced 6% growth - that has been concentrated around private label brandsthat are offered at lower price points than national brands 27 . Niche premium drinks such as coconut water have also demonstrated category growth however, they are also under increasing pricing pressure from private label brands that are able to offer comparable products at lower price points28 . Furthermore, despite being a recognizable product among consumers, the coconut water category represented less than 2% of the total NARTD value29 . For smaller and niche categories thus, CCA would need to be the market leader to generate sufficient sales and profits to recoup initial investment costs. Given these trends CCA management was faced with two options: change the beverage portfolio to better align with the projected growth in emerging categories or develop a strong understanding of the drivers of CSD decline and address them with a focus on the current portfolio. Both options represented a significant investment and management had to choose the path that would take the company in the direction of long-term growth. CONSUMER EDUCATION AND SOCIAL TRENDS Research into the harmful effects of unhealthy foods suggested that transnational corporations might be major drivers of non-communicable diseases30 . Sugar sweetened and diet beverages provided a major source of added sugar and have been commonly identified as a target for public health intervention. Their high and frequent consumption had been associated with adverse health behaviours and outcomes including higher energy consumption, weight gain and increased risk of health problems such as dental cavities, high blood pressure, type 2 diabetes and cardiovascular disease31 . Consuming sugar-sweetened beverages, specifically soft drinks, could also lead people to further increase their energy intake from other foods, leading to an overall increase in appetite and reduction in satiety32 . Public or government intervention was the most effective way to mitigate negative consumption patterns33 . In Australia, evaluations of intervention campaigns focused on the improvement of public health (between 2004-2013) and reported signs of success with positive improvements in targeted areas34 . For example, studies in 2017 found that Australians were consuming less added sugars overall and were drinking less sugar-sweetened beverages (SSBs) than they were two decades prior and that the total mix of added sugars in Australian diets had also changed - extending from soft drinks and sugar-sweetened beverages that had been the main focus of intervention campaigns, to include chocolate and confectionery products35 . In part, the decline in CSDs had also been attributed to the increased focus on health and healthy lifestyles. Health consciousness had risen sharply and was expected to continue for at least the next five years in Australia, contributing to a decline across tobacco expenditure, alcohol consumption, and obesity, and with increases in fruit and vegetable consumption and sport participation36 In 2015, the Health Star Rating (HSR) was introduced by the Australian state and territory governments in collaboration with industry, public health and consumer groups to tackle the obesity problem in Australia. The HSR was a voluntary labelling system that rated the overall nutritional profile of packaged food using ratings ranging from a half star to five stars, to enable consumers to efficiently compare packaged food 37 . To encourage consumer to use the system, to make healthier food choices38 , it was created as an intuitive, graphics-based product. Specifically, the system had five graphic options; four incorporated a star rating icon, and the fifth showed an energy only icon that was permitted for use with small pack sizes and selected confectionary and beverage products (Exhibit 4). Most beverage manufacturers chose to display the energy-only icon rather than the star rating, despite the star rating being the most useful element of the HSR system for consumers39 . Although voluntary and an imperfect solution, Health star ratings have had an overall positive effect in helping consumers make more informed choices. By 2019, manufacturers of over half of the products displaying the star rating labels had reformulated their products to improve their rating40 . In 2019, the Australian government called for mandatory 'added sugar' labelling, whereby labelling would show consumersthe equivalent of the number of teaspoons ofsugar in the product. Health experts were recommending that consumers should see for example, a label indicating that the equivalent of 16 teaspoons of sugar were in a 600-millilitre bottle of Coca Cola, however, the beverage industry lobbied to retain the energy icon instead41 . At the same time health experts were urging the Australian government to consider the implementation of a 'sugar tax', that had already been adopted in other 28 countries42 . High profile celebrities also supported the anti-sugar push, where Jamie Oliver advocated for a sugar tax, and Sarah Wilson (I Quit Sugar), and Damon Gameau (That Sugar film) were active in promoting the anti-sugar sentiment43 . Rising health consciousness had slowed high sugar soft drink sales volumes, and evolved consumer lifestyles supported demand for functional beverages or beverages perceived to be healthier, which invigorated emerging beverage categories such as low or zero sugar, high value energy, and sports drinks44 . Downsizing was also evident as consumers actively changed their choice of package from planned, routine consumption of multipacks to occasional single serve indulgences of CSD's45 . Smaller pack sizes were developed to replace the 375ml can with a smaller 200ml cans and similarly, smaller bottles, in response to both consumer health priorities and price competition46 . In addition to general consumer health education, changes in society more broadly have contributed to changes in the role of beverages and beverage consumption patterns. That is, the traditional role of beverages has been as a pairing with food47 . For CSD's, this has translated to consumption with meals from fast food outlets, to community gatherings, and family BBQ's. Multipack beverages usually purchased for the latter occasions has been the biggest source of volume losses, while the former performed better48 . Standalone beverage consumption was typically associated with events such as movies, sporting matches, and music festivals that had relatively low consumption, with about 9% of all visitors purchasing them49 . Furthermore, growing environmental concerns related to beverage manufacturing had become evident with the growing popularity of DIY solutions. One such example of at-home soda production was Sodastream, which allowed consumers to create carbonated beverages at home, and that appealed to both the healthy and environmentally conscious consumer, as well as those who sought to personalise their drinks according to carbonation, flavor and ingredients50. . Overall, it is unclear whether these shifts reflect changed consumer palates, consumer sophistication, social expectations, weak economic conditions or a combination of these. CCA management could benefit from a better understanding of how consumer health, consumption changes, and environmental concerns were influencing beverage purchase decisions to discover whether all consumers are affected in the same way, or if there is a possibility to segmented consumers in new ways to either serve existing markets better or to find new markets to serve. NEW PRODUCT DEVELOPMENT: COKE LIFE Coke Life was designed to respond to consumer health concerns around the consumption of sugary beverages, as well as the health implications of artificial sweeteners used in diet soft drinks. It was launched in Australia in 2015 and was positioned as a "more natural" Coke because it was naturally sweetened (with stevia), and had fewer kilojoules than Coca Cola Classic51 . Coke Life had green packaging and had an accompanying 'Plant Bottle', that was made from 100 per cent recyclable material to further link health to environmental concerns52 . Pepsi had already launched a comparable product, Pepsi Next, in 201253 . Coca Cola South Pacific marketing director at the time, Lisa Winn was quoted as saying "Coca-Cola Life truly is an example of us keeping in step with consumer demands" for greater choice54 . Coke Life was launched with a multi-million-dollar communication campaign across multiple channels, including television, cinema, out of home, print, digital, public relations, sampling, and its pricing in line with Coca-Cola Classic55 . However, some supermarkets were unable to sell the product even after discounting the retail price56 , and in 2017 Coke Life was pulled from Australian supermarket shelves. Experts were divided about why Coke Life failed: lack of supermarket support, Coke's fear of cannibalization of other products in their range, unsuccessful repositioning of an unhealthy product to a healthy one, or consumers wanting a healthier options or substitute products such as water were cited57 . In 2019 a new product called 'Coca-Cola with Stevia' was launched to better communicate the lower sugar option by more clearly articulating to use of stevia (instead of sugar)58 . As a large incumbent firm, CCA have been criticized for a slow response to consumer trends, however under Alison Watkins' early guidance, more than a dozen new products were launched in a matter of months59 . However, many of these new niche products had barely moved the dial60 , with Alison Watkins conceding: "some innovations will not generate sufficient volume, but they may generate quite good margins - you can't always pick and choose solely based on volume or profit...it's not that black or white...new products don't move the dial meaningfully in a matter of weeks or months - it takes years because you need to invest a lot to get distribution and awareness"61 . VALUE DELVIERY AND CAPTURE Built over many years, CCA had created a unique advantage relative to the competition through strengths including manufacturing facilities for efficient production of portfolio brands, and far reaching and sophisticated distribution networks that enabled vast accessibility of its products62 . These capabilities became core competencies for CCA and supported long standing business relationships with retail partners. For example, Woolworths and Coles were partners in the value delivery and capture process because most of the industry's output was sold to supermarkets or other grocery retailers63 . CCA relied on retailers as important partners in value delivery - making the product available for consumers to purchase (Exhibit 5). Retailers also relied on CCA products to generate sufficient market demand and sales levels to earn profits64 . Historically, if there was enough demand for a product a retailer may be able to maximize their gross revenue with a branded product, despite the product often offering smaller margins 65 . Greater demand from supermarkets and grocery stores typically increased revenue for the industry but as consumers have begun to shift their attention (and spend) to private label alternatives, supermarkets have responded by increasing shelf space to accommodate store owned brands66 . For example, in 2018 Coles stated that their aim was to have private label products comprise 40% of the entire range within the next five years, offering the rationale that they could offer lower prices for consumers and greater margin for themselves compared to stocking manufacturer branded products67 . Overall, private label products offered an additional margin of 8-10% compared to manufacturer branded products and offered the additional benefit of retailer differentiation through the stocking of a retailer-specific range of unique products68 . The actions taken by large supermarkets were echoed by smaller retailers who had to respond to dynamic consumer preferences to safeguard their own business sustainability Retailers preferred to stock a successful mix of products that would stimulate consumer interest69 . This wasimportant because retailers were forced to negotiate premium shelf space because a new listing often forced the delisting of another70 . Thus, the retailer wanted to be confident about demand for a new product to offset removing the former product71 . For example, Woolworths delisted CCA's Mount Franklin water products in favor of their own private label brand 'Select'72 .. Domino's switched allegiance from Coke to Pepsi/Schweppes, citing consumer research that suggested customers wanted a wider range of drinks73 . Retailers as a result, appeared to be responding to market changes and consumer pressure for lower prices by becoming brand agnostic, seeking instead to stock products that would maximize their profits. Furthermore, smaller customers such as convenience stores and quick service restaurants raised concerns that CCA seemed to favor larger chains which has led to conflict with the company74 . One example was a Coke Life launch advertisement that featured Woolworths, and only noted its availability at Woolworths stores75 . The rising power of smaller retailers, along the rise of private label brands and consumer acceptance of limited differentiation may have a significant impact on CCA's decisions for pursuing a long-term growth strategy. Continued discounting, price competition and shifts to lower value or substitute products became key concerns in wider cost-saving initiatives and improvements in operational efficiency as industry operators attempted to bolster profitability76 . Other technological changes focused on improvements in distribution efficiency. CCA developed an online ordering system that enabled the company to build relationships with its domestic customers and improve supply chain effectiveness. Wholesalers and retailers could select, order and pay for supplies online and check their current order status, history and accounts. These initiatives were expected to reduce operating and administrative costs for industry operators by instituting just-in-time delivery systems77 . VALUE CREATION The Coca-Cola brand was valued at $80.83 billion (USD) in 2019 - its second highest valuation in 13 years, and one that demonstrated a strong market position and operational scope to capitalize on changing consumer tastes and market trends78 . Changes in the consumer market and emerging societal trends meant that consumers have been drinking less sugary carbonated drinks and were switching to healthier options or at least, less sweet choices. CCA had responded by producing new reduced sugar and sugar free beverage options such Diet Coke and Coke Zero79 . By 2018, approximately one third of their Australian portfolio products were no- or low-sugar, in a strategic move to cater for the increased demand for healthier options80 . However, changes were still to be made to tweak the product portfolio - in 2019, Coca Cola with Stevia was no longer featured on the CCA website and no longer available on Woolworths or Coles online shopping platforms81 . Meanwhile, CCA identified the NARDT market as a targeted area for focused long-term growth82 (Exhibit 6). LOOKING FORWARD CCA has defined itself as a strong brand that has established itself clearly in the minds of consumers. Indeed, Coca Cola is said to have some of the most loyal consumers of any product in the world with customer loyalty estimations hovering at around 94%83 . Such loyalty stimulates consumer demand which in turn, invokes consumer behaviours such as seeking out CCA products, and thus the drive for retailers to stock CCA products, even at the sacrifice of other brands84 . CCA maintains market leadership in CSD's and with established brands in its portfolio, and industry leading logistic capabilities, has promising foundations for growth and profitability. However, CCA's brand value has barely moved since the turn of the century, and it does not appear in a global list of the top 30 growing brands85 . An existing large and successful product portfolio has not translated easily to similar large-scale success with diverse products that outside the carbonated drinks category86 . Changing consumer tastes and preferences are driving industry-wide upheaval and customers are more discerning about the products and brands they choose. These changes along with shifts in retailer trends such as the rise of private label brands, and the refusal to stock new product releases, may have a significant impact on CCA's decisions for pursuing a long-term growth strategy. Key success factors for this industry include control of distribution arrangements, strong retail partner relationships, manufacturing capabilities that enable scope (as well as scale), clear brand positioning and product differentiation87 . CCA possesses these capabilities, however, even leading incumbent companies such as CCA must actively listen to the market and regularly reassess their strategies for long term growth and profitability. Alison Watkins still faces a challenging decision to secure CCA's long-term growth-focus: should CCA focus on claiming a greater portion of the emerging NARDT categories, or should CCA continue to focus on core capabilities linked to distribution and branding strength particularly in CSD's?