Tuesday Talking Points Memo

Coca-Cola is Getting its Natural~Specialty Groove On:

A New Herbal Medicine Research Center in China, A Premium Coffee Alliance, A 'Beauty Drink' Under Development, and a New Green Packaging Initiative are Demonstrating the Beverage Giant is No Longer Your Parent's Coca-Cola.

Beverage industry giant Coca-Cola is embarking on four new initiatives that demonstrate the Atlanta, Georgia-based company is adding a "new age" element to its corporate culture with health, wellness and green initiatives and embracing the growing natural and specialty products market with new health & wellness and premium products.

Coke's New Initiatives

Yesterday, Coca-Cola opened its new Coca-Cola Research Center For Chinese Medicine in Beijing, China. The center is a facility where the company will research, experiment with, and develop new Chinese herbal flavors for its flagship Coca-Cola soda brand and other beverage products. The research center is a partnership with the China Academy of Chinese Medical Sciences. Coca-Cola scientists will work side-by-side with Chinese scientists at the facility focusing on developing beverages using Chinese herbal ingredients and formulas.

Rhona Applebaum, vice president and chief scientific and regulatory officer for Coca-Cola, told Forbes.com yesterday "it's very possible to add Chinese herbal Coke as a new line extension to various flavored Coke products such as Coca-Cola with Lime and Diet Coke Plus." She said the beverage company also might develop a whole new herbal beverage product. According to Applebaum the collaboration with the Chinese Medical Sciences Academy will help Coca-Cola bring the insights and benefits of traditional Chinese medicine to consumers all over the world. "As the world's largest beverage company, we can add global reach and world-class marketing skills to help promote Chinese Wisdom in preventive holistic health through new and innovative beverages," she says.

The second new initiative for Coca-Cola is a partnership and joint-venture with Italian premium coffee producer and retailer Illycafe. Trieste, Italy-based Illycafe is well-known as one of the best producers of premium and gourmet coffees, especially its espresso. The coffee roaster markets branded coffee to upscale retailers, coffee bars and restaurants in 140 countries. Illycafe also has its own gourmet coffee cafes and bars located in major cities globally, including in the U.S.

Coca-Cola and Illycafe will be creating a number of ready-to-drink premium coffee brands and beverage items together using the coffee roaster's famous espresso coffee. Illycafe will develop the ideas and concepts for the coffee drinks, essentially creating them. Coca-Cola will use its bottling expertise, distribution network, marketing power and huge sales force to produce, market, sell and distribute the premium coffee beverages globally.

The ready-to-drink coffee category has current global sales of about $10 billion and has been growing substantially over the last few years. Global sales have grown at 10.1% annually over the last five years and are expected to maintain that double-digit growth rate for the next few years.

The two companies are currently finalizing specifics of the joint venture which they said will be complete before the end of this year. They hope to launch their first coffee drinks in 2008. Coca-Cola already has one joint-venture with Caribou Coffee Company. Coke markets a line of iced coffee drinks under the Caribou brand name. The drinks are mid-range than the Illycafe products will be and the Caribou brand isn't nearly as well known (especially globally) as Illycafe is, especial when it comes to premium coffee.

The third new Coca-Cola venture/product is even more interesting (or maybe mysterious) to us than the Chinese herbal initiative in that it's not only an entirely new category for Coke but also is an entirely new category all together. No, it isn't a food or even a traditional beverage product. Give up? What it's being described as is a "beauty drink." Although the company hasn't officially announced the product, which is named Lumae, a number of Coke insiders working on the product, which is a joint-venture with cosmetics company L Oreal, have confirmed press reports abouts its existence. Lumae is a tea-based beverage which contains other ingredients which are said to improve the skin. The beverage will be sold in department stores and rather than in the traditional venues where Coke sells its beverage products. Lumae's target market will be "active, influential, image-conscious woman over 25 , who embrace health and wellness," an insider told us.

Lumae will be part of a brand new category which has been titled "beauty foods and beverages." There are only a couple products currently in the category. One is a line of waters produced by a company called Borba Skin Balance. The company says it is the pioneer company in the new category. The waters have been sold in department stores since 2005. International food company Danone has introduced the first food it says will nourish the skin from the inside out. The product is a line of yogurt called Essensis

Moving away from the new product development front into the company's green new green initiative, Coca-Cola seems to be getting the green message from consumers, retailers, environmental groups and others, to a certain extent. In addition to investing tens of millions of dollars in recycling programs and launching a major research effort designed to find a way to use less petroleum-based plastic in its bottled water, soda, juice and other beverages, Coke has just teamed-up with a firm know for it's environmental sustainability when it comes to direct marketing, printing and product order fulfillment. That company, Harte-Hanks, has been hired by Coca-Cola to conduct all retail product fulfillment and direct mail activity at the beverage company's online Coca-ColaStore.com using more environmentally sustainable packaging and other materials than the company has been using to date.

Coca-Cola does a huge, global business via its online store. Selling and shipping over 4,500 items, ranging from its beverage products to Coke branded clothing and other company-branded and related gift items, products and accessories. As such, the web operation uses tons of paper products and cartons in its shipping operations. The Shipping cartons, gift boxes, paper, package rolls and newsprint, gift cards and other shipping materials used will now all be of post-consumer recycled (PCR) content, ranging from 30% to 100% PCR materials. You can view a diagram of the specific PCR content of each item used here.

This is an important step for Coca-Cola via sustainability, however the beverage giant has much more to do, a says so. Of most important is finding a way to better deal with all the empty plastic water bottles that get tossed into landfills. the company is one of the top three bottled water producers in the world. Although many cities in the developed world have recycling programs which include plastic water bottles the majority of the bottles don't get recycled and endup in landfills.

Unlike plastic soda pop bottles plastic water bottles don't have a CRV fee attached to their retail price in most regions and cities in the world, including in the U.S. and parts of Europe. As such their isn't an economic motivation, like with the soda bottles, for consumers to recycle them. Additionally, in many countries the recycling infrastructure doesn't exist at all. With pressure on them from consumers, activist groups, retailers, government officials and others, Coke and other bottled water companies are trying to find ways to reduce the amount of plastic used to make the bottles along with exploring alternatives to the petroleum-based plastic used to package the water.

What We Think

It's clear Coca-Cola is moving far beyond its heritage as a carbonated soda pop company that morphed into a beverage company with juice and water in addition to soda. If you ask a Coke executive today what business the company is in they will tell you Coca-Cola is in the hydration business, producing and marketing beverages of every type, and as we see in the case of Lumae not limited to thirst quenching or even health (like Vitamin Water) bit now for cosmetic enhancement as well.

We find the company's evolution and growth into the natural, health, wellness, gourmet and beauty segments fascinating. It shows Cola-Cola isn't afraid to innovate, lead--and perhaps even fail. In the case of health, wellness and upscale beverages however failure isn't the likely outcome. In the 1990's Coke bought all-natural juice brand Odwalla. In the decade since the company has grown the brand dramatically, showing it can be successful in the natural beverage segment. Earlier this year Coke bought Glaceau, the maker of Vitamin Water and other nutritionally enhanced water brands, for a whopping $4.1 billion, paying a premium for the hugely successful brands of flavored and enhanced water. This acquisition alone shows Coke is committed to the health and wellness segment.

We'll watch with great interest the developments that will come out of the Chinese medicine/herbal research facility. There's a myriad of beverages and related products that Coke can develop for sales globally from Chinese herbs. Everything from extending its brands in the health and wellness segment. to creating drinks specific to various world regions, to even creating entire new categories based on the research and product development that can come from the joint venture and new facility in China.

The "beauty drink" could also be just the tip of the iceberg for Coke. Using beverages to aid medical conditions--such as drinks for joint problems and other ailments--is a rapidly growing segment that the company also could enter. Further, with the Chinese herbal medicine research facility, in addition to a joint-venture Coke has with Swiss-based food giant Nestle, we expect the company to come out with more types of beverages for things like skin care and other cosmetic purposes if the Lumae product is a success.

We often talk here about the convergence between the natural and specialty or upscale product categories which includes environmentally sustainable elements and programs as well. With its new ventures and product development and acquisitions Coke is demonstrating it sees this convergence as well--and that it could be key to the company's future growth and success. A combination of good old fashion soda pop--with some upscale and herbal additions--along with new products in the health, wellness, gourmet, cosmetic and other categories is changing Coke from your parent's soda pop company into your grandchild's hip, new age hydration company. It will be interesting to watch as Coke continues to gets it groove on.