Coffee Wars, Part II – What’s wrong with Coke Blak

Posted by: Aaron Pressman on September 6, 2006

John Austin, an academic expert on management and organizational effectiveness, applies his knowledge to stock picking on his Monty’s Bluff blog (which, parenthetically has the best motto of any finance blog: “Oh, meltdown. It’s one of those annoying buzzwords. We prefer to call it an unrequested fission surplus.” C. Montgomery Burns, The Simpsons).

Today he’s on about Coke’s efforts to diversify with coffee-laced beverages (Update: it appears Coke may soon announce a wider array of coffee beverages). He’s a bit skeptical of the new Coke Blak. I tried it and found it way too sweet, but Austin is questioning the branding and positioning. He warns that we may suffer from the overconfidence bias when assessing Coke’s marketing tactics because of their past successes. Then he goes on to his critique of Blak:

“Their ads use words like premium, coffee essence, artistic, and sophistication. I’m sorry but Coke talking about sophistication creates some dissonance. They also seemed to want to create a buzz campaign for this drink yet they put the Coca-Cola brand on it. This again puzzles me. How can you create a hipster image with a link to one of the most mainstream brands around? Blāk’s saving grace will be if they can tap the Red Bull mixed drink phenomenon. I just don’t see the sophisticated essence message working with this demographic.”

I’d have to agree and throw in the recent story in the trade press that Coca-Cola Enterprises (CCE) is in talks with Dunkin Donuts to create a line of ready-to-drink cold coffee. Coke appears to be woefully behind in this fast-growing niche.

Pepsi (PEP), distributing a Starbucks (SBUX) branded drink, dominates with a 90% market share – and in a segment that has grown 25% a year for the past two years with higher profit margins than soda, according to Morgan Stanley analyst William Pecoriello. He rated CCE "overweight" with a price target of $24.50 in an August 18 report on the Dunkin talks. The stock has been on a run all summer after hitting $19 in June. It's around $22 today.

Starbucks had its own stumble recently thanks (at least in management’s eyes) to its successful frozen drink line extension. Making all those frappaccinos created long lines and drove away drinkers of traditional aka piping hot coffee beverages. A Dunkin-CCE link-up probably hurts the Pepsi-SBUX line at least some.

And don’t forget about McDonalds.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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