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Coca-Cola to Exit Zico Coconut Water Brand, Reforms Portfolio

Zacks Equity Research
·5 min read

The Coca-Cola Company KO is on track with its strategy of restructuring brands portfolio, which also includes layoffs and a revamped marketing strategy, to emerge strongly in the post-pandemic period. Per the Wall Street Journal, the company announced plans to discontinue the production of its Zico coconut water brand in a phased manner by the end of 2020.

The company’s association with the Zico brand dates back to 2019 when it acquired a minority stake for $15 million. In 2013, it fully acquired Zico due to the growing popularity of coconut water in the United States. At that time, Zico held the second spot in the category, only trailing the market leader Vita Coco. In 2019, Zico contributed about 20% of the total retail-store sales of coconut water in the United States, retaining its position as the second-largest brand.

However, the company notes that sales for coconut water have declined in the United States in recent years, with retail-store sales for the category, reflecting a 22% decline between 2015 and 2019, according to Euromonitor International. Nonetheless, sales for coconut water has picked up during the pandemic, reflecting 4.4% year-to-date growth, per the Nielsen data compiled by Coke.

Despite the uptick, Zico’s sales during the year-to-date period slumped 46% as the company prioritized other higher-demand products like Smartwater and Powerade at this time, where the supply chain was constrained. Consequently, Zico’s market share fell to 4% this year. Apart from the competition from Vita Coco, the brand has recently lost share to cheaper coconut water brands like Goya and other private-label products.

In addition to coconut water, the company expects to eliminate its less-popular Coke and Diet Coke categories in continuation of its efforts to reduce product offerings in response to the coronavirus pandemic. Particularly, it is currently reviewing its Diet Coke Feisty Cherry, Coke Life, Northern Neck Ginger Ale and Delaware Punch products due to their fading popularity amid the pandemic. Moreover, the company is eyeing the discontinuation of store sales for Hubert’s Lemonade and limiting it to fountain machines. This will replace the Odwalla lemonade in the fountain machines, which it dumped earlier this year.

Notably, in a quest to exit its Zombie Brands, the company shut its Odwalla juice brand and its chilled direct store delivery, effective Jul 31. The company expects the brand exit to provide flexibility to support investments in brands like Minute Maid and Simply as well as improve scale for leading brands like Topo Chico sparkling mineral water.

Under the previously announced restructuring strategy in view of the pandemic, the company plans to reduce its brand portfolio of 500 fully- or partially-owned global brands by more than 50%. By exiting the Zombie brands the company is looking to redirect resources to explorers and challenges with the most growth potential. The company notes that of the 400 master brands in its portfolio, nearly 50% accounted for 98% of revenues in second-quarter 2020, while the remaining 50% contributed just 2% to revenues.

Apart from exiting underperforming brands, the company is focused on expanding into new markets and product categories, which includes the recent launch of Topo Chico hard seltzer in the Latin America market. Further, the company is up for the launch of the Topo Chico hard seltzer in the United States in the first half of 2021 in partnership with Molson Coors TAP. The Topo Chico hard seltzer marks the company’s first venture in the alcoholic-beverage space after more than a decade. The company earlier had a wine business in the 1980s. It also sells Lemon-Do, an authentically crafted, sour lemon drink in the chu-hi category in Japan.

 


 

We note that shares of this Zacks Rank #4 (Sell) company have gained 9.2% in the past three months compared with the industry’s growth of 4.5%.

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