Today and tomorrow, the Rule Maker offers readers two servings of Coca-Cola (NYSE: KO). First, we'll take a look at the company's marketing efforts, with a special focus on the difference between sales and marketing. Tomorrow, Zeke Ashton analyzes the company's improving case volumes and the decision to open its conference call to investors. Enjoy!

Let me start off by saying that I like Coke, both the company and the beverage. In spite of this, last time I wrote about the company I more or less lambasted it because I have extremely high expectations for this corporation and it wasn't living up to them. Maybe I was a bit too hard on it, maybe not. The recent company conference call indicated a bit of a turnaround, with case volume up 7%. This is a good thing, but we all know it's just a start.

Coke also reported some gains in net income resulting from cost cutting and restructuring, but that's just noise to me. Restructuring doesn't fix what's been wrong with Coke, it just buys time. Sales growth is what's going to drive this company into the future; cost cutting is merely financial hygiene. If my company is in an accident and is bleeding profusely, I really don't care whether it has on clean underwear.

Coke's upturn in sales coincided with its return to the advertising world with (in the U.S. at least) the "It could be your next Coke" promotion. It worked. So, why didn't I like it? Because Coke is a marketing company, and that promotion was almost pure sales. Yes, there's a difference. A big one.

Marketing is telling your customers about a product. Sales is trying to get them to buy it. Marketing is an ongoing investment in brand equity. Sales cashes in on that investment. While Coke's shipped case volume went up 7%, according to this study the value of Coke's global brand name went down 13%. Obviously, that is not an indefinitely sustainable situation.

Marketing's primary job is to open new markets by breaking down the barriers of unfamiliarity and the natural human tendency to be uncomfortable with the unknown (i.e., they introduce people to the product so they know what it is and don't feel threatened by it). Then, once some modicum of name recognition has been established in the target market, marketing can build on that foundation to try to get people to actually like the product, or at least accumulate whatever positive emotional associations it can manage -- that is, sing the product's praises, preferably set to music, and repeat that mantra until it sticks.

Sales efforts cash in on the work done by marketing, trying to get customers to turn any positive feelings they may have for the product into actual purchases. To use a farming metaphor, marketing efforts plant, water, and fertilize the crops. Sales merely harvests them.

While good marketing works on the emotions, sales tends to be all about hard facts and figures. Product X is a good deal at price Y. Marketing is long-term: Coke will still be a good thing in 10 years. Sales is short-term: buy now before this promotion ends. Financial analysts love sales, because numbers are easy to measure, and tend to discount marketing, which they can only really measure in terms of future sales.

I take the opposite view. If you do the marketing well enough, the sales part will take care of itself. Coke has long been a product that sells itself because it has the world's most powerful brand name. And, it got to be that way through a century of intense and unrelenting marketing. Nobody remembers if it was briefly available for half price one week three decades ago, but tons of people remember the song "I'd like to teach the world to sing," which started as a 1970s-era Coke ad. Coke was so good at marketing, it didn't have to bother with sales. People bought Coke because they liked it.

Coke's fat has repeatedly been pulled out of the fire by the strength of the brand name its marketing efforts built over the years. Throughout most of the 1970s, Coke's CEO had undiagnosed Alzheimer's disease, but even while the corporation was drifting rudderless, money kept coming in because Coke's main product kept selling itself. Every Coca-Cola investor knows about "New Coke" in the 1980s, so I won't repeat the story here. And, in the past few years, while Coke rested on its laurels, sales continued to roll in as interest on a century of accumulated brand equity.

Coke's current CEO, Douglas Daft, understands marketing. I'm fairly certain of this. I suspect the reason the first advertising campaign on his watch was all about sales instead of marketing is that he shipped whatever pending advertisements Coke had laying around just to get something out there. Daft's predecessor, Ivester, was a financial type who would almost certainly have commissioned a measurable sales effort instead of a nebulous marketing campaign, and Daft probably just wanted to get the company's name in front of the public again as fast as possible, using the materials on-hand to do so. This scenario didn't occur to me at the time, but if that's what happened I suppose I understand.

That said, what I'm looking for in the future is marketing, not sales. The current promotion for Sprite, for example, is not something I'm at all impressed with. Bribing people to buy your product with "valuable cash prizes" is sales, not marketing. It does not convey the message that Sprite is a good thing to drink when you're thirsty, it just tries to get you to buy some right now. (The "Obey your thirst" campaign is sales disguised as marketing. It's easy to tell the difference simply by asking yourself: Is it telling us "Sprite is nice," or is it telling us "Go buy some right now"? Another Ivester holdover...)

I don't care how much Coke the company sells this year. I care how much it sells over the next 10 years and beyond. To survive, Coke has to stop telling people why they should buy the product and start telling them why they should drink it. Increased local autonomy in Coke's marketing efforts (another conference call topic) is all well and good, but it must be marketing, not just sales. Doing dumb things on a local level instead of a global level isn't going to fix anything.

If Coke doesn't tell people that Coke is good to drink, nobody else will. And, if Coke doesn't repeat that simple message, over and over and over again, as often as possible, and in as many clever different ways as it can, the value of Coke's brand name will continue to diminish. Declining (or rising) sales are just a symptom of that, not the cause. This is not rocket science, and it's not brain surgery. Just repeat to your customers that the product is good. Everything else is details.

Daft said a very smart thing during the call: "The brand and the company are the same thing." That's it exactly. The brand is the company. Daft knows this stuff. One quarter does not a turnaround make, but I've become comfortable enough with what I've seen to give him more time to refuel and repair the sluggish machinery of this once-and-future Rule Maker. I think he can pull it off. I'm at least willing to give him the benefit of the doubt.

Finally, a couple of our Rule Makers reported earnings today. While its Q2 numbers were excellent overall, Nokia (NYSE: NOK) took a beating after it gave a short-term warning. Bill Mann and Matt Richey have some analysis in today's Fool News & Commentary. Also, JDS Uniphase (Nasdaq: JDSU) reported fiscal Q4 earnings, and it too is covered on the Fool news page.

- Oak

Related Links:

  • Coke's Q2 a Success Overseas, Fool News, 7/20/00
  • Bids on Coke's Brand Power, Fool News, 7/17/00