Coca-Cola (NYSE:KO) sells some of the most widely-used products on the planet. The soda giant collects a profit from delivering 1.9 billion servings -- or about 3% of all beverages consumed around the world -- every day.
The company has been in business for more than a century and controls four of the top five sparkling beverage brands: Coca-Cola, Diet Coke, Fanta, and Sprite. You might think that dominant position would make management's job easy when it comes to marketing. However, maintaining Coke's unique branding is a massive undertaking, and it is getting more expensive by the year.
Why it's rising
Coke's $4 billion ad outlay in 2016 represented just a slight uptick over the prior year. Yet total revenue declined, increasing the size of that line item as a percentage of sales to 10%. This spending has been trending higher in both absolute terms and with respect to the revenue base. In fiscal 2012, Coke was allocating $3.3 billion to advertising, or 7% of its sales.
The company's advertising needs are elevated right now for two main reasons. First, demand for traditional soda, especially diet drinks, is falling. As a result, the company needs to support its products with more consumer-facing media to protect its market share in a weakening industry. These investments helped organic revenue rise 3% in 2016 despite just a 1% uptick in volume.
Second, Coke is responding to rapidly changing consumer preferences by making tweaks across its massive portfolio of carbonated and still beverage brands. To name just a few examples, it's reducing the use of out-of-favor ingredients like high fructose corn syrup and sugar, changing serving sizes, and pivoting brands toward a more natural, healthy focus.
Shifts like that require significant advertising and marketing commitments as Coke works to inform consumers about the changes to its formulas. The company also needs to spend heavily to support new global launches like the recent Coke Zero Sugar release.
Investors can expect this expense to continue rising. After all, management cited advertising support as a key reason why organic revenue growth accelerated to a 3% pace last quarter from zero in the first quarter of 2017. "Our organic revenue growth in sparkling soft drinks was led by innovation in and marketing support for our low- and no-sugar options like Coca-Cola Zero Sugar," CEO James Quincey said in late July.
Advertising expenses will grow to a larger portion of Coke's costs, too, thanks to the math behind a refranchising initiative that's driving revenue lower while sending profitability up. Revenue dove 16% last quarter, and adjusted operating margin jumped nearly four full percentage points.
Coke plans to introduce over 500 new products this year while repositioning many of its established brands. The formula changes and production costs here are insignificant. Yet executives still must spend billions of dollars to communicate those adjustments to consumers in the 200 countries in which it operates.
That's a mighty challenge given Coca-Cola's global portfolio. Few companies are better equipped to make such a pivot, though. The beverage titan's marketing abilities are one of its core competitive advantages, and they have helped it build one of the most recognized brands on the planet today.