Fairlife Bottles

The new face of high-end milk. Source: Fairlife, LLC

A tall glass of nutritious, cold milk may be one of the last things consumers associate with the Coca-Cola Company (NYSE: KO), but by early next year, one of the company's newest brands, "Fairlife Milk," will hit grocery store shelves nationwide. The premium drink offers 50% more protein and calcium than regular milk and contains half the sugars, in addition to being lactose-free.

Fairlife Milk was launched by Fair Oaks Farms, LLC, a company jointly owned by Coke and its dairy partner, Select Milk Producers. Select Milk Producers is a co-operative owned by 97 farms that produces over 6.3 billion gallons of milk annually. "Fairlife" is actually the second brand to be launched by Fair Oaks Farms; the first, "Core Power," a high-protein sports recovery drink, has benefited from Coke's marketing and distribution might.  

At the center of Fairlife Milk's appeal is its proprietary cold filtration process, in which milk is filtered at the molecular level into its primary constituent parts: water, vitamins/minerals, lactose, protein, and fat. These basic ingredients can then be recombined into any proportion desired. The following video from the company's website explains the process in a clear, visual manner:

Coke's not losing its marbles; it's experimenting with them

While Fairlife is already available in Chicago, Denver, and the twin cities of Minneapolis-St. Paul, interest in its nationwide rollout spiked in November when Sandy Douglas, Coke's "Global Chief Customer Officer," mentioned Fairlife at the Morgan Stanley Global Consumer Conference. Douglas promised that the premium brand would sell for twice the price of regular milk and, over time, would turn out to be a rainmaker for Coca-Cola, in the manner of its "Simply Orange Juice" line of beverages.

While the media has focused on Douglas' comments regarding Fairlife's potential, less attention has been paid to perhaps a more important point Douglas made in the same session:

If you dropped a marble in the center of a super market and said to the marble, roll toward growth, it's going to roll to the perimeter, it's going to roll the fresh food. There is a globalization of food happening in the United States, and people are balancing calories with their choices of freshness.

Douglas' metaphor, while topically about the characteristics beverages need to appeal to contemporary consumers, is an appropriate one for Coca-Cola's North American brand investment approach. The Coke system is so vast that many beverage companies KO buys into start out as marbles rolling on a floor.

These marbles, often with just a fledgling regional presence, are found and cultivated by the "Venturing and Emerging Brands Group," or VEB, a sort of venture capital arm for Coke. VEB invests in and scales the promising marbles into household names. The misses roll under the grocery store shelves into a dusty corner, where they're never heard from again.

VEB is tasked with finding the next generation of billion-dollar brands for Coca-Cola, taking stakes in beverage companies with $75 million in annual revenue potential -- the minimum revenue needed to justify scaling up distribution. Coke's investment in Fair Oaks Farms, and thus Core Power and Fairlife, was led by VEB.

But why milk, of all beverages?

Images

Glass milk bottle. Source: Nic McPhee under Creative Commons license.

While some may question the advisability of jumping into a beverage category that has been declining for decades, it should be noted that Coke is targeting the high end of the market -- specifically, consumers willing to pay a premium for Fairlife's unique formulation. Additionally, one of Fairlife's characteristics provides a slight tailwind. According to Food Business News, lactose-free milk is one of the few categories expanding in the milk spectrum: Industry sales have increased 6.3% year over year through mid-July. 

Coca-Cola's success with Fairlife shouldn't be taken as inevitable yet. Consumers will have to decide if they're comfortable with the assertion that the beverage is actually milk, versus a recombined fluid from filtrated constituents of cow's milk. And as with any beverage that captures market share consistently, milk drinkers will have to vote for Fairfield's formulated product with their taste buds.

Incidentally, the investment also opens the door for Coke to experiment in one of the fastest-growing U.S. dairy categories. The U.S. yogurt market is a double-digit growth phenomenon projected to expand to $9.3 billion by 2017, led by the popularity of Greek yogurt. Fair Oaks Farms is already plumbing this business, providing a high-protein Greek yogurt for the popular West Coast frozen yogurt chain Pinkberry

As Coca-Cola CEO Muhtar Kent stated recently, Coke will "expand [our] investments in selected profitable categories where [we] believe we can capture value, such as value-added dairy." These words describe Fairlife, but they can also be applied to yogurt. Competitor PepsiCo (NYSE:PEP) has already entered this field through its own dairy partnership with the Theo Muller Group, selling Muller-brand yogurt in select regional markets.

Before we dismiss the plausibility of Coca-Cola purveying homely cups of yogurt, cultured with acidophilus and laden with honey and fruit, consider the company just a few years ago, when it was still riding high on the backs of two flagship sparkling beverages: Coke and Diet Coke. It would have been hard to conceive then that we'd be talking about milk today.

Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.