Coca-Cola(NYSE:KO) popped earlier this week on better-than-expected results in its fourth-quarter earnings, but CEO Muhtar Kent warned that 2015 would be a "challenging" year. A stronger dollar has put a damper on international sales, and volume growth is still sluggish despite improvements in North America, as global unit case volume increased just 1% in the fourth quarter. The product portfolio has expanded over the years, and the company is placing a big bet on a new product that could juice sales.
For the first time, the company is introducing a milk product, tackling a market worth $100 billion in the U.S alone. Coca-Cola launched Farilife nationally this week, a new brand of ultra-filtered, nutrient-rich milk that is lactose-free, has 50% more protein and 30% more calcium than regular milk, and just half the sugar. There is a catch, though. The fortified milk is more than twice as expensive as the standard product.
What is Fairlife?
Fairlife is the brainchild of Mike and Sue McCloskey, dairy farmers in New Mexico, who in the 90s developed a special water-filtration system for their cows after they lost their main water well. Mike McCloskey, a trained veterinarian, said the change had a clearly positive impact on the cows as their coats and health improved, and their milk production increased. That experiment led to a collaboration with university researchers and finally to a patented cold-filtration system. Mike explains that the process is just an enhancement of milk's natural properties -- there are no additives.
Fairlife is not the first of product of McCloskey Select Farms to be distributed by Coke, as the companies had previously reached an agreement to market CorePower, a protein drink for athletes, which uses Fairlife as a major ingredient.
Why now could be the perfect moment for Fairlife
Milk sales have long been in decline in this country, falling more than 80% from 1950, when per capita consumption was at 290 pounds compared to just 45 pounds today. However, as consumption of regular milk has fallen, interest in alternatives has grown. Sales of non-dairy products such as soy milk and almond milk have doubled in the last 10 years, and sales of organic milk have also spiked, up 9.5% last year to 2.26 billion pounds. Prices on organic milk were up 8.4% in the last year to $3.89 per half gallon, but demand has still outpaced supply. A number of grocery stores across the country have experienced shortages of the drinkable organic dairy and have warned of more to come.
The problem is not an easy one to rectify, as the process to convert a dairy farm to certifiably organic is expensive and time-consuming. Milk deemed organic must come from cows that have not been injected with hormones or antibiotics and eat only organic food, be it grass or grain. Currently, the process can take up to three years to convert pastureland and feed crops to organic, and the cost of using organic-only feed is estimated at $365,000 a year.
Organic Valley, the largest organic co-op, subsidizes part of the cost of conversions to alleviate some of the burden on farmers. Conventional dairy farmers have also been reluctant to switch because profits from regular milk have been stronger than organic over the last four years, in part due to increasing exports.
This could open the door for Coke. Fairlife is not certified organic, but it could serve a substitute for those looking for organic milk with its improved health benefits. Fairlife, which comes in a 52-ounce container, is slightly more expensive than a half-gallon of organic milk.
And the survey says ...
Posts on Twitter about Fairlife were mixed, with some saying the beverage tasted great and others noting a sour smell and a more viscous texture. Overall, many reviewers were not able to distinguish it from regular milk, which is probably a good sign.
Unsurprisingly, Fairlife has attracted its fair share of criticism, having been called "frankenmilk" and the company's farming practices have been called into question, which may not be surprising considering this is a Coke product. If it catches on, though, the new drink could have a huge impact for the parent company. Sandy Douglas, a Coke executive, said it was the type of product that could "rain money." Given the size of the milk market, that is true, but Coke must first convince skeptics that this is a better choice than organic.