Share a Coke with… Sustainability!
Coca-Cola's sustainability challenges with water, refrigeration, and its supply chain
Coca-Cola (“Coke”) shares many of the same challenges that other CPG and beverage companies face with regard to climate change. The nearly 1.9 billion number of bottles of Coke consumed each day rely on various raw materials and agricultural products that will be affected by changing temperatures around the world.[1] Moreover, manufacturing the Coca-Cola syrup leaves a carbon footprint, and as Coke attempts to become more sustainable, becoming a more efficient in its manufacturing process will be necessary to reduce costs. Packaging its soda and other beverages can also lead to increased emissions to the extent the materials used to bottle are not sourced in an environmentally friendly manner or are not recyclable. But while these issues are common across many CPG companies, Coke faces a few more pressing concerns as it thinks about global climate change.
Would you like some sugar in your water?
Coke’s greatest challenge will be its heavy reliance on water in its production process. It is estimated that by 2030 global demand for water will be 40% greater than the supply of available freshwater.[2] Any sustainability goal Coke attempts will be dependent on the availability of water, the quality of that water, and the efficiency in which it uses it. The company reports that approximately 80% of its total water usage comes from its agricultural ingredient supply chain. Coke recognizes this potential problem and has committed that by 2020 it will improve water efficiency in its manufacturing operations by 25% (compared with its 2010 baseline).[3] Making this process more efficient is key to its long-term success.
Yet Coke must be careful in the manner it goes about acquiring its water. In 2004, Coke lost an operating license for one of its manufacturing plants in India due to its over usage during water shortages, angering local villagers.[4] We have also seen an increasing frequency of droughts across the world, meaning freshwater will not come as easily nor will quality water be as available.[5]
Warm Coke? No thanks.
Another of Coke’s major challenges is refrigeration. Approximately 73% of its carbon footprint is due to refrigeration of its end products.[6] This is because many of the coolers that house Coke products are cooled with hydrofluorocarbon (“HFC”). An alternative is cooling with CO2 coolers that are 1,430 times less harmful for climate change than HFC refrigerant gas. Coke has attempted to work on this problem by setting a goal that by 2020, all new cold-drink equipment will be HFC-free. Thus far, it has improved its efficiency by 40% since 2000.[7]
The soda supply game.
Coke’s challenges with climate change are exacerbated by its distribution model as it relies on supply chain partners to bottle and sell most of its product. Since 1899, Coke has operated a franchise system in which it only produces the Coca-Cola syrup and then sell it to bottlers and fountain companies who bottle, mix, and sell the finished drink.[8] While in the United States, Coke owns the main bottler, around the world Coke has various levels of ownership in its distribution partners. While Coke can control the overall sustainability of its product in the areas of the supply chain that it owns, it does not have the complete ability to regulate downstream. As consumers become aware of the total carbon footprint of one bottle of Coca-Cola, they may not realize that only certain of those channels are Coke-owned, and put pressure on the company to increase efficiency of the third-party distributors.
What to do.
Coke maintains laudable stated climate and environmental sustainability policies. Their goals focus on improving efficiencies which will both help in reducing costs for the business as well as leaving less of a negative environmental impact and contribute less to global climate change. Examples include those listed above as well as using more recyclable materials in their packaging and using best practices for agriculture sustainability. But Coke still must improve upon its distribution model if it is to be fully prepared for future climate change effects on the environment and potential regulation. One solution is to change its supply chain from a franchise system to a vertically integrated system, bringing bottlers and fountain producers into its ecosystem. This will allow Coke to have more control over the method of distribution and can cut down on its carbon footprint in refrigeration.
Finally, while Coke maintains strong written environmental policies, its record on lobbying for climate change regulation is weak. Coke has supported organizations that attempt to stall policies that in the short-term would add costs to its business.[9] If the organization is committed to reducing the effects of global climate change, it must not only become more efficient internally, but use its power in the industry to promote global, productive change.
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[1] http://www.coca-colacompany.com/contact-us/faqs
[2] Giulio Boccaletti, Sudeep Maitra, and Martin Stuchtey, “Transforming Water Economies,” McKinsey & Company, 2012, p. 1, accessible at https://www.mckinsey.com/~/media/McKinsey/dotcom/client_service/Sustainability/PDFs/McK%20on%20SRP/SRP_09_Water.ashx
[3] http://www.coca-colacompany.com/stories/setting-a-new-goal-for-water-efficiency
[4] http://www.nytimes.com/2014/01/24/science/earth/threat-to-bottom-line-spurs-action-on-climate.html?_r=0
[5] William K. M. Lau and Kyu-Myong Kim. “Robust Hadley Circulation changes and increasing global dryness due to CO2 warming from CMIP5 model projections.” Proceedings of the National Academy of Sciences of the USA. Vol 12. No 12. Accessible at http://www.pnas.org/content/112/12/3630.abstract
[6] Sonja J. Vermeulen, Bruce M. Campbell, and John S.I. Ingram. “Climate Change and Food Systems” Annual Review of Environment and Resources. Vol. 37: 195-222. Accessible at http://www.annualreviews.org/eprint/EBIXxM7sNxrBJyuRYgki/full/10.1146/annurev-environ-020411-130608
[7] http://www.coca-colacompany.com/stories/cooling-equipment-pushing-forward-with-hfc-free
[8] http://www.businessinsider.com/inside-coca-cola-franchise-system-2015-6
[9] http://www.nytimes.com/2016/10/17/opinion/coke-pepsi-and-climate-change.html?_r=1
I agree, Coke has done a great job in trying to reduce their carbon footprint and promote sustainability. In a recent Forbes article called “Coke’s Planet-Friendly Vending Machines,” it stated that by Coca-Cola replace HFC coolers and vending machines with environmentally friendly refrigerants, 120,000 machines were able to reduce 630k tons of carbon dioxide emission over 10 years. While it probably cost Coca-Cola a substantial investment to commit to using cold-drink equipment that are HFC-free, I’m glad to see they are walking the talk for their commitment to environmental sustainability policies.
However, I would caution against Coke becoming more vertically integrated because it comes with a lot of inherent financial and operating risks. Perhaps they could become more disciplined with their supplier and vendor selection process because at the end of the day, Coke is still a business and vertically integrating would drastically change their operating model and margin structure, which may or may not be profitable.
(P.S. Love your post’s title!)
Thanks for the post Ari. I’m glad to see that Coke has taken a proactive approach to their supply chain as well as innovation around refrigeration. Considering Coca-Cola is a massive organization that owns over 500 sub-brands, the place where I think they could have a lot of impact is in implementing these best practices through the entire corporation and adding environmental consciousness to their criterion for acquiring new businesses in the future. Given the fact that consumer preferences for soda are changing rapidly, Coca Cola has the ability to invest in some potentially massive opportunities with new food and beverage brands that, with the right guidance from their parent company could also make a large scale impact on sustainability in the next 100 years.
Interesting post on such a storied and iconic brand, Ari! Two things come to mind while reading:
1) Control of the supply chain. You mention the challenge that Coke faces in driving sustainability through the entire supply chain because it lacks ability to regulate downstream where is doesn’t have control. In TOM we have seen this challenge for other firm’s such as IKEA and Barilla. One option is more vertical integration as you mention. Another is using scale to influence. If Coke is really serious about advancing sustainability it its products, it would be great to see them use their size to more effectively shape the practices of their supply chain partners.
2) Reinvigorating the Brand. Being a soda company is tough these days. As consumers have become increasingly aware of the health risks and harm caused by soda consumption, perceptions of firms like Coca Cola and PepsiCo have soured. I agree with you that Coke should do more to promote sustainability externally in addition to within the organization. I think Coke has a tremendous opportunity to re-build its brand image by becoming more vocal and active about advancing sustainability efforts in the industry.
Thanks for the great post, Ari! As a former PepsiCo employee, I felt obliged to respond.
Two thoughts that came to mind for me while reading:
1. Agree with many of the comments posted above on the challenges of a potential vertical integration. I’d imagine that the bottling partners likely have aligned long-term incentives with Coke, i.e. what’s good for Coke and helps to sell more bottles and cans is also good for them. If Coke can help to articulate the value Coke would provide to consumers by increasing its level of sustainability in production, and what impact that would have on sales, this could be an approach forward to push bottlers to change processes. Beyond this, focusing on the influence they have over bottlers to improve sustainability of operations feels like the right immediate step before moving to considering vertical integration.
2. An additional idea your post sparked for me is that Coke could leverage a campaign which has worked well for them, Share A Coke, and, as your title suggests, use this as a reason to engage with consumers in a sustainability conversation. If Coke credibly delivers on sustainability, Coke can encourage consumers to share how they’re helping to improve sustainability as Coke has done.