Are Consumers Shying Away From Coke and McDonald’s?

Coke and McDonald's face unique challenges moving forward.
Coke and McDonald’s face unique challenges moving forward.

By: Bruce Li

Coke and McDonald’s—it’s a pairing as classic as Batman and Robin. Coca-Cola is more than a soda company, and McDonald’s isn’t just a fast food restaurant. These quintessentially American companies have built global empires, crafting brands that transcend the food and beverages that they sell.

But recently, questions have abounded about these titans’ hegemony.

Coca-Cola has dominated the world’s most valuable brands rankings for over a decade now, holding the top spot every year—except for last year. In 2013, Coca-Cola slipped to third place, behind both Apple and Google. Coke’s quarterly report showed falling profits to cap off a disappointing year, causing a nearly 4 percent drop in the company’s stock price that day. In the ever-important North American market, overall sales have declined thanks to a host of growing competitors who have cut into Coke’s market share and an intensifying public focus on health. The World Health Organization published a revised recommendationa for daily sugar intake earlier this month—one that wouldn’t even allow for a full 12-ounce can of Coke.

As for McDonald’s, the picture isn’t looking much brighter. This past fourth quarter has been the fifth straight quarter of subpar sales, a quandary made even more serious by the rising sales posted by competitors like Wendy’s. Even as McDonald’s opened a new restaurant in Vietnam earlier this month, taking one more country off the ever-shrinking list of countries without the Golden Arches, store sales across all of Asia have been dropping—especially in the biggest markets China and Japan.

But the numbers are only symptoms of a more deep-rooted problem. The ultimate question is whether or not these companies can recapture their old magic. As the current American culture continues to place a greater emphasis on being health-conscious, one has to wonder how Coke and McDonald’s can survive this major countercurrent trend. Former New York Mayor Michael Bloomberg made headlines in 2012 for trying to ban sales of big containers of soft drinks. First Lady Michelle Obama has become almost synonymous with the campaign against childhood obesity by advocating healthier eating habits and cutting back on fast food. In fact, carbonated soft drinks sales are declining across the board. Parents these days cautiously monitor how much soda their kids can drink, which may affect the way Coke builds its loyal fan base. Marketing consultant Martin Lindstrom notes that while energy drinks sales are thriving thanks to a younger audience, the average age of a Coke drinker is 56. And even with a medley of other drinks offered, 60 percent of Coke’s revenue still comes from soda.

It’s not hard to see how this trend has affected the landscape of fast-food and beverages. Coke-owned Powerade sports drinks have performed positively as its soda counterparts’ sales dropped. Chipotle, the increasingly popular burrito chain posting huge gains as McDonald’s’ sales sink, has made its name off of superior ingredients and an ethical menu.

So how does the future look for these two beleaguered titans? Bleak, according to Forbes contributor Adam Hartung—at least if they don’t change their approach. Hartung compares the situation to a similar one faced by tobacco companies in the 1960s. “Investors should be aware of the long-term impact when products are seen as unhealthy,” writes Hartung. “Cigarettes were a common consumer staple well into the 1960s, but when that product was determined to have adverse health impacts advertising was banned, consumption was restricted to adults only…taxes shot through the ceiling creating a 20-fold price increase.” And as the general public became more aware of the health implications of tobacco, cigarette companies like R.J. Reynolds and Phillip Morris were faced with a dilemma. How would they respond in an environment poised against them?

In short, they tried to fight to trend. They refused to take responsibility for the health issues their products caused, and they aggressively challenged the claims that tobacco causes cancer. In the end, they lost. After devastating lawsuits, strict regulations by the federal government, and a strong public effort to promote “quit smoking” themes, the industry is a shell of what it was in the mid-1990s.

Granted, the tobacco industry is not completely analogous to the fast food and soda markets, but history does serve as a warning of what can happen when companies fail to adapt. This “healthy” trend, like the crusade against smoking, is far from a fleeting obsession and is here to stay. The challenge now is finding the innovative solutions to right the ship.

Coke recently invested $1.25 billion in Green Mountain—the maker of the home-fizzing soda machine Keurig Cold—for a 10 percent stake. While Green Mountain has had impressive sales figures, Coke is still betting on the carbonated drinks that America has, quite frankly, grown less fond of year after year. But, Coke also plans to invest more than $4 billion in China in the next few years. With an aging population seeking healthier options, even China is turning away from carbonated beverages. The company’s Asian products have many local flavors like wolf berries and herbal essences, and with a variety of ready-to-drink teas and juices, Coke has an outstanding opportunity to drive growth in new categories and decrease its dependency on soda.

As for McDonald’s, the problem of sluggish sales is a little harder to solve. The chain has been under pressure to raise wages, but the new, pricier menu items introduced in an attempt to increase profit margins have had a lukewarm reception at best—as evidenced by the latest Mighty Wings debacle. McDonald’s has also made increasing coffee-driven visits a top priority, but many see this as a losing battle given that established competitors like Starbucks already dominate the market. Even as McDonald’s tries to align itself with the new health-first mentality, CEO Don Thompson admits that the salads simply don’t sell. Whatever McDonald’s tries, there is a sense of urgency to end the stagnation coming from the company and its shareholders. While McDonald’s and Coca-Cola are strong enough to weather a rough patch, both companies are definitely at a crossroads—and how they move forward may impact the endurance of these classic American brands.