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Coca Cola plans to up its $1-billion-plus marketing budget by at least another $1 billion. Do they have some secret growth formula?

First of all, Coke will reportedly spend much (most?) of this additional budget on already well-known products (Coke and Diet Coke) in already mature markets. Second, reports suggest that Coke will put much of this incremental spending power behind existing campaigns. No hint yet of anything new in the messaging area.

Over the past four or five decades, the study of advertising effectiveness has drawn some strong conclusions through research and analytics. And on the surface, Coke’s announcement seems to violate most of them.

Advertising (and most marketing tactics) operate on the basis of a marginal returns curve. If you’re on the steep part of the curve, you should spend aggressively. But if you’re way out on the flat part of the curve, spending more comes at much lower promise of ROI. For a mature brand like Coke in a mature market where profit margins are tight and competition is fierce, it’s hard to imagine they can even recall being on the steep part of the curve, never mind still be on it.

No problem. Marketing science tells us there are three ways for even mature brands in the most established categories to shift the entire curve upward:

Product innovation: When you have something really new, different and meaningful to say, more advertising can be highly effective at helping you get the word out and stimulate trial and re-purchase, at least initially.

Strengthen the relative value proposition: Add value—more for the same price, lower prices, better taste, better packaging, etc. Improving your value proposition for the product is the next best thing to true innovation.

Deliver materially better advertising copy: Not just a little better, but far better than you were using and far better than anything competitors are doing.

Absent any of those three things, however, more advertising can only be expected to generate results at a lower rate per dollar spent than current advertising. In short, it loses its fizz, fast.

Coke has stated that it will find the extra billion for advertising from efficiencies in other parts of the business. The company generated gross margins of about 60 percent in Q4’13, and net operating income of about 15 percent. That means an additional $1 billion spent in advertising would need to generate about $6.7 billion in incremental revenue (roughly a 15 percent increase over 2013 total revenues) to break even IF the alternative were to drop those dollars directly to the bottom line. This in an industry where the volume-weighted average growth across major markets for the past few years is plus or minus 2 percent annually.

Sounds like a longshot. So, again, what do they know that we don’t?

 

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