Coca-Cola: Survival in an Era of Climate Change
Coca-Cola and its business model face a variety of challenges as the effects of climate change become more prevalent.
A New Normal
We live in a precarious time where our action (or inaction) has the potential to cause irreversible damage to the world in which we live. In its 2014 Synthesis Report, the Intergovernmental Panel on Climate Change determined with 95% certainty that humans maintain responsibility for global warming and identify rising greenhouse gas emissions (GHG) as a primary driver for climate change (see figure 1).1
Recently, atmospheric carbon dioxide passed the 400 parts per million (PPM) threshold which indicates a potentially dangerous (and irreversible) trend that continues to fuel rising global temperature.2 Should we pass 450 PPM, it is projected that average global temperature will increase by 2oC and cause a “rapidly escalating risk of crossing climate ‘tipping points’ that would lead to intolerable impacts on human well-being.”3 However, even without reaching this threshold, we have already begun to experience the adverse effects of GHG emissions and the future operating environment for the beverage industry has irrevocably changed.
Impact on Coca-Cola
In Coca-Cola’s 2015 10-K, they list a variety of factors that have the potential to materially affect their business in future periods and specifically identify climate change, adverse weather conditions, and water scarcity as key risks.4 They also mention a concern that increased GHG levels will cause shifts in global weather patterns that will increase the “frequency and severity of natural disasters.”5 Such weather changes have the potential to limit access to or increase the cost of many key ingredients required to create products (e.g., sugarcane, sugar beets, and coffee). They also have the potential to degrade production and supply chain capabilities as well as decrease product demand.6 Furthermore, with a world population expected to reach 9.2 billion people by 2050, the global need for water will continue to grow in tandem with natural disasters that reduce availability as well as quality.7 As a result, climate change has the potential to significantly impact Coca-Cola’s bottom line if its effects are not properly mitigated.
At a company level, Coca-Cola has recognized the implications of climate change and created a “Climate Protection Strategy” focused on mitigating environmental effects of their operations and products. In practice, this effort has taken the form of programs and policies targeting water stewardship and GHG emission reduction focused on their manufacturing plants, distribution fleet, and cold drink equipment.8 A prime example of their commitment to combating climate change came in the form of a multi-year partnership with the World Wildlife Fund. Here Coca-Cola pledged to facilitate the conservation of global freshwater river basins, improve operational water management in their global supply chain, and reduce its carbon footprint.9 Furthermore, Coca-Cola, along with McDonald’s and Unilever, created and started employing HFC-free refrigeration units that made such an impact on reducing global warming that the Environmental Protection Agency awarded them their Climate Protection Award.10 Through these and similar efforts (e.g., green power), Coca-Cola has made a clear impact throughout the value chain that not only establishes it as a business leader in the area of sustainable practices but also helps curb further climatic instability.
When looking at the problem faced by Coca-Cola, one can quickly see that their key challenges lie outside of their direct control. Consequently, they have to find a way to not only diversify risk but also join the global fight to reduce GHG emissions, curb climate change, and better utilize increasingly limited resources. While Coca-Cola has already started initiatives along these lines of effort, they should continue looking for innovative ways to improve operational efficiency. Regarding their supply chain, they should look to create a decentralized production and distribution network with overlapping sectors of coverage that can handle supply shocks. Additionally, they should continue to improve their facilities, equipment, and transportation fleet by increasing investment in technologies that reduce GHG emissions (e.g., electric and autonomous vehicles, buildings powered by renewable energy, etc.). Coca-Cola must also look for substitutions to increasingly costly (or scarce) commodity ingredients (e.g., citrus), seek to improve resource productivity through waste reduction in process byproducts, and increase product circularity by repurposing materials for repeat use in the supply chain. By focusing on continuous improvement, Coca-Cola can lead the beverage industry in a new direction that helps create a sustainable business model which positively impacts both the environment and local communities in which it operates.
Word Count (excluding citations): 718
1 Core Writing Team, R.K. Pachauri, and L.A. Meyer (eds.) (2015), “Climate Change 2015: Synthesis Report. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change.” Geneva, Switzerland: Intergovernmental Panel on Climate Change, p. VI & 4.
2 Brian Kahn. “Earth’s CO2 Passes the 400 PPM Threshold—Maybe Permanently,” Scientific American, September 27, 2016, [https://www.scientificamerican.com/article/earth-s-co2-passes-the-400-ppm-threshold-maybe-permanently/], accessed October 30, 2016.
3 Rosina M. Bierbaum, John P. Holdren, Michael C. MacCracken, Richard H. Moss, and Peter Raven (eds.) (2007), “Confronting Climate Change: Avoiding the Unmanageable and Managing the Unavoidable.” Research Triangle Park, North Carolina: Sigma Xi, and Washington D.C.: United Nations Foundation, p. 69.
4 The Coca-Cola Company, December 31, 2015 Form 10-K (filed February 25, 2016), via Coca-Cola Website, accessed October 30, 2016, p. 11-21.
5 Ibid, p. 17.
7 United Nations, Department of Economic and Social Affairs, Population Division (2008). “World Urbanization Prospects: The 2007 Revision.” New York, New York: United Nations, p. 1.
8 “Position Statement on Climate Protection,” on Coca-Cola website, [http://www.coca-colacompany.com/stories/position-statement-on-climate-protection], accessed October 30, 2016.
9 “The Coca-Cola Company Pledges to Replace the Water It Uses In Its Beverages and Their Production; Multi-year Partnership Announced with WWF to Conserve and Protect Freshwater Resources,” PR Newswire, June 5, 2007, ABI/INFORM via ProQuest, accessed October 30, 2016.
10 “The Coca-Cola Company, McDonald’s and Unilever Recognized by U.S. EPA for Leadership in Fighting Global Warming,” PR Newswire, May 4, 2005, ABI/INFORM via ProQuest, accessed October 30, 2016.
Student comments on Coca-Cola: Survival in an Era of Climate Change
I agree with Ward that water scarcity is one of the key risks to Coca Cola. Given that soda is between 89% to 90% water , I think that Coca Cola should be heavily incentivized to seek out solutions to water scarcity through preservation and recycling. One of the key challenges facing Coca Cola in the future, however, will not only be how it can combat climate change in general, but also what the company can do to justify taking a scarce resource from developing countries to make soda. For instance, in the past few years, Coca Cola has had to shut down a number of their Indian bottling plants because local farmers blamed the company for using too much water during a time of water scarcity . To combat these issues, I think that it may also be in Coca Cola’s best interest to partner with local governments to find solutions to drivers of water shortage, such as improving India’s water irrigation practices.
 The Coca-Cola Company, “Why water is one of our most important ingredients,” http://www.coca-cola.co.uk/stories/why-water-is-one-of-our-most-important-ingredients, accessed November 7, 2016.
 Avantika Chilkoti, “Water shortage shuts Coca-Cola plant in India,” Financial Times, June 19, 2014, https://www.ft.com/content/16d888d4-f790-11e3-b2cf-00144feabdc0, accessed November 7, 2016.
Great article! Really enjoyed the perspective on the product itself and the focus on water. Initially I guessed that this post would be covering the packaging of coca-cola products and the impacts of all the plastics manufactured and the subsequent impact of those plastics on the environment when not recycled. While we as consumers have come a long way in changing our habits (e.g., recycling bottles), we still have got a long way to go. I wonder to what extent coca-cola can look to innovate on the current plastics and look to more biodegradable goods. In the emerging markets, recycling is not done consistently and instead of trying to change consumer behaviors, coca-cola could potentially look to the source of the problem (plastic bottle) to help solve this issue.
Great article good sir!
Coke is definitely facing many constraints driven by water scarcity. The example of plant closings in India is a good example that sustainability can negatively impact financial results (http://www.wsj.com/articles/coca-cola-closes-plant-in-india-1455122537) .
One of the biggest things that Coke can do is to simply increase customer awareness They need to influence more firms and people to understand the importance of sustainability and fulfill their social responsibility.
Ward, what an interesting article. As mentioned in some of the other comments, not where we thought you were going. I know that Coca Cola has a unique bottling situation with other companies running the bottling operations in a majority of regions. I would want to know more of how much of this carries over to the independent bottlers.
I know that over the past few years, KO has taken back some of the regions and redistributed them because they were unhappy with how they were managed. I want to know if this new initiate is part of their strategy.
Great post Ward! Thanks for bringing our attention to the severe impact of climate change on the beverage industry. This is not an association one makes instinctively while thinking of climate change. Also, given that I wrote about McDonald’s, I think Coca Cola is definitely the most complimentary to that!
It is great to know that a corporate powerhouse like Coca Cola is taking such steps towards sustainability and climate conservation. They were also amongst thirteen companies to sign the White House climate change pledge. They committed to “reduce the carbon footprint of “the drink in your hand” by 25% by 2020” . The efforts towards employing HFC-free refrigeration units and conservation of global freshwater river basins are surely in the right direction
My skepticism arises from the fact that most of these measures seem too little and might have minimal impact. It is tough to gauge whether the intention behind such measures is purely positive media coverage or a sincere concern for climate change. This is further compounded by their lobbying efforts to resist meaningful climate legislation . I believe true strides can be made only when there is a systematic change in the thought process and culture within such organizations.
Ward – wonderfully researched and well-written article. I greatly appreciate how you link Coca-cola’s largest weakness to that of influencing entities over which it has no direct control. To me this is very analogous to IKEAs position in which by its massive size, power and supply chain it is able to exert influence upon others who will (more or less) bend to its will to gain large and long-term contracts. Can you speak more about areas where Coca-cola is doing this, or thinking about utilizing these tactics to do so? Additionally are there other companies (beyond Coca-cola and IKEA) that exemplify this type of behavior with successful results?