Taste the Feeling or Fizzle Out?The Coca-Cola Company’s Climate Change Dilemma
Will consumers be able to 'taste the feeling' if The Coca-Cola Company cannot find freshwater? The company is in an interesting predicament as it figures out how to confront climate change, while also realizing that it can in some ways benefit from its harmful impact on our planet.
There’s one thing we can all agree on: our love of Coca-Cola products. Soda, juice, water – The Coca-Cola Company (“TCCC”) has something for everyone, everywhere. According to their latest Annual Report, TCCC operates in 200+ countries and owns 500+ brands, bringing in revenue of $44 billion (2015).
Essential to TCCC beverage production is, of course, water. Water comprises approximately 90-99% of the ingredients in soft drinks and TCCC uses approximately 300 billion liters of it a year., The increasing impact of climate change – prolonged droughts, major flooding, rising sea levels – has confronted the company with new challenges that impact its main ingredient and how it distributes its products to consumers globally. At the same time, these challenges present TCCC with opportunities to eventually reduce costs and meet rising consumer demand for cold beverages.
As the world’s temperature rises, regions globally have experienced droughts. And, sea levels are rising due to melting land-based ice, allowing salty ocean water to muddy freshwater sources. , Therefore, the main input into TCCC’s products has become harder to come by. Coupled with the agriculture’s increasing need for freshwater, access to quality water is becoming increasingly expensive.
Additionally, extreme weather impacts like flooding threaten to disrupt the day-to-day operation of TCCC’s supply chain. For example, flooding in certain areas near TCCC’s manufacturing or distribution plants may impact its ability to supply customer orders and receive supplies from its providers. Long-term, coastal erosion and other geographical changes in TCCC’s 200+ markets could impact the very existence of its local operations. When people eventually migrate away from coasts, the makeup of the different nodes in TCCC’s distribution system and the way in which it allocates resources to its markets is also likely to change.
Amidst these threats, however, is an opportunity that seems ironic. When it’s swelteringly hot, what are you craving? Like most people, you need a cold drink! So, the same forces that are impacting TCCC’s ability to produce the product and deliver the product are actually causing the demand for TCCC’s product to rise. Complicating matters even further, TCCC’s day-to-day operations through its manufacturing plants, distribution fleet, and cold drink equipment (which all in some way or another produce emissions that are harmful to the environment) are feeding both the threats and opportunities for the business.
Seeing these fundamental changes confronting its business, TCCC has taken action, limiting some negative environmental impacts of its operations in three main areas:
- “Optimizing delivery routes to minimize stops and fuel usage” for its 200,000 delivery vehicles
- Reducing the amount of energy used by manufacturing facilities to reduce overall carbon emissions
- “Improving the efficiency of refrigeration equipment” and reduce corresponding carbon emissions by replacing hydrofluorocarbon in the refrigerant gas
These initiatives are in fact successful, demonstrating that TCCC is doing its part in curbing climate change. Given its size and global reach, it can even make a dent in its customers’ practices. For example, after implementing its energy management system for its refrigeration network, TCCC saved its customers $300 million annually from reduced electricity consumption.11 Their efforts are important also because the government could impose regulation that may not give them a choice in these efforts; getting ahead of the curve is wise from a cost perspective. Perhaps most importantly, TCCC launched efforts to reduce the net amount of water it removes from the system by returning “nearly 192 billion liters of water to nature” and reducing the ratio of water used in manufacturing to beverages sold from 2.7:1 ten years ago to 2:1 today.
TCCC cannot turn the tide of climate change singlehandedly. Temperatures will continue to rise. So taking advantage of the favorable demand that hot temperatures bring to their products, is, at its core, a wise business move.
Given water’s critical role in many aspects of its business, I’m surprised there hasn’t been more desalination efforts. While it’s expensive, it may eventually be the only way to access clean water. Additionally, TCCC should start considering the sociopolitical implications stemming from climate change, like lack of clean water. Social/political uprisings may occur, negatively impacting its ability to operate in certain markets. And, the general shift of people that may occur away from coasts will fundamentally alter the consumers TCCC serves and how it serves them. If they aren’t already, TCCC should be creating forecasts on potential future market compositions and preparing its supply chain to be agile to meet these changes.
TCCC’s efforts to limit its use of natural resources while growing its business are impressive and may be enough to allow consumers to sustainably Taste the Feeling. Compounding effects of climate change globally and difficulties in turning a profit, however, will determine if they will just fizzle out.
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Student comments on Taste the Feeling or Fizzle Out?The Coca-Cola Company’s Climate Change Dilemma
KZ2018, I was fascinated by your blog post because of the paradox it presented. The notion that climate change could benefit Coca-Cola – by making people thirstier for the product – is something that I had never thought about. While global warming is something Coca-Cola would not publicly try to capitalize on (given that it has established a reputation for being a well-respected company that gives back and cares about the planet), this idea is an interesting one.
You mentioned that you were surprised there haven’t been more efforts towards desalination and acknowledged that it would be expensive, but I wanted to share with you just how expensive this alternative would be. To desalinate 1000 gallons of water, it would cost TCCC $2.50-$5.00. With Coca-Cola’s net profit margins hovering around 17%, the company would need to look into how much this would hurt its margins (or if they needed to increase selling prices to maintain current margins with this increased cost).
In addition to the water shortages you mentioned, I know that the variability in weather caused by droughts and floods has had a negative impact on TCCC’s supply of sugar cane and sugar beets. I’m curious as to whether these shortages will ultimately impact prices charged to consumers, and if TCCC anticipates corresponding changes in demand/margin/revenues.
I was surprised to see that Coke’s three main areas of focus in its sustainability initiatives did not have to do with water. Given that water is 90-99% of the ingredients of its products, and given the potential fresh water shortage to face society in the future, it seems like this should be a major areas of focus for Coke. This is not to say that its other efforts are not laudable, but it is convenient that these areas seem to positively impact Coke’s bottom line, whereas water sustainability efforts may have the opposite impact.
Nonetheless, I was glad to see that Coke has sought to reduce its demand on the water cycle through reducing the ratio of water used in its formulations. Still, I wonder whether a company with as many talented people and resources as Coke can do more. Are there additional ways to help address the future fresh water shortage we all could face?
Beyond its water consumption, one other way in which Coke imposes externalities on society is the health concerns related to its products. Some cities have resorted to banning large soft-drinks in an effort to reduce the sugar intake, and relatedly the obesity rate, of the population. If Coke is taking water out of its drinks, I wonder what it is putting in them to replace it. Hopefully not more sugar!
Interesting post! Like Erica, I was amused by the graphic which juxtaposed the negative and positive impacts of climate change on Coca-Cola’s operations. There seems to be some misaligned incentives here. If warmer temperatures lead to more consumption, then why would a profit-seeking business like Coca-Cola be incentivized to change? The answer, as you pointed out, is adopting a long-term view. While in the short-term, Coca-Cola sales may increase with higher temperatures, this is not sustainable as natural resources become sparse.
As for your point on desalinization, I wonder if this really solves the issue? Although desalinization would increase water supply in the short-term, it may propagate excessive consumption of water and not fix the problem long-term. Thoughts?
Intriguing post! You mentioned that it is surprising why Coca-Cola hasn’t taken more effort in desalination, and Erica has also mentioned that desalination may not reduce Coca-Cola’s margin much as it does not cost much. Yet I would argue that desalination is not very environmental friendly merely for sustainability reasons:
Desalination is an energy hog: desalination plants around the world consume more than 200 million kwhs each day, with energy costs an estimated at 55% of plants’ total operation and maintenance costs. It takes most reverse osmosis plants about 3 to 10 kwhs of energy to produce one cubic meter of freshwater from seawater, in contrast to traditional drinking water treatment plants which typically use well under 1 kwh per cubic meter.
Desalination also causes environmental problems by potentially displacing ocean-dwelling creatures to adversely altering the salt concentrations around them.
So I would say that Coca-Cola company, as one of the most respected brands in the world, may be fully aware that obtaining fresh water by desalination has much more profound impacts on our environments than most of us are aware of, and thus has rejected the idea proactively.