A Big Mac, Coke and side order of decline

 First published in the Financial Times on 9th September 2014.

Younger customers are less tolerant of dominance by a few large businesses

Have many big consumer brands peaked? I ask this question because I believe a number of the world’s biggest products appear to be in structural decline.

Companies such as Interbrand and Brand Finance value brands. But two of their top global brands, Coca-Cola and McDonald’s, are facing what may be existential threats. Both are in pronounced decline in their home country, and it appears these slumps are not temporary. Coca-Cola sales have been falling for a decade in the US, according to Euromonitor – supplanted by everything from iced tea and sports drinks to coffee and fruit juices. Sugary, carbonated beverages are seen by the younger generation as unhealthy. Once such trends become established they are difficult to reverse. And fizzy drinks still make up three-quarters of the company’s overall sales.

Meanwhile McDonald’s restaurants are losing their appeal among millennials, according to recent research. More than 40 per cent of the company’s 35,000 restaurants are in the US – but younger customers are visiting McDonald’s less, and going instead to rival fast-casual chains. Diners want fresher, healthier food and a more bespoke offering. And what happens in America is likely to be followed in other territories.

It may be that the health issues challenging Coca-Cola and McDonald’s are specific to those market leaders. But I suspect other factors are at play too. Customers younger than 30 are more promiscuous in their brand choices and have less product loyalty. The digital revolution has brought almost total price transparency, diminishing the ability of brands to charge more. Retailers are embracing own-label to defend their margins.

Greater variety and the ability to browse from a wider range of goods online mean younger customers are less tolerant of an overwhelming dominance of a few big businesses. Just as media consumption has fragmented considerably – the old TV and radio networks, newspapers, magazines and suchlike gradually losing their power – so 20- and 30- somethings are more inclined to buy from a range of sources than rely on a few vendors. In both alcoholic and soft drinks, for example, almost all the growth is coming from smaller, independent producers.

The difficulty for big corporations such as McDonald’s and Coca-Cola is that their core products are vastly profitable. Replacing these enormous cash flows is an almost impossible task. Large organisations find it extremely hard to innovate despite investing large sums in research and development because the strategic emphasis at the board and among shareholders will always remain focused on the bulk of the profits – the traditional, ageing product lines.

For both these companies their business model is essentially that of pure intellectual property owners. This means they need invest only modest amounts in capital expenditure. They license most of the hard work to partners. Coca-Cola relies on its bottlers to produce and sell the actual product; McDonald’s depends increasingly upon franchisees to operate its restaurants. That system is fine when the strength of the IP and marketing are undoubted; but when the brands lose their relevance, then they may not be able to charge such high fees and mark-ups to their partners. Burger King has struggled considerably in its franchisee relationships over the years, and is now buying Tim Hortons .

And that is usually the answer from large companies which feel they cannot grow – they make acquisitions. Frequently these fail because the cultures clash. Ironically McDonald’s made two excellent purchases of minority stakes years ago – Chipotle and Pret A Manger – but then sold both off. Each has become steadily more successful and is part of the growing band of competitors to McDonald’s.

Meanwhile Coca-Cola has a division meant to cultivate and buy drink start-ups with potential. Let’s hope they do better than they did with Malvern Water, near where I have a home. Schweppes had bottled water there for more than 150 years: but Coca-Cola felt the operation was too small so shut the plant down in 2010 and sold it off for development. They did not sell the brand to any local entrepreneurs to revive – the sort of behaviour that gets big business a bad name.

All of these are reasons why I prefer smaller, dynamic concerns to the behemoths.