Coca-Cola's Weak Brew

Coke's (NYSE: KO) at it again, folks. Finally.

Yesterday, the titan of carbonated sugar water announced that it's finally ready to get its "Ilko Coffee" partnership with Italy's illycaffe off the ground and begin moving some serious java. The disturbingly named joint venture (Ill-co? Really?), sealed in October 2007, has begun selling ready-to-drink (RTD) canned "Caffe," "Cappuccino," and "Latte Macchiato," aiming to tap into what Coca-Cola describes as a $16 billion global RTD coffee market -- which has been growing at better than 10% per year.

The numbers certainly sound attractive. I can see why Coke is interested. Then again, this is hardly the first time Coke has gone the coffee-drink route. It already has a coffee-flavored partnership with Caribou Coffee (Nasdaq: CBOU). In 2006, it tied up with Godiva (then owned by Campbell (NYSE: CPB)) to hawk packaged lattes and mochas. Prior to that, Coke bought its way into the market with a purchase of Planet Java. I can't say for sure how the Godiva and Caribou deals are working out, but I certainly haven't heard much about them -- which doesn't indicate rip-roaring success. As for Planet Java, Coke dropped that effort a few years after buying the company.

With so much activity, you might think Coke had this playing field all to itself, with endless opportunity to make as many mistakes as it likes -- but that couldn't be further from the truth. In fact, PepsiCo's (NYSE: PEP) partnership with Starbucks (Nasdaq: SBUX) dominates the RTD coffee market. At least in the U.S., their bottled DoubleShot, Frappuccino, and canned iced coffee products command a 90% market share. If Coke aims to break into the U.S. market with its Ilko products, it's got its work cut out for it.

That said, I see two things working in Coke's favor, assuming it doesn't flub this latest effort as it has its past attempts. First, if Coke is to challenge "Pepsibucks" stateside, it needs a hook. Partnering with U.S. coffee makers apparently had just as little success as other U.S. coffee makers have had in their own right, trying to take down Starbucks. But buddying up with an honest-to-goodness Italian firm, hailing from the homeland of espresso and cappuccino? That might give consumers enough of a reason to try the new product.

But even if Coke fails, again, to break into the U.S. RTD coffee market, there's always the rest of the world. Abroad, Coke enjoys better name recognition than Starbucks, and a broader distribution system. Pair that with a market growing at 10% per year, and even starting from zero, I think Coke could see some growth from its new venture. In short, this time, I think Coke's on the right track.

Sip on another article about Coke and a smile:

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