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Markets Live: 16 July

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Markets Live: 16 July
  • Coca-Cola attempts another recipe relaunch amid growing sugar tax questions 
  • Revolut becomes UK’s most valuable start-up ever 
  • Companies news: Burberry trading update, Ascential acquisition

Coca-Cola: another recipe relaunch brings back painful memories

In 1985 when Cola-Cola (US: KO) made a big song and dance about its new recipe, Beverage Digest said “This has got to be the boldest consumer products move of any kind of any stripe since Eve started to hand out apples.”

Under pressure from the growing popularity of PepsiCo (US: PEP) executives relaunched the iconic drink, with a smoother, sweeter taste. Consumers were outraged. The stunt is now known as one of the big corporate PR failures of all time. 

But Coca-Cola has not made many missteps in its 130-year history. The current chief executive James Quincey was brought in to repair the damage from the last blip (another attempted recipe change in 2015) and he has achieved a great deal (mostly) - even the controversial new flavours launched in 2019 managed to take off without major teething problems. 

But talking of teeth, health concerns in the sugary drinks market are not going away. Add to the fact that brand strength has lost some of its edge in the age of social media and celebrity culture (Ronaldo might not have moved Coke’s share price with his Euro’s stunt, but having revered celebrities openly pan your product can’t be great for business). With pressure once again mounting, Quincey is trying again with a recipe relaunch. Not a big one one - the plan is to attempt to make Diet Coke and Coke Zero taste more like the original. The latter has already been made to look more like Coke Zero with its new red can - perhaps the ultimate goal is to replace the original sugary drink with an equally tasty, equally popular low sugar version, to satisfy the diehards and the health police. 

Revolut: bigger than NatWest

Revolut’s latest private financing round (backed by Softbank’s visions fund) has given it a market capitalisation of £24bn. That means the loss-making foriegn exchange and banking app provider is worth about £300m more than NatWest - one of the UK’s biggest lenders, which at the last count had £770bn worth of assets on its balance sheet. 

Madness, I hear you cry! 

Revolut might have grown its revenues by 57 per cent to £261m last year, but £39m of that came from “fair value gains on cryptocurrency assets” - a feat that is unlikely to be repeated next year. More significantly, unlike the high street banks, customers of Revolut do not face convoluted layers of regulation which makes switching difficult. If they want to try out a different app for budgeting or foreign exchange services, they simply download another one. 

By contrast, the UK’s biggest lender Lloyds (LLY) - which derives its revenue from mortgages, credit cards, small business loans, personal banking and investments - generated almost £30bn in operating income in 2020. Revolut’s new valuation is 70 per cent of that of Lloyds. 

But beyond the madness of the comparisons, there are two valid questions retail investors should be asking themselves in the wake of Revolut’s success. 

First, why are investors at Softbank and other big venture capital or private equity firms being given the opportunity to benefit from the storming success of the new era of banking, while public market investors are left lumped with the links of Lloyds?

Second, what will the company do with its $800m of new cash? International expansion is the plan, but should Lloyds and its peers fear the growing influence of challenger banks. 

To read more about the challenges facing the UK’s banking sector, check out this week’s cover feature: The Death of the City.

Burberry goes virtual

Burberry’s (BRBY) next top model is set to be a short, rotund, blockheaded creature known as a Blanko.

Blankos, if you haven’t heard of them, are humanoid characters in the online video game Blankos Block Party, which players can buy and trade as non-fungible tokens.

As Burberry highlighted in a trading update today, the launch of its own limited-edition Blanko will not only represent the company’s first foray into the NFT craze, but also a key part of its ongoing digital strategy.

The global shutdown of high street stores during the Covid crisis is forcing the luxury retailer to search for new revenue streams: as well as entering the booming world of online gaming, Burberry has recently launched virtual stores, augmented reality handbags and fashion shows on the popular streaming platform, Twitch.

It should continue exploring the virtual world after the pandemic. Burberry says one of its three main targets is delivering “meaningful margin expansion” – this is easier to do when Gen-Z consumers are increasingly willing to pay luxury prices for goods that require no physical production. In May, a virtual Gucci handbag in the video game Roblox (RBLX) reportedly sold for more money than the real thing. 

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