|New Threads Only:|
|New Threads & Replies:|
Forum List » Value Ideas and Strategies|
Share and discuss value investing ideas and investing strategies.
Coca-Cola - Reigning in the Cola Industry
Posted by: Mrinalini Chaudhuri (IP Logged)
Date: April 11, 2014 10:58AM
Soft drinks are an all-time favorite among people of all ages. The Coca-Cola Company (KO), being the leader in the beverage industry, is constantly innovating new products and techniques for its valued customers. Over the years, this company has also provided a decent return to its valued investors.
Today, there's no question that consumers are much more empowered. The social media scene is exploding, and gone are the days when you simply needed to create impressions about your brands with consumers. Now it's all about expressions — communicating in a dialogue with consumers to meet their expectations. Take the Coca-Cola Facebook page as an example, which has more than 76 million likes. It is the largest Facebook page of any single brand.
The Coca-Cola Company is the world's largest beverage company, refreshing consumers with more than 500 sparkling and still brands. Led by Coca-Cola, one of the world's most valuable and recognizable brands, the company's portfolio features 16 billion-dollar brands including Diet Coke, Fanta, Sprite, Coca-Cola Zero, vitaminwater, Powerade, Minute Maid, Simply, Georgia and Del Valle.
Let’s Have a Look at the Recent Performance
Coca-Cola recently announced the closing of the $1.25 billion investment in Green Mountain Coffee Roasters (GMCR). Coca-Cola will purchase roughly 16.7 million shares of Green Mountain Coffee roasters for $74.98 per share, according to Coca-Cola's press release. Green Mountain Coffee Roasters will buy back some of the newly issued shares under its current $1.1 billion share repurchase authorization to reduce the dilution effect on its existing owners. Green Mountain Coffee Roasters will utilize some of the proceeds to develop a Keurig Cold system, eventually enabling people to mix a homemade glass of Coca-Cola products.
Facing Some Competition in the Field
Coca-Cola’s largest competitor is PepsiCo (PEP). There is intense competition between the two companies. They not only compete in soft drinks, but also have branched out to other beverages including coffee, juice drinks and even water. If Pepsi were to offer a new product it wouldn't be surprising to see Coca-Cola follow suit. Coca-Cola entered foreign markets differently than Pepsi, providing it an edge over Pepsi. While Pepsi invested heavily in foreign markets, Coca-Cola's appointed bottlers with significant experience easily neutralized any threat PepsiCo could pose. As of March 2011, Pepsi was knocked into third place behind Coca-Cola and Diet Coke; Diet Coke outsold Pepsi in 2010.
Over the next decade Coke's global reach should give it the edge in the regions that offer the greatest growth. Moreover, Pepsi's success with snack foods may prove harder to maintain as consumers worry more about salt and fats.
Minor Hiccups Paved the Way for New Products
The healthy lifestyles movement has certainly taken its toll on carbonated soda demand. Coca-Cola saw its global carbonated soda volume expand a mere 1% in 2013. The company recognizes the urgency of innovating new products perceived as healthier in the soda segment. As a result Coca-Cola recently introduced the Diet Coke Frost. The company press release highlights its low 30 calorie count and low carbs amounting to only 12 grams. Initially the product will be distributed at 7-Elevens in the country with a wider distribution coming at the "end of May." While this may hardly move the needle on Coca-Cola's global carbonated soda business, it certainly represents a move in the right direction to rejuvenate consumer interest in its increasingly stigmatized soda segment.
New products are extremely important to long term investors as they will likely make or break these companies in the years to come. With that said, geographic expansion and product innovation is a must for these large and mature companies facing shifting consumer tastes.
Coca-Cola offers constantly growing dividends with stable price appreciation. The company is also backed its return with a solid financial position. The company is looking to shift its focus toward franchising. This means Coca-Cola is moving its revenue base more towards fees instead of sales. With the move in revenue generation, I think Coca-Cola will sustain its returns over the long term.
Coca-Cola's future lies in emerging markets expansion and non-carbonated beverages such as Honest Tea and Minute Maid Juice. PepsiCo's continued focus on snacks may cause it to drop the ball on its beverage segment, further enhancing Coca-Cola's strategic position in beverages.
Far-Reaching Global Acceptance
Coca-Cola's presence is felt across the globe. One of the reasons that Coca-Cola resides in the No. 1 market spot is that it maintains a presence all over the globe. India, Indonesia and China hold huge potential for this company, leaving plenty of room for it to expand. Coca-Cola India is aiming to get back on to the double-digit growth trajectory over the next year as it focuses on the Indian market, which by 2020 is expected to become the fifth largest in the world from its current seventh position.
The company said it is working towards achieving the 2020 vision of doubling system revenues and servings and revealed that India would be a strategic growth market vis-a-vis that goal. The company had lined up $5 billion till 2020 in India. With a per capita consumption of 14 per year for Coca-Cola products, as compared to the global average of 94, the Indian market offers huge opportunity for growth.
People are now much more health conscious as the rate of obesity is accelerating at a great pace. Sugar, being the most important ingredient of soft drinks, is the main contributor to obesity. Health consciousness of people has paved the way to a decline in the consumption of carbonated soft drinks and diet soda in the U.S. market. The only reason for this is numerous health problems such as weight gain, poor dental health, diabetes and cardiovascular disease.
There is an indication that the company will keep its history of consistently increasing dividends. With the recent details of its financials, Coca-Cola is expected to quench the thirst of its consumers in the near future.
Coca-Cola's $17 billion in cash and investments gives it the resources necessary for product innovation. This adds to its appeal as a long-term investment. An increasingly evolving middle class, higher disposable incomes and changing lifestyles are key factors that will fuel growth of this company in the beverage industry.
Stocks Discussed: KO, PEP, GMCR,