Coca-Cola (KO) and PepsiCo (PEP) have come under some pressure from analysts in the past few years for the continued decline of their most profitable business segment: carbonated soft drink sales in the United States. Overall U.S. sales of CSD’s dipped 2.1% in 2009 to roughly 9.4 billion cases, marking the fifth consecutive year of declines; when compared with a consistent growth rate of roughly 3% that added significant volume and revenue through the 90’s, this suggests a long term trend away from CSD’s (at least in the US; China’s soft drink industry grew 12.8% in 2010) and towards alternatives (energy drinks) and health-conscious beverage consumption (waters, RTD teas and coffees, etc). While these new categories provide an opportunity for new entrants (such as Red Bull, Hansen Natural (HANS), etc.) to fight for new found customers, the power concentrated in the hands of KO and PEP should not be overlooked.
In this article I will look at the recent success of Minute Maid Pulpy, which I believe is a recent example of the still dominant business strategies by the current leaders in the beverage industry; while I believe M&A is a critical part of this strategy, this article will focus on organic growth, especially through R&D, Glocalization, marketing, and swift/widespread adaptation to emerging consumer trends.
Pulpy, which is under the Minute Maid umbrella, was originally launched in China in 2005. This is a key product category for Coca-Cola: after their $2.4B bid for Huiyuan (the largest privately owned juice producer in China) was blocked by the Chinese Ministry of Commerce, Coca-Cola needed to find a way to enter the juice segment with a locally relevant product (which is growing roughly 16% per annum in China). Pulpy appears to have been the answer; In five short years, it has reached the milestone of $1 billion in sales, becoming the 14th brandin the Coca-Cola portfolio to reach this mark; in fact, this marks the first time that a product developed and launched in an emerging market has eclipsed the $1 billion hurdle.
Coca-Cola has made a commitment to juice; Pulpy joins the exclusive list as the third brand out of the juice and juice drink portfolio (along with Minute Maid and Simply), a testament to the development of a diversified group of products to meet consumers needs across a variety of brands and categories. This looks like the early days of a good future for KO in the Chinese juice market, which is expected to double to $23.9B in revenues by 2015 (according to Euromonitor International).
On the conference call for Q4 2006 (which took place in February 2007), Neville Isdell (who was CEO at the time) talked about the success that was being driven by this segment: “Our juice platform continued to evolve. As you know, we're already the global leader in juice and juice drinks and we increased our global presence through trademark Minute Maid's expansion and key acquisitions.” The next year, he again noted the products strong performance: “Trademark Minute Maid increased unit cases 5%, driven by the expansion of Minute Maid Pulpy in China and other emerging markets.”
Think about the development of Pulpy since 2007. At that time, the product had been successful developed and introduced in a new market; from here, the marketing team that have developed some of the most valuable brand names across the globe gets its moment to shine. On top of that, this endeavor is being backed by millions in resources and global distribution. Coca-Cola has used these advantages to drive the continued growth and development of the brand around the world. Pulpy is now available in 18 geographies across 3 continents (2010 additions: Algeria, Malaysia, Singapore, Vietnam), with planned released in additional regions coming soon. This is the system that has led to distribution in more than 200 countries and at a rate of consumption at 1.6 billion company products a day.
In my mind, this is where you see the separation between your Coca-Cola’s, Proctor & Gamble’s (PG), and PepsiCo’s of the world, compared to the rest of the field; these companies are the epitome of global brands, and have the infrastructure to continue dominating their industries looking forward.
Pulpy in 2005 was much like other products; unknown and unproven. When a product first gets off the ground, there are plenty of factors that make the potential between failure and success hard to calculate. A great example of this is none other than Coke’s CSD lines over the years; when the product is first launched, it is difficult to judge whether it will become Surge (discontinued) or Sprite (5.5% share of CSD market, #7 brand overall as of 2009).
An example I like is Microsoft’s (MSFT) moves into different product categories as of late. Between phones, cloud computing, video games, and search engines, there is no question that MSFT is testing the waters. Fortunately, they have the cash to do so, and don’t mind spending a decent amount of it to find a home run that will drive returns over the next 20-30 years. The key here is that they know WHERE THEY WANT TO BE. As everyone knows, Bing has lost billions for MSFT in the fight against Google. Despite the response by the market, there is a method to the madness; Microsoft sees the future of online search, and is willing to forgo current EPS growth for what they think will be overwhelming long term success.
Much like for Coca-Cola, the important factors are that they have the resources to test the waters, and are investing based on the long term and where consumers are going to be 10, 20, and 30 years from now, without a focus on simply avoid failures and driving today’s profit. The company will be offering free samples of Pulpy (at certain times) over the next 12 months in Malaysia, a testament to their willingness to pass up on small short term profits in order to find lifelong customers.
The beauty of Pulpy is that this is just the beginning; over time, products/brands that have become known to and liked by consumers are developed further to become an integral part of the company’s operations. An example of the company’s focus on driving complementary products was the launch of Pulpy Super Milky across 300 cities in China in 2009. The product, which is a mix of fruit juice, milk powder, whey, and coconut, was developed at the company’s Global Innovation Technology Center in Shanghai. As noted by Doug Jackson, president of Coca-Cola Greater China, the product “underscores the company’s commitment to China in developing new products for the local market and the world from the Chinese R&D center”. By using a mix of brand recognition and Glocalization, Coca-Cola is able to capitalize on their scale and brand advantages, while simultaneously remaining competitive in the fight for share in niche categories.
As I have attempted to explain above, the CSD issue overlooks one key point; Coca-Cola will continue to research, develop, market, and distribute their products (which cover a wider spectrum with each passing year) better than anyone in the business. Their brand recognition and operational efficiencies don’t stop at soda; management’s focus and investment in product lines outside of CSD’s will only strengthen one of the strongest moats in global business.
What does this mean for investors? When you find a great company, watch it closely; be patient, but commit yourself to the idea that regardless of short term macroeconomic issues or company specific issues, you must be “greedy when others are fearful” for the companies with a well known and long term sustainable competitive advantage.
For nearly twelve full months, (2008-2009) KO stock traded for less than $50/share. This suggests that at the top of the range during the time period, the company’s stock was trading for roughly 16x earnings. At that time, the market was getting killed, the economy continued heading south, and unemployment was through the roof; as value investors, sometimes we need to step back from the noise and “be greedy”.
Patience must be rewarded by taking advantage of situations like these; as an investor during periods of downward market movements, it is important to look at the reasoning behind the stock’s price decline, take an unbiased look at the valuation, and pounce at exceptional long term opportunities in great businesses.
In this article I will look at the recent success of Minute Maid Pulpy, which I believe is a recent example of the still dominant business strategies by the current leaders in the beverage industry; while I believe M&A is a critical part of this strategy, this article will focus on organic growth, especially through R&D, Glocalization, marketing, and swift/widespread adaptation to emerging consumer trends.
Pulpy, which is under the Minute Maid umbrella, was originally launched in China in 2005. This is a key product category for Coca-Cola: after their $2.4B bid for Huiyuan (the largest privately owned juice producer in China) was blocked by the Chinese Ministry of Commerce, Coca-Cola needed to find a way to enter the juice segment with a locally relevant product (which is growing roughly 16% per annum in China). Pulpy appears to have been the answer; In five short years, it has reached the milestone of $1 billion in sales, becoming the 14th brandin the Coca-Cola portfolio to reach this mark; in fact, this marks the first time that a product developed and launched in an emerging market has eclipsed the $1 billion hurdle.
Coca-Cola has made a commitment to juice; Pulpy joins the exclusive list as the third brand out of the juice and juice drink portfolio (along with Minute Maid and Simply), a testament to the development of a diversified group of products to meet consumers needs across a variety of brands and categories. This looks like the early days of a good future for KO in the Chinese juice market, which is expected to double to $23.9B in revenues by 2015 (according to Euromonitor International).
On the conference call for Q4 2006 (which took place in February 2007), Neville Isdell (who was CEO at the time) talked about the success that was being driven by this segment: “Our juice platform continued to evolve. As you know, we're already the global leader in juice and juice drinks and we increased our global presence through trademark Minute Maid's expansion and key acquisitions.” The next year, he again noted the products strong performance: “Trademark Minute Maid increased unit cases 5%, driven by the expansion of Minute Maid Pulpy in China and other emerging markets.”
Think about the development of Pulpy since 2007. At that time, the product had been successful developed and introduced in a new market; from here, the marketing team that have developed some of the most valuable brand names across the globe gets its moment to shine. On top of that, this endeavor is being backed by millions in resources and global distribution. Coca-Cola has used these advantages to drive the continued growth and development of the brand around the world. Pulpy is now available in 18 geographies across 3 continents (2010 additions: Algeria, Malaysia, Singapore, Vietnam), with planned released in additional regions coming soon. This is the system that has led to distribution in more than 200 countries and at a rate of consumption at 1.6 billion company products a day.
In my mind, this is where you see the separation between your Coca-Cola’s, Proctor & Gamble’s (PG), and PepsiCo’s of the world, compared to the rest of the field; these companies are the epitome of global brands, and have the infrastructure to continue dominating their industries looking forward.
Pulpy in 2005 was much like other products; unknown and unproven. When a product first gets off the ground, there are plenty of factors that make the potential between failure and success hard to calculate. A great example of this is none other than Coke’s CSD lines over the years; when the product is first launched, it is difficult to judge whether it will become Surge (discontinued) or Sprite (5.5% share of CSD market, #7 brand overall as of 2009).
An example I like is Microsoft’s (MSFT) moves into different product categories as of late. Between phones, cloud computing, video games, and search engines, there is no question that MSFT is testing the waters. Fortunately, they have the cash to do so, and don’t mind spending a decent amount of it to find a home run that will drive returns over the next 20-30 years. The key here is that they know WHERE THEY WANT TO BE. As everyone knows, Bing has lost billions for MSFT in the fight against Google. Despite the response by the market, there is a method to the madness; Microsoft sees the future of online search, and is willing to forgo current EPS growth for what they think will be overwhelming long term success.
Much like for Coca-Cola, the important factors are that they have the resources to test the waters, and are investing based on the long term and where consumers are going to be 10, 20, and 30 years from now, without a focus on simply avoid failures and driving today’s profit. The company will be offering free samples of Pulpy (at certain times) over the next 12 months in Malaysia, a testament to their willingness to pass up on small short term profits in order to find lifelong customers.
The beauty of Pulpy is that this is just the beginning; over time, products/brands that have become known to and liked by consumers are developed further to become an integral part of the company’s operations. An example of the company’s focus on driving complementary products was the launch of Pulpy Super Milky across 300 cities in China in 2009. The product, which is a mix of fruit juice, milk powder, whey, and coconut, was developed at the company’s Global Innovation Technology Center in Shanghai. As noted by Doug Jackson, president of Coca-Cola Greater China, the product “underscores the company’s commitment to China in developing new products for the local market and the world from the Chinese R&D center”. By using a mix of brand recognition and Glocalization, Coca-Cola is able to capitalize on their scale and brand advantages, while simultaneously remaining competitive in the fight for share in niche categories.
As I have attempted to explain above, the CSD issue overlooks one key point; Coca-Cola will continue to research, develop, market, and distribute their products (which cover a wider spectrum with each passing year) better than anyone in the business. Their brand recognition and operational efficiencies don’t stop at soda; management’s focus and investment in product lines outside of CSD’s will only strengthen one of the strongest moats in global business.
What does this mean for investors? When you find a great company, watch it closely; be patient, but commit yourself to the idea that regardless of short term macroeconomic issues or company specific issues, you must be “greedy when others are fearful” for the companies with a well known and long term sustainable competitive advantage.
For nearly twelve full months, (2008-2009) KO stock traded for less than $50/share. This suggests that at the top of the range during the time period, the company’s stock was trading for roughly 16x earnings. At that time, the market was getting killed, the economy continued heading south, and unemployment was through the roof; as value investors, sometimes we need to step back from the noise and “be greedy”.
Patience must be rewarded by taking advantage of situations like these; as an investor during periods of downward market movements, it is important to look at the reasoning behind the stock’s price decline, take an unbiased look at the valuation, and pounce at exceptional long term opportunities in great businesses.
