Before delving into the issue, it would be appropriate to look objectively at the American beverage industry and grasp an understanding of the predominating sheers.
It’s a big blow
Some may hate to admit it, but the beverage industry has been badly hit. The market has been flooded with uncertainties as most bigwigs have been compelled to go back to the drawing board in search of a plan B. Even Coca-Cola, which by the way started off with a big bang, is now fizzling out. In recent earnings reports, it was revealed that Coca-Cola profits dipped slightly despite the 3 percent increase in sales.
Competitors like Dr. Pepper Snapple (NYSE:DPS) actually have a good story to tell so far as its stock has been up by close to 16%. PepsiCo (NYSE:PEP) also basks in glory as it enjoyed an 8 percent run-up till now. All the same, things now look dim for all players.
For starters, the ongoing drought has greatly impacted the cost of inputs. The price of high fructose corn syrup, a core ingredient in many beverage drinks including coke products, is going through the roof. Some key producers of this "magical ingredient" like Archer-Daniels Midland (ADM) are pushing their prices a few notches higher. Coke, among other peers, will therefore be compelled to dig deeper into its pocket if it wants to maintain supply at equilibrium. With high fructose syrup being a core ingredient in most beverages, the bottom line of beverage players may be greatly affected. While Coke is renowned for hedging syrup, only time will tell if they will be able to hold on to supplies amid the threatening drought.
Another factor that has sunk its teeth deep into the American market is competition. While competition is more than positive, it occasionally suppresses growth in trying moments. As per now, the American beverage market is wedged in a moribund state and the last thing that it needs is destructive competition. SodaStream and Coca-Cola have introduced the aspect of destructive competition. By destructive competition, I mean the type of competition that ends up in the courtroom. How is SodaStream and Coke’s competition playing out? The bitter rivalry may very well just pull the two bigwigs into a legal spiral. Coke is not at ease with SodaStream’s signature marketing campaign, "The Cage." Coke alleges that apart from using Coke bottles in the marketing campaign, SodaStream went to the extent of touting Coke’s original idea that is profound in Coke’s own PlanBottle campaign. Coke also alleges that SodaStream rolled out its Coca-Cola dispensing machines into more markets. The way I see it, these wrangles may end up in court. If this happens, Coca-Cola and SodaStream will be pushed to the sideline as other competitors make advancements. All the same, court cases have always had a reputation of blowing out of proportion. If this happens, overall progress in the market may be slowed.
Another big blow and perhaps the biggest of all, is the significant loss of a potent market in the American space – school going children. More and more schools are continuing to rally a negative outlook towards carbonated sodas. The market is reeling in an increasingly heightened disapproval of carbonated drinks as Faulkton Area School District in Faulkton S.D pioneers the ban of sugar filled sodas, arguing that it does not promote the good health that the school administration advocates for.
From the look of things, it is pretty evident that things are rough in the U.S. market.
The weapon revealed
Coca-Cola’s key strategy is its excellence in emerging markets. It has secured strong anchorage in emerging markets and in the event that the American market plummets, it will have a good fallback position. There is a lot of leg room in emerging markets with particular regard to India. Being the canny player that it is, Coca-Cola has already secured deep anchorage in India.
In fact, so far, it has been established that India has been the core driving force behind Coca-Cola sales. India recorded a 20% growth and by far played the most instrumental role in improving overall sales figures. This, perhaps, is the reason that has fueled Coca-Cola’s decision to pump in funds into the Indian market. Apparently, Coca-Cola wants funds in India to hit the $5 billion mark by 2020, underscoring the great potential there.
India is Coca-Cola’s escape route in case the American market crumbles. While competitors grapple with uncertainty in the U.S. Coca Cola continues to widen its global footprint.
I am sure that the India slant and in general Coca-Cola’s dominance in the global front spells well for its future. Regardless of what happens in the American market, Coca-Cola’s growth is still guaranteed. Investors should buy now more than ever. While returns on investments may be slow in the short term, the future holds a lot of potential for growth and far greater returns.