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The Science of Hitting
The Science of Hitting
Articles (456) 

Coca-Cola - 1906 All Over Again

September 12, 2012 | About:

Coca-Cola (KO) has a storied history – the company began expanding internationally over a century ago, when it started its operations in Cuba, Panama, and Canada in 1906; this growth, along with explosive expansion in domestic markets, fueled year after year of attractive volume, sales and profit growth for the company. After 30 years and expansion to dozens of other countries around the globe (the beverage was being bottled in 44 of them by WWII), some began to question the company’s ability to keep growing. Roberto Goizueta, Coca-Cola’s CEO for nearly two decades in the 1980s and 1990s, used to produce an article for analysts when the inevitable question of "how much longer will it last" came up. It read:

"Several times every year, a weighty and serious investor looks long and with a profound respect at Coca-Cola's record, but comes regretfully to the conclusion that he is looking too late."

That quote, as Goizueta would proudly point out, was from an article in Fortune Magazine — written in December of 1938.

Today, Coca-Cola’s expansion in international markets is alive and well. Over the years, Coca-Cola has presented a chart showing per capita consumption of the company’s products by country in order to quantify just how sizable of an opportunity remains across the globe; here are some of the most relevant figures as of year-end 2011:

Country Per Capita Consumption Estimated Population
Mexico 728 115M
United States 403 315M
Brazil 230 195M
Philippines 129 95M
Russia 73 145M
China 38 1.3B
India 12 1.2B

The two lines at the bottom of the graphic jump off the page; it’s interesting to know that despite having committed billions to the region, the company is still unable to reach an estimated 80% (as cited by Bloomberg) of all potential outlets for their products due to poor infrastructure. This will change over the coming years, and will correspond with a growing middle class and a population under the age of 15 numbering 350 million people — larger than the entire population of the U.S; by Euromonitor’s estimates, this will result in the soft drink market more than doubling in the five years to 2015, to more than $7 billion.

As Coca-Cola and Pepsi (PEP) have shown time and time again, their competitive advantages are not contained by national borders. Part of this advantage comes in the form of sheer size and financial flexibility, which cannot be matched by dominant (but materially smaller) regional players — for example, Coca-Cola and it’s local partners plan on spending $5 billion in India by 2020, which will be used on marketing and advertising, as well as on distribution networks in order to penetrate the majority of outlets that are currently unreachable. To date, the result has been pure domination, with Coca-Cola and PepsiCo commanding 60% and 37% of the Indian carbonated beverage market, respectively.

With 2012 sales to exceed $50 billion and a current market cap of $170 billion (in addition to being the favorite holding of the world’s most well-known value investor), KO certainly isn’t riding under the radar; like the Fortune article from the late 1930s, it’s easy to look at Coca-Cola and conclude that one has come across the behemoth a bit too late. In reality, the market opportunity in China, India and other emerging markets is comparable (in terms of population) to the space Coca-Cola has grown into over the past 100 years; from my perspective, this is looking much more like 1906 than 1938.

About the author:

The Science of Hitting
I'm a value investor with a long-term focus. As it relates to portfolio construction, my goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach to investing is "patience followed by pretty aggressive conduct". I run a concentrated portfolio, with a handful of equities accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

Rating: 3.5/5 (24 votes)


Dr. Paul Price
Dr. Paul Price - 5 years ago    Report SPAM

You gave no indication of the 'value' of KO today.

Without that, no decision to buy, sell or hold can be made.

The Science of Hitting
The Science of Hitting - 5 years ago    Report SPAM
Dr. Paul,

That's very true; the point of the article was to simply address the idea that Coca-Cola has saturated it's growth opportunities. I currently have no position, which says a lot about my thoughts on the valuation. Thanks for the comment!
Jonathan Poland
Jonathan Poland - 5 years ago    Report SPAM
You make a very interesting argument..
The Science of Hitting
The Science of Hitting - 5 years ago    Report SPAM

Thanks! Now comes the part of waiting for the right price...

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