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KO AT A GLANCE

P/E ► 19.8 AVG EV/EBITDA ► 14.3 AVG ROA ► 14% AVG ROE ► 26.4% HIGH Debt to Equity ► 0.966 AVG Current Ratio ► 1.27 AVG Interest Coverage Ratio ► 21.8 AVG

 

 

 

 

 

 

This article refers to the overall multinational beverage manufacturer, distributor, and marketer. To view Coca-Cola bottlers, see Coca-Cola (disambiguation)

The Coca-Cola Company (NYSE: KO) is the world’s largest manufacturer, distributor, and marketer of non-alcoholic beverage concentrates and syrups. Based in Atlanta, Georgia, KO sells concentrated forms of its beverages to bottlers, which produce, package, and sell the finished products to retailers. The Coca-Cola Company operates in over 200 countries and sells over 400 different brands that produce over 3000 different products, including the world-famous Coca-Cola and Sprite lines of soft drinks. ^[1]

An increased consumer preference for healthier drinks has resulted in slowing growth rates for sales of carbonated soft drinks (abbreviated as CSD), which constitutes 78% of KO’s sales. ^[2] KO’s profits are also vulnerable to the volatile costs for the raw materials used to make drinks - such as the corn syrup used as a sweetener, the aluminum used in cans, and the plastic used in bottles. Furthermore, slowing consumer spending in Coke's large North American market compounds the challenge of increasing costs^[3] and a weak economic environment. Finally, Coca-Cola earns approximately 75% of revenue from international sales, exposing it to currency fluctuations, which are particularly adverse with a stronger U.S. Dollar (USD). ^[4]

Despite these challenges, Coca-Cola has remained profitable. Though the non-CSD market is growing quickly, the traditional CSD market is still large in terms of both revenues and volume and highly lucrative. The size and variety of KO’s offerings in the CSD category, coupled with the unparalleled brand equity of the Coca-Cola trademark, has allowed KO to maintain its share of this important market. KO has also responded to consumers’ changing tastes with new, non-CSD product launches and acquisitions such as that of Glaceau^[5] in 2007. Strong international growth has also more than offset a weak domestic market.

History and Corporate Overview

The Coca-Cola Company traces its origin to 1884, when an entrepreneur named John Stith Pemberton concocted a cocaine-infused wine for sale in the U.S. A non-alcoholic version, called Coca-Cola, was introduced in the following year in response to new laws prohibiting alcoholic beverages, and the company was officially incorporated in 1888 in Atlanta, Georgia.

The entire Coca-Cola system is divided into two parts: the Coca-Cola Company and its bottlers. KO manufactures concentrates and syrups for its beverages, which it then sells to bottlers for packaging and distribution. KO owns all the rights for its brands, which include some of the world’s most popular non-alcoholic beverages, though it does grant bottlers some rights as part of its bottling agreements. In addition to manufacturing the concentrates, KO is also primarily responsible for marketing its brands, which includes running advertising and promotional campaigns. Bottling companies are generally independent of the Coca-Cola Company, though some are either partially or completely owned by KO.

KO is now one of the largest corporations in the world, with a global workforce of over 90,000 and revenues of $31.9 billion in revenues in 2008.^[6] Over the years, the brand equity of the Coca-Cola trademark, as well as that of other KO-produced brands, has established KO as a prominent figure in the non-alcoholic beverage industry and allowed the company to keep both revenues and profits high.

Quarterly Earnings

Q1 2009

In the first quarter of 2009, the Coca-Cola Company posted revenues of $7.169 billion, a 3% decrease from Q1 2008 figures; net income fell 10% to $1,348 billion.^[7] Although sales volumes actually rose 7% during the quarter, the Coca-Cola Company was negatively impacted by the dollar's strengthening against the euro, Brazilian real, Mexican peso, and South African rand.^[8]

Q2 2009

In the second quarter of 2009, the Coca-Cola Company posted revenues of $8.267 billion, an 8.6% decrease from Q2 2008 figures; net income grew 43% to $2.037 billion.^[9] Although the company managed to grow worldwide case volume by 4% (with especially important increase of 33% in India and 14% in China), adverse fluctuations in the foreign exchange caused the decrease in revenue. On a currency neutral basis, revenues grew by 4% during Q2 2009, as pricing remained constant during the year. The growth in net income is deceptively large, as the 2008 figure includes an $843 million, or $0.40 per share, charge due to to changes in the company's accounting policy of its equity investments in its bottlers. Ignoring this charge, net income would've fallen by 12%.^[9]

Q3 2009

In the third quarter of 2009, the Coca-Cola Company posted revenues of $8.044 billion, a 4.2% decrease from Q3 2008; net income rose 0.2% to $1.920 billion.^[10] Worldwide unit case volume grew 2% (lead by a 7% increase in Latin America and a 37% increase in India), but overall revenues declined as a result of a stronger US dollar compared to most foreign currencies.^[11] Strong unit case volume growth in Latin America (7%) and the Pacific (6%) was offset by decreases in South and Eastern Europe (declined 13%) and North America (decreased 4%). Mexico, India, China, and Vietnam saw volume increases of 9%, 37%, 15%, and 12% respectively since Q2.^[12] North America was affected by shifting the July 4th holiday to Q2 and by a double-digit decline in Dasani water, which is representative of slower growth in the water industry as a whole.^[13]

Bottlers

Bottling and canning companies are typically separate from the Coca-Cola Company’s main concentrate manufacturing business. However, KO does maintain ownership interests in many of its bottlers, ensuring that the relationship between the two parts of the Coca-Cola system remains close. Unlike rival Pepsico (PEP), Coca-Cola Company will likely not make bids to purchase any of its bottlers because a consolidated company would not offer the same cost cutting synergies as it does for Pepsico (PEP).^[14] Since Coca-Cola realizes a smaller percentage of total sales in the US than does Pepsico (PEP), it has much less to gain from a consolidated company.

Some of the Coca-Cola Company's principal bottlers are:

• Coca-Cola Enterprises (CCE) (NYSE: CCE), which is the largest member of the Coca-Cola bottling network by volume. CCE accounts for 80% of all domestic Coca-Cola sales and 18% of all sales worldwide.^[15] KO retains a 31.6% share of CCE stock, as well as two of its thirteen board seats.

• Coca Cola Femsa S.A.B. de C.V. (KOF) (NYSE: KOF), the second-largest bottler in the Coke system, produced 2 billion unit cases of beverages in 2007. KO owns 32% of Coca Cola Femsa S.A.B. de C.V. (KOF), which has a strong presence in Central and South America.^[16]

• COCA COLA HELLENIC BOTTLING CO (CCH) S.A. (NYSE: CCH) is KO's fourth-largest bottling company, selling 1.81 billion cases in 2007. CCH has a large market presence in Europe, Asia, and Africa with its operations spread among 26 different countries. KO currently owns 23% of CCH's stock.^[17]

Products

The Coca-Cola Company produces over 400 brands of non-alcoholic beverages, including carbonated and non-carbonated beverages, such as ready-to-drink juices, coffee drinks, tea and bottled water. Of these over 400 brands, there are more than 3,000 different beverage products. ^[18] Most of KO's beverage portfolio is composed of CSD, though the company has been expanding into the non-CSD category in response to a shift in consumer demand and a greater emphasis on healthy options.

Carbonated Soft Drinks

Carbonated soft drinks are the single largest component in the Coca-Cola Company's collection of beverages, accounting for around 78% of total volume sold in 2008. ^[19] Within the CSD category, KO offers other sugared drinks and diet drinks. Of all CSD sales, beverages bearing the Coca-Cola or Coke trademark make up 82% of total volumes.^[20]

The Coca-Cola Company's major CSD offerings (>$1 billion in annual sales) include:

• Coca-Cola
• Diet Coca-Cola
• Sprite
• Fanta
• Barq's Root Beer
• Coke Zero
  • Introduced in 2005, Coke Zero is the most significant of KO's new innovations. This beverage is marketed as a "calorie-free" version of Coca-Cola Classic, omitting the diet label in an attempt to appeal to new demographics. This brand alone accounted for nearly on third of all 2006 growth for beverages bearing the Coca-Cola trademark.

Most of KO's carbonated soft drinks come in several varieties with different flavors, caloric values, etc.

KO also offers energy drinks such as TaB and Full Throttle, which are carbonated but are aimed at different demographics, putting them in a special category of their own.

Non-carbonated Soft Drinks

The remaining 26% of KO's total volume is composed of non-carbonated soft drinks, which include a variety of beverages such a fruit juices, waters, sports drinks, and teas. This non-CSD segment has been showing higher growth rates than the CSD category, resulting from higher demand for healthy alternatives to traditional CSD. ^[21]

The Coca-Cola Company's major non-CSD offerings (>$1 billion in annual sales) include:

• Dasani bottled water
• Glaceau VitaminWater
• POWERade sports drinks
• Minute Maid and Minute Maid To Go juices
• Aquarius sports drinks
• Nestea
• Sokenbicha

Trends & Forces

The Global Economic Recession Threatens Overall Demand

In 2008 and 2009, the global economy has fallen into a recession. Not just the United States but countries from all over the world have felt the impacts of the 2008 Financial Crisis. This may be a problem for Coke, which derives approximately 75% of its sales from outside North America ^[22]. Still, the company has positioned itself well in international markets both organically and through acquisitions, such as that of Chinese juice maker Huiyuan for $2.4 billion. ^[23]

New Aversion to Soda Threatens Main Business

74% of the Coca Cola Company's products are classified as carbonated soft drinks, making it particularly sensitive to changes in demand for CSD. ^[24]

• Consumer demand for CSD has been negatively affected by concerns about health and wellness. This is true across most of KO's markets.
• There has been an increase in the number of regulations regarding CSD in the United States in response to the heightened desire for healthy food consumption.
  • In 2006, many state public school systems banned the sale of soft drinks on their campuses. ^[25]
  • The Center for Science and Public Interest proposed that a warning label be placed on all beverages containing more than 13g of sugar per 12-oz serving. This proposal would affect all non-diet, full calorie drinks produced by KO. ^[26]
• These factors have driven a shift in consumption away from CSD to healthier alternatives, such as tea, juices, and water.
• Within the CSD segment consumers have been moving away from sugared drinks, opting instead for diet beverages, which do not generally contain any sugar or calories.

Though KO has been somewhat slow to respond to this shift in consumer preferences, it has recently begun to increase its development of both diet CSD and non-CSD beverages. KO is faced with the task of balancing the risk of new innovations with the low growth rates of established brands, a predicament for manufactures throughout the beverage industry.

Integrated Bottler Strategy Increases Flexibility

After CEO Neville Isdell was brought out of retirement in 2004 to revive the then flagging beverage maker, one of the first areas that he targeted for improvement was KO's frayed relations with its extensive network of bottlers. Since consolidating all company-owned bottlers into the Bottling Investments division, Isdell has continued to increase KO's interest in its bottlers through stake purchases or outright buyouts. This strategy represents a weakening of the division between KO's production and distribution operations. Isdell believes that by combining production and distribution operations the company will have enhanced its ability to quickly respond to changing market conditions. In KO's 2007 Q3 Analyst call, Isdell credited the outright purchase of Coca-Cola Bottlers Philippines (CCBPI) for double-digit volume growth in that country. Additionally, KO has signed new agreements with many of its bottlers which allow them to distribute drinks produced by other companies. For example, Coca-Cola Enterprises (CCE) now distributes AriZona, a ready-to-drink tea made by Ferolito, Vultaggio & Sons, an American iced-tea company. Isdell sees these agreements as another way of taking advantage of the rapidly growing non-CSD market.

Commodity Cost Fluctuations Affect Margins

2007-2009 PET resin prices, ¢/pound ^[27]

The Coca-Cola Company’s profitability can be affected both directly and indirectly by the costs of various production inputs. KO itself is responsible for purchasing the raw materials used to make its concentrates and syrups. Variations in the prices for these goods can affect the company’s total cost of production as well as its profit margins. Changes in the production costs of bottlers can also impact KO’s profitability, though in a more indirect way. If the raw materials necessary for bottling become more expensive, the bottler may be forced to drastically raise prices to compensate. Such a price increase would likely hurt KO, given the competitive nature of the non-alcoholic beverage industry, and provide a possible incentive for consumers to switch to other companies’ beverages. Aluminum, corn, and PET resin are three examples of such production goods used by bottlers that could have significant bearing on the Coca-Cola Company’s profit margins. In 2007, the prices of these commodities rose drastically with general commodities bubble and dramatically pressured margins. They receded in 2008, but the possibility of another significant rise in Commodities represents a constant threat to profits.

Dollar Affects International Performance

KO has broad exposure to foreign currencies and actively hedges a large portion of these to avoid wide swings in earnings from currency fluctuations. Although this hedging insulates from the potential downside of a strengthening dollar, it also limits larger gains from drastic downswings in the dollar's value.

Bottled Water Falling Out of Favor

In Q3 2009, Dasani bottled water's revenues fell by double digits; this decrease is emblematic of the bottled water industry as a whole. In August 2009, the Wall Street Journal reported that sales of bottled water had fallen for the first time in five years.^[28] The combination of the recession and upper class consumers' increased environmental consciousness^[29] has lead many customers to cut back on bottled water in favor of tap water and reusable containers. Following this trend, at least one town in Washington state and one in Australia have outlawed the selling of bottled water within their city limits. In 2008, bottled water was the third most popular beverage (behind soda and milk), but compared to 2007, Americans consumption declined for the first time, down to 8.7 billion gallons from 8.8 billion gallons.^[30] Although this is a seemingly small decrease, industry experts don't expect bottled water to bounce back anytime soon.

Domestic Competition and Market Share

U.S. non-alcoholic beverage market share, by volume

Coca-Cola’s main competitors in the U.S. are Pepsico (PEP) (NYSE:PEP) and Cadbury Schweppes (CSG)(NYSE:CSG). There are many smaller beverage companies competing domestically, and marketers of non-CSD brands sometimes possess significant shares of their specific sectors. Examples include Red Bull GmbH's Red Bull energy drink, Monster energy drink, produced by Hansen Natural (HANS), and Ferolito, Vultaggio & Son's AriZona iced tea.

Coke vs. Pepsi

• Pepsi
• Mountain Dew
• Gatorade
• Aquafina
• Tropicana
• Lipton

For decades now, Coke and Pepsi have battled for the title of tastiest soda producer, but which company will add the best flavor to your investment portfolio? Although both companies share powerful brandnames and global franchises, there are two important distinctions between Pepsico and Coca-Cola that any investor should consider before choosing between these comestible titans:

Global Footprint

When it comes to international presence, Coca-Cola easily trumps Pepsico. In 2008, Coca-Cola generated around 75% of its revenue overseas compared to just over a third of revenue for Pepsico. Coca-Cola's larger global footprint exposes it more to international economic health, particularly in the developing world. While this led to strong growth through much of the decade, current weakness in emerging market economies suggests that trend may come to an end. Furthermore, because Coke generates so much of its revenue abroad, it stands to suffer from the continuing strengthening of the dollar as sales denominated in foreign currencies are suddenly worth less dollars back home. At the same time, Pepsico's heavy dependence on North America makes it much more susceptible to a slowing US economy.

Diversified Product Offering

Another important distinction between the two companies is their product offering. Though KO is the largest company in the non-alcoholic beverage industry, Pepsico (PEP) has larger revenues, due to the diversification of its product lines. Non-carbonated soft drinks make up 39% of PEP’s beverage product line, compared to 26% at KO. PEP also owns the Frito-Lay and Quaker Oats brands in addition to its beverage holdings. This relatively more diversified portfolio provides PEP with a certain degree of protection from weak performance in any one market or industry, in addition to generally higher revenues. PEP’s 2008 gross revenues were $43.3 billion as compared to KO’s $31.9 billion, reflecting PEP’s more varied product offerings. Furthermore, Coca-Cola's heavy dependence on beverages, particularly carbonated beverages, makes it more susceptible than Pepsico to a growing aversion to carbonated beverages which are perceived as fattening and unhealthy. On the other hand, Pepsico's extensive portfolio of beverages, foods and snacks puts it in a better position to benefit from the movement to healthier eating.

Dr Pepper Snapple Group (DPS)

Dr Pepper Snapple Group (DPS), a Texas-based spinoff of Cadbury Schweppes, is the third-largest beverage franchiser in the domestic market, with a market share in 2007 of 15%. ^[32] DPS manufactures both beverages and confectionery goods, and it has sold some of its trademarks in certain geographic regions to both KO and PEP. In the U.S., some of DPS’s significant beverage brands are:

• 7Up
• Dr. Pepper
• Hawaiian Punch
• Canada Dry
• Snapple (US Operations)

The company identifies itself as a beverage business, and its sole revenue source is from its beverage lines. It is a direct competitor of both KO and PEP, though its as a company is significantly smaller. 2007 revenues for DPS were $5.75 billion, a mere fraction of the two CSD monoliths.

Coca-Cola Company Must Grow Its Coffee and Tea Lines

Since 1996 when it began selling read-to-drink Frappacino beverages, a partnership between Starbucks and Pepsi is the undisputed owner of the U.S. ready-to-drink (i.e., canned) coffee and tea market, with 90% market share. The global market is a different story - Coca-Cola's Georgia product line owns over 30% of the international market, easily dwarfing Starbuck's 4%. However, the Pepsico (PEP) Starbucks (SBUX) partnership has started to exert pressure on Coca-Cola Company's international sales with the 2008 beginning of its two year expansion into new markets, including China. Coca-Cola will have to protect its sales from the new competition, which is supported both by Pepsico (PEP)'s distribution strength and Starbucks (SBUX)'s brand recognition.^[33]

International Competition

Internationally, the Coca-Cola Company’s largest competitor is, again, Pepsico (PEP). Both companies have significant presence in the domestic market, but KO sells more beverages outside of the U.S. KO receives nearly 80% of its operating income from international sources and holds over half of the global market share for non-alcoholic beverages. PEP, meanwhile, makes only 42% of its net revenue from outside the U.S., and a large portion of PEP’s income comes instead from its snack business, a market in which KO does not participate. ^[34]

In addition to PEP, Dr Pepper Snapple Group (DPS) also sells beverages internationally, specifically in Australia, Mexico, and Canada. DPS's predecessor Cadbury Schweppes (CSG) had previously sold beverages in Europe, South Africa, and Hong Kong, among others, but the new company since sold its businesses in all markets except Australia and North America. DPS generates only 10% of its revenue from abroad, relfecting the company’s desire to concentrate on its strongest markets. ^[35]

There are various other concentrate manufacturers and beverage franchisers across the world, though none hold a significant percentage of the global market, instead focusing on particular geographic regions.

References

1. ↑ Coca-Cola 2008 Annual Review
2. ↑ Coca-Cola 2008 Annual Review
3. ↑ International Sales Boost Coca-Cola's Results
4. ↑ KO 2008 10-K Pg. 14
5. ↑ Coke set to buy Glaceau for $4.2 bln
6. ↑ Coca-Cola 4Q profit down on charges, strong dollar.
7. ↑ KO 2009 10-Q  
8. ↑ KO 2009 10-Q  
9. ↑ ^{9.0 9.1 9.2} The Coca-Cola Company 2009 Second Quarter and Year-to-Date Results.
10. ↑ KO Q3 2009 10-Q, p.4
11. ↑ KO Q3 2009 10-Q, p.41
12. ↑ The Coca-Cola Company Q3 2009 Earnings Call transcript, Seeking Alpha
13. ↑ KO Q3 2009 10-Q, p.38
14. ↑ Fitch: Coca-Cola will not buy its biggest bottlers.
15. ↑ 2007 Annual Review, p.9
16. ↑ |Coca Cola Femsa Ownership Breakdown
17. ↑ Coca-Cola Hellenic Shareholder Structure
18. ↑ Coca-Cola 2008 Annual Review
19. ↑ Coca-Cola 2008 Annual Review
20. ↑ Beverage Digest 2008 Market Share Report
21. ↑ Coca-Cola 2008 Annual Review
22. ↑ KO 2008 10-K Pg. 14
23. ↑ Coca-Cola Company Offers To Buy Huiyuan Juice Group
24. ↑ Coca-Cola 2008 Annual Review
25. ↑ New York Times. "Bottlers Agree to a School Ban on Sweet Drinks." 5 April 2006
26. ↑ Center for Science and Public Interest
27. ↑ Corn Prices.
28. ↑ Bottled Water Boom Appears Tapped Out, Wall Street Journal, 8/13/2009
29. ↑ A Fashion Trend Meets A Watery Grave, Wall Street Journal, 8/6/2009
30. ↑ Bottled Water Boom Appears Tapped Out, Wall Street Journal, 8/13/2009
31. ↑ Beverage Digest 2007 Market Share Report
32. ↑ Beverage Digest 2007 Market Share Report
33. ↑ Starbucks, Pepsi take bottled coffee overseas.
34. ↑ PEP 2008 10-K
35. ↑ DPS 2008 10-K pg. 106