Coca-Cola company history and global operations

Coca Cola

Summary of the Company

Coca-Cola is a manufacturer and sometimes distributor of non-alcoholic beverages. The company was founded in 1886 in Atlanta, where the company is still based. It was concocted by John Pemberton, who then sold the product in soda fountains and pharmacies. The name comes from key ingredients, including cocaine and Kola nut, and the drink was initially marketed as a medical tonic. Coca-Cola was initially a syrup that was sold, to which carbonated water was added at the time of dispensing. The company spread nationwide in the early part of the 20th century, and began overseas expansion (Bellis, 2015).

The first major shift in the business model came in the 1960s when the soda fountain -- the main distribution point for the product, began to fall out of favor (Bellis, 2015). To some extent, this was replaced with fast food restaurants, another primary distribution point, but this also led to an increase in the packaged soda market, as supermarkets were becoming popular during this era. Coca-Cola's next major strategic shift was to begin taking the company global, a process that it ongoing today.

Coca-Cola today is ranked #3 on the list of most valuable brands in the world, with a brand value of $81.3 billion (Interbrand, 2014). However, Coca-Cola is faced with declining revenues. In FY 2014, the company earned$46 billion in revenue, down from $46.8 billion the year before and $48 billion in 2012. Net income also declined in this period. In FY14 it was $7.098 billion, down from $8.584 billion in 2013 and $9.019 billion in 2012 (MSN Moneycentral, 2015). This also means that the net margin has been declining as well. The company's profits have been shrinking everywhere -- the gross and operating margins have also been declining over this period. The EPS has declined over this period, although the company has been steadily increasing its dividend anyway. The company's stock price has basically been rangebound for the past few years, which could be viewed as a positive development given the decline in its business.

Financially, the sluggish business may start to reflect on the balance sheet as well. Coca-Cola has seen its current ratio decline. In FY it was 1.02, compared with 1.27 five years ago, and the erosion has been fairly steady over the past five years. The LT debt to equity ratio is 0.63, compared with 0.204 five years ago. Four years ago, it took on a significant amount of extra debt, and at that point the LT debt to equity ratio was 0.45, so the company has increased its debt load since then. According to the Statement of Cash Flows, the company has been adding $3-$5 billion per year in long-term debt (Form 10-K, 2014) None of the trends in the company's financial ratios are positive.

The competitive environment is intense. There is one major competitor, PepsiCo, and both companies compete globally. Each has over 1000 brands in its global stable, including many billion-dollar brands. These companies also face substantial competition around the world from national and regional competitors. In most markets, the non-alcoholic beverage is fragmented, such that there are very few markets where Coca-Cola holds a 50%+ share. While these companies are able to earn healthy gross margins, they must also spend heavily on advertising to promote their products, and manage distribution channels with the result being that operating margins are suppressed.

The major growth markets for Coca-Cola are Asia-Pacific and Eurasia/Africa, with 5% and 4% growth rates respectively in 2014. These were also the major growth markets in 2013. Europe has seen declines in each of those years, and the North American market is mature, with no growth, or slight decline in business. Latin America is also a mature market for Coca-Cola, as it entered most of those markets many years ago (2014 Form 10K).

Coca-Cola has long operated with a differentiated strategy. The company produces a fairly generic, uninteresting product but it uses heavy advertising to differentiate this product's branding, and also invests heavily in distribution. Coca-Cola has the world's #3 most valuable brand, but it never wins any awards for being the finest beverage known to man -- this is marketing driven company. The company has over the years built an extensive portfolio of products in the non-alcoholic beverage category. It seeks out new product innovations constantly, and launches hundreds of new products every year around the world. Coca-Cola seeks to develop complementary products to its flagship, and build new categories. It does this in order to leverage its distribution channels more effectively, as well as its market expertise in selling non-alcoholic drinks. The company's brands are almost always positioned -- and priced -- as premium brands within what is otherwise a mass market product category.

The current objectives of Coca-Cola are to maintain market positions, to build on the growth areas of the world, and to try to restore revenue and profit growth. The company has certain growth areas where it is trying to build market share, while defending its share in the mature markets that, ultimately, are its cash cows. These strategies have generally had limited effectively. This is a big, powerful company, but the revenue and profit declines, and deteriorating balance sheet, are noticeable and a long-term trend that management has struggled to reverse.

Projections

If Coca-Cola continues with its current strategy, it can expect much the same for the next five years. There are good reasons for this. The biggest reason is that this industry is mature, and there are limited growth opportunities. Coca-Cola may want to grow, but competition is intense in most places, and the company's brand is already as ubiquitous and powerful as it is going to get. Rising living standards, ironically, lead to higher sales of carbonated sugar water, so there is growth in areas where people are still joining the ranks of the middle class. Coca-Cola's strategy already targets these parts of the world extensively. There may not be much incremental growth available beyond what the company is already winning in the world's growth regions.

In the mature markets, Europe is already in the decline stage, and North America has flatlined. There is no reason -- economic, demographic, or otherwise -- to think that the soft drink industry is going to expand in these area. Coca-Cola at this point is working hard to defend its market share, and that is about all the company can expect from these regions.

The company's current innovation strategy is already fairly aggressive. Given the size of the company, it will need multiple hit products in order to spur noticeable revenue growth, especially given the risk of cannibalization. With hundreds or even thousands of new product introductions per year, Coca-Cola is already going guns-a-blazing in search of new hit products. The company can expect one or two hit products, but there is no reason to expect a new billion-dollar brand. Those are unusual. New innovations usually only pillage market share from products that are on the decline, given the limitations of shelf space and consumer consumption rates.

As such, the industry has remained in something of a holding pattern for years. The trends that are driving the business at Coca-Cola now are expected to continue for the coming five years, and the company has already directed its resources at the best growth areas. There is not much that Coca-Cola is going to be able to do since its strategies are already sound. The reality is that the company's fate is being driven to a large part by broad-based economic and demographic trends, which the company is powerless to reverse. Any improvements it can make on its strategy -- given that the strategy is pretty good already -- would yield incremental gains insufficient to overcome these trends.

Recommended Strategies

The current situation is both good and bad for Coca-Cola. The company has one of the world's best brands, but that limits growth potential. It already innovates, which limits the upside from plowing more money into new product development. You can buy its products everywhere that isn't North Korea (Hebblethwaite, 2012) -- it says it doesn't sell Coke in Cuba but its Mexican subsidiary very much does. So there are not a lot of new markets in which it can sell, unless it can secure distribution rights in Tristan da Cunha.

It is hard to complain if you're Coca-Cola, sitting at the top of the world, selling everywhere, with new products flooding the shelves every year. But the reality is that there are very few plausible avenues for growth within the non-alcoholic beverage industry, and many key markets are going nowhere fast. The company's revenues and profits are declining as a result, it is borrowing money every year, and its long-term debt to equity continues to grow. While it has been able to make shareholders happy by increasing its dividends, this is not sustainable. The gap between its EPS and its dividend is shrinking, and at the current rates 2015 will be the last year the company can increase its dividend. It may have bought some time with the shareholders but the reality is that the shareholders are going to need to see some growth in the next few years.

In a mature industry, there are only two real options. The first is consolidation within the industry. Coca-Cola can buy other beverage makers as a means of achieving growth. It would never get a deal with PepsiCo past regulators, and blood would be shed in that takeover attempt, and there are no other major global players. Coca-Cola would therefore need to adopt an acquisition strategy similar to that undertaken by AB InBev, the brewing giant, which has over the past couple of decades built itself, first by acquiring national and regional breweries, and then by absorbing major global players like Anheuser-Busch and Modelo. This acquisition strategy is a long-run strategy, but it could allow Coca-Cola to establish stronger market positions, to acquire successful products to which it can add value with its global distribution and marketing empire, and this is a strategy that plays to Coca-Cola's strengths. It has focused on in-house innovation, but the time might be right to buy market share, and use this strategy to acquire products that it can take to the global market, much the same way that AB InBev did with some of the beer brands it bought.

The other alternative is to expand outside of the non-alcoholic beverage industry. The logic is simple -- if you need growth and its not available where you are now, you have to go somewhere else. Market expansion is not possible for Coca-Cola, so product expansion is all that is left. If new products in the same industry do not float the CEO's boat, then moving into another industry is the only other logical step. This has been discussed before -- the aforementioned AB InBev has long been rumored to have explored tying up with PepsiCo (Stanford, 2014).

I recommend first pursuing growth within the industry. In essence, this strategy better utilizes Coca-Cola's existing skill set. The company is adept at innovation, distribution and marketing. Adding new products that have already proven viable at the regional level to this, via acquisition, is a proven pathway to growth that comes at relatively low risk. There is much more risk associated with tying up with a company in an entirely different industry. The point of such acquisitions is to leverage synergies, and there are fewer of those with companies in other industries. The idea of a brewery is appealing because in many countries there are distribution synergies, and there could be synergies with thing like marketing and bottling. But ultimately, soft drinks are the business that Coca-Cola is in, and the synergies are going to be much more significant. Given that either way there will be an acquisition premium paid, the option that delivers the greater likelihood of synergies is the option that should be adopted.

Competitors' Strategies

PepsiCo is the main competitor, and its strategy is slightly different than Coca-Cola's. Pepsi approaches the soft drink industry the same way that Coca-Cola does, focusing on premium positioning, a focus on marketing and branding, and new product innovation. Pepsi operates globally as well. All of these strategic elements are basically the same as what Coca-Cola does.