Coca-Cola Strategic Analysis: Growth, Competition & Future

Company Overview and History

Coca-Cola is a manufacturer and sometimes distributor of non-alcoholic beverages. The company was founded in 1886 in Atlanta, where it remains headquartered today. It was created by John Pemberton, who sold the product in soda fountains and pharmacies. The name derives from two key ingredients — cocaine and the kola nut — and the drink was initially marketed as a medicinal tonic. Coca-Cola began as a syrup to which carbonated water was added at the point of dispensing. The company spread nationwide in the early part of the 20th century and then 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). This was partially offset by fast food restaurants, which became another primary distribution point. The era also saw a significant increase in the packaged soda market, as supermarkets were becoming widely popular. Coca-Cola's next major strategic shift was to pursue global expansion, a process that continues today.

Coca-Cola today is ranked #3 on the list of the world's most valuable brands, with a brand value of $81.3 billion (Interbrand, 2014). The company has long operated with a differentiated strategy. It produces a fairly generic product but uses heavy advertising to differentiate its branding, and invests heavily in distribution. Despite holding the world's third most valuable brand, Coca-Cola does not win awards for producing the finest beverage — it is a marketing-driven company. Over the years, it has built an extensive portfolio of products in the non-alcoholic beverage category, constantly seeking new product innovations and launching hundreds of new products every year around the world. Coca-Cola seeks to develop complementary products to its flagship brand and build new categories, in order to leverage its distribution channels more effectively and capitalize on its market expertise. 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 growth areas of the world, and to restore revenue and profit growth. The company targets certain growth areas where it is attempting to build market share, while defending its position in the mature markets that are, ultimately, its cash cows. These strategies have had limited effectiveness. Despite being a large and powerful company, the revenue and profit declines, along with a deteriorating balance sheet, represent a long-term trend that management has struggled to reverse.

Financial Performance and Competitive Environment

Coca-Cola is faced with declining revenues. In fiscal year 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 over this period: in FY2014 it was $7.098 billion, compared with $8.584 billion in 2013 and $9.019 billion in 2012 (MSN Moneycentral, 2015). Net margins have declined accordingly, and gross and operating margins have followed the same downward trend. Earnings per share (EPS) has declined over this period, although the company has continued to increase its dividend. The company's stock price has been largely range-bound for the past several years — a development that, given the business deterioration, might be viewed as relatively positive.

The sluggish business is also beginning to affect the balance sheet. Coca-Cola's current ratio declined to 1.02, compared with 1.27 five years prior, with fairly steady erosion over that period. The long-term debt-to-equity ratio rose to 0.63, compared with 0.204 five years earlier. Four years prior it stood at 0.45, indicating that the company has continued to increase its debt load. According to the Statement of Cash Flows, the company added $3–$5 billion per year in long-term debt during this period (Form 10-K, 2014). None of the trends in the company's financial ratios are positive.

The competitive environment is intense. PepsiCo is the one major global competitor, and both companies compete worldwide. Each has over 1,000 brands in its global portfolio, including many billion-dollar brands. Both companies also face substantial competition from national and regional players. In most markets, the non-alcoholic beverage industry is fragmented, leaving few markets where Coca-Cola holds a 50%+ share. While these companies earn healthy gross margins, they must also spend heavily on advertising and manage complex distribution channels, which suppresses operating margins.

The major growth markets for Coca-Cola are Asia-Pacific and Eurasia/Africa, with growth rates of 5% and 4% respectively in 2014 — the same regions that led growth in 2013. Europe has seen declines in each of those years, and the North American market is mature, with flat or slightly declining business. Latin America is also a mature market for Coca-Cola, having been entered many years ago (2014 Form 10-K).

References

Bellis, M. (2015). The history of Coca-Cola. About.com. Retrieved April 24, 2015.

Coca-Cola 2014 Form 10-K. Retrieved April 24, 2015 from http://assets.coca-colacompany.com/d2/78/7d7cad454f3fbd033d55d786b890/2014-annual-report-on-form-10-k.pdf

Hebblethwaite, C. (2012). Who, what, why: In which countries is Coca-Cola not sold? BBC News. Retrieved April 24, 2015.

Interbrand (2014). Rankings. Interbrand. Retrieved April 24, 2015 from

MSN Moneycentral (2015). Coca-Cola. Retrieved April 24, 2015.

Stanford, D. (2014). AB InBev CEO says he's open to making acquisition at right price. Bloomberg Business. Retrieved April 24, 2015.