Coca-Cola's Enormous Potential in China

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Coca-Cola (NYSE: KO) is the best way for U.S. investors to play China's growth story. Consider that the average Chinese consumer only drinks 39 bottles of Coke per year, compared to the average 400 bottles consumed in the U.S., and you get the picture of Coke's potential in China. Coca-Cola has been in the Chinese market for only 35 years. In 1978, Coca-Cola was able to convince the Chinese government that if the country wanted tourists, that the country needed to offer Coca-Cola.

Today, Coca-Cola has 42 plants in China and has invested more than $5 billion into the country. The company employs 50,000 local-Chinese employees. Coca-Cola plans to almost double its investment by investing an additional $4 billion into China by 2014. This money will be used to add more plants and increase its retail distribution arm.

Ahmet Bozer, President of Coca-Cola International, said:

"We want to make China our largest beverage market soon."

Coca-Cola's goal is to expand its market share. Last year, the company only had 16.6% of the soft-drink market with its Coke, Sprite and Fanta brands. Rival PepsiCo only had a 5.1% share of the market. In terms of carbonated beverages, Coca-Cola has a bigger share of the total market with 55%. PepsiCo has 32% of this market.

Foolish perspective

Consider that between 1979 and 2009, Coca-Cola invested only $2 billion to build its business in China. Between 2009 and this year, the company invested another $3 billion into China. Coca-Cola has already seen a tremendous return on this money, with China sales accounting for 7% of total revenue.

Last year Coca-Cola had $65.64 billion in sales, so China sales accounted for roughly $4.6 billion. Not bad considering the company has so far invested only $5 billion and is getting almost that much in sales from the country in a year--and there's more growth to come.

According to Ernst & Young, by 2030 an estimated two-thirds of the world's middle class will be in Asia, primarily in China. The Chinese middle class currently stands at about 150 million. In 20 years, that number will likely be 1 billion. That is incredible growth and as taste preferences change, demand for products like Coke will naturally increase as incomes rise.

How the competition stacks up

The biggest challenger to Coca-Cola in emerging markets is PepsiCo. PepsiCo benefits by being the exclusive soft drink for Yum! Brands (NYSE: YUM) and its KFC, Pizza Hut and Taco Bell franchises. KFC is the number-one fast-food chain in China. However, KFC has recently been hit by a tainted meat scare and a bird flu scare. Last month, Yum! Brands reported that its same-store sales were down 29%.

Competitors to Yum! Brands are quick to capitalize on its misfortune. McDonald's (NYSE: MCD) is the biggest beneficiary with the problems at KFC. McDonald's will this year add 300 stores in China and hire 75,000 new employees in China. Currently, McDonald's has approximately 90,000 employees in China. McDonald's has only a 15.6% share of China's fast-food market, compared to 39% for Yum! Brands. Look for McDonald's to close this gap with Yum! Brands over the next few years.

Coca-Cola will be a key beneficiary of McDonald's expansion in China since it is the soft drink supplier for each McDonald's location. As the Chinese continue their love of American products, McDonald's and Coca-Cola make a great partnership and help each company target the Chinese consumer. As McDonald's continues to expand in China, it naturally increases Coke's awareness in the country and gives Coca-Cola an even stronger presence in China.

Foolish assessment

In looking at the financials, we see a very well-run company. The company's current operating margin is approximately 23.2%, and the stock trades at a forward P/E of 18. Even with the stock at a 52-week high, the current dividend yield of 2.6% is better than 10-year Treasuries.

Coca-Cola is a great company, and as Chairman and CEO Muhtar Kent said about China:

"As one of the only true multi-category beverage players in China, the measure of our success will be how we grow our total business between now and 2020 versus our growth in any particular quarter. Clearly, I think, with the consumer fundamentals and our strong position in China, we’re just getting started."

I agree with his assessment and see China driving growth for Coca-Cola and its share price. Coca-Cola is a great way for investors to play the amazing growth story that is China. Over the last 50 years, investors have continued to question when Coke's amazing run will end. The stock has continued to outperform its peers and has been one of the best stocks to own for the past five decades. With China growing, the next 50 years look bright for Coca-Cola and its shareholders, as well.

Coca-Cola's wide moat has helped provide its shareholders with superior gains in the past, but the company faces some new threats to its continued market dominance. The Motley Fool recently compiled a premium research report containing everything you need to know about Coca-Cola. If you own or are considering owning shares in the company, you’ll want to click here now and get started!

Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus