3 Things Coca-Cola is Doing to Maintain its #1 Status
Bobby 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) products are sold in more than 200 countries around the world. Coca-Cola, the world’s largest beverage company, sells 1.7 billion servings per day on average from a line of products that has over 500 brands. Coca-Cola has come a long way since 1886 when Dr. John Pemberton walked into Jacob’s Pharmacy to sell the first syrup. Coke today is one of the most recognized brands in the world.
Coca-Cola has a shrinking soda market in the United States. The beverage market has changed as people are becoming more health conscious, and moved toward more organic healthy beverages. Coke will continue to get more of its profits in the United States from sports drinks, tea, and fruit drinks in the future. Coca-Cola also has started an education website about beverages and health called The Beverage Institute for Health and Wellness. Coke is making money off the trend though. Coke realized that the health concern over carbonated sodas could eventually hurt the bottom line; so it decided to embrace the trend and produce healthy beverage lines to make up the lost revenue in its soda lines. Coca-Cola bought the other 60% of the Honest Tea Company that it did not own last year. Honest Tea makes organic healthy tea, which Coca-Cola has eyed as a growth market. Coke already had a line of fruit juice drinks so it was not a culture shock for Coca-Cola. In my opinion, I believe Coke will continue this expansion into healthy natural drinks to capitalize on the health trend.
Coca-Cola, due to the shrinking U.S. soda market, will also get more of its revenue from energy drinks and continue to raise its market share in this segment. Coke offers several energy drink options: Full Throttle, Rehab, Tab Energy, Relentless, Burn, Buzz and others, in direct competition with Monster (NASDAQ: MNST). These drinks have a lot of caffeine, ginseng, and herbs and cater towards sports and youth demographics. Often these energy drinks also have Vitamin B complex and other nutrients designed to increase energy and “wake up” a tired run down body. Perhaps the biggest consumer of energy drinks are young people 18-30 that need an energy boost. Coke will be able to target a younger consumer with energy drinks which could give Coke the opportunity to develop a lifetime customer. These products carry higher margins and, on a per unit basis, are more often sold individually rather than in bulk, like Coca-Cola’s legacy soft drink products. In my opinion, Coke will eventually be one of the largest sellers of energy drinks in the world because of a long history of success in the beverage market.
Indeed, in many ways, Coca-Cola is a distribution company as much as it is a beverage producer and innovator. It ties up sales channels with contracts so that its competitors cannot compete as easily for the same customers. Coca-Cola focuses its operations on what it is good at unlike rival Pepsi (NYSE: PEP) which has gotten into the snack market through its Frito Lay and other brands. These, too, are high margin businesses, but because of its largely concentrated efforts, Coca-Cola is able to employ larger economies of scale in both manufacturing and distribution. Coca-Cola knows how to sell beverages whether it is energy drinks, sodas, or sport drinks.
Red Bull GmBH is one of the biggest players in the energy drink market. Last year, Red Bull sold 4.6 billion cans and has the potential to sell 6 to 8 billion cans in 5 years, according to a Red Bull spokesman. Red Bull, instead of staying in energy drinks which it has been successful at, tried to break into the soda and cola market. Red Bull did so poorly in the cola market the venture was discontinued. Coke has its sites set on catching Red Bull in the energy drink segment and saw its energy drink business grow across the board in 2011. Do not dismiss Coca-Cola’s ability to catch Red Bull; because after all, Coke is the number one beverage maker in the world. Red Bull failed in the cola market, but Coke will not fail in the energy drink market.
I expect Coke to pay down debt in the future. Lower debt will attract investment and give the company more options. Coke has $29 billion in total debt with a debt to equity ratio of around 89. This amount of debt is not unusual for a beverage maker, as Pepsi has $26 billion in debt. In fact, Pepsi and Dr Pepper Snapple Group (NYSE: DPS) both have debt to equity ratios of 126 and 129. Coke will also work to save money in the future and has already started. For example, Coke announced a new cost savings plan that will save the company between $550 to $650 million dollars a year. This cost savings initiative will also increase profit and revenue from the increased productivity not just the savings itself. I expect some of this increase will go into debt reduction. Coca-Cola, besides bringing down its debt and costs, will continue to raise its stock dividend each year. For any investor that wants a good dividend stock, Coca-Cola should be a candidate. I have no doubt Coke will continue to raise its dividend in the near future because it has raised its dividend 49 years in a row. How many companies can say that?
In the future, Coca-Cola will use unconventional advertising such as social media and internet, as much as radio and TV. Coke’s branding and image make it very recognizable. Coke will take advantage of this and sponsor this year’s Olympics in London. The TV coverage will add to that branding and exposure which could have 4.7 billion watching in 220 countries. This TV advertising will transition to untraditional types of ads. Coca-Cola already advertises at movie theatres, but Coke will increase the internet and Twitter ads in the future. Facebook and other social media will be utilized as well. Social media has the added advantage of getting the consumer to interact with the ad as well as leaving contact information like an e-mail address. The contact information allows Coke to follow up with additional ads that are more personal and targeted to the individual. This can be a cost effective way to advertise, since emails are free. Interactions with ads make customers more connected with the advertising. These ads may involve clicking on a button to answer a question, leaving an opinion to get a free coupon, or filling out a survey. Coca-Cola can use the information to improve its products.
I expect Coke will stay the number one beverage maker far into the future. It will do this by increasing market share in health and related energy drinks, lowering debt, and advertising in non-traditional ways like the internet and social media. As a result, investors will be rewarded in the future with higher dividends.
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