Coke Hones in on Key Emerging Markets

By Tom Gibbs - June 21, 2012 | Tickers: KO, DPS, PEP, SODA | 0 Comments

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As if the war within the soft drink industry was not intense enough, individual players including Coca-Cola (NYSE: KO), Pepsico (NYSE: PEP), and Dr Pepper Snapple (NYSE: DPS) have been under increased scrutiny lately as health and environmental concerns continue to be on the forefront of the newsreels.  New York City Mayor Michael Bloomberg’s anti-soda sentiment, for example, has spread up the coast to Boston, which is now considering its own ban on the sale of super-sized drinks at restaurants.  Likewise, SodaStream International Ltd. (NASDAQ: SODA) has launched a new marketing campaign that attempts to raise consumer awareness on the gross amount of waste that plastic bottles and aluminum cans utilized by Coca-Cola, Pepsico, and Dr Pepper Snapple create. 

Amidst all of this potentially hazardous news, however, all three soft drink stocks are showing rather promising resiliency thus far in June – Pepsico, Coca-Cola, and Dr Pepper trade 2.2%, 3.4%, and 5.1% higher, respectively, two-thirds of the way through the month.  When looking closer at Coca-Cola, there was one rather small news tidbit that may have contributed slightly to the stock’s June increase: after a 60-year U.S. government investment sanction, the corporation will finally begin selling Coke and other beverages in the small Southeastern Asia country of Myanmar. 

Small, But not Inconsequential

Coca-Cola first entered the Chinese neighbor in 1927, but following a dictatorship takeover in the early 1960s, trade sanctions specifically prohibited many Western-based enterprises from selling products and services in the country.  Following the recent U.S. government’s decision to suspend the sanctions on Myanmar for its democratic reforms, Coca-Cola can now cross the name from its very short list of countries in which it does not operate (still includes Cuba and North Korea). 

The corporation does need to wait for the U.S. government to issue a license allowing it to make such a move into the nation, so Coca-Cola management has yet to announce specific details as to the size and scope of the Myanmar investment.  As an act of good faith, however, Coca-Cola did recently announce that it will donate $3 million (via non-governmental group PACT) to support job creation for women in the region, and it will still be able to get a head start by selling product in the nation that will be imported from plants in neighboring countries like China and Thailand. 

With a population of around 55 million, Myanmar is going to be one of the smaller markets in which Coca-Cola deals in the Southeast Asia region.  When looking at the big picture, however, the sanction suspension is a meaningful step forward in Coca-Cola’s huge push toward attracting more consumers in emerging markets.  Likewise, because Burmese citizens are far from foreign to the product – shops in the nation have sold Coke and other American staples for years by skirting inefficient trade laws – the existing strong product awareness and demand (consumers do need to ante up heavily for the product to create a smuggled supply) should give the corporation an attractive initial boost when it opens shop. 

2020 Vision

Coca-Cola’s global operating plan for the next decade – “2020 Vision” – has more to do with eyesight than one might initially think.  The all-encompassing plan is a full on attempt to attract more eyes to Coca-Cola as a whole – the corporation of course seeks to push more product to more people in emerging nations, but it intends to simultaneously boost awareness on its responsible environmental, health, and employment efforts. 

One of the primary metrics of the 2020 Vision plan, as laid out by Coca-Cola CEO Muhtar Kent, is to double revenue by the year 2020 through targeting marketing efforts toward 800 million to 1 billion emerging market consumers.  As more than 44% of revenues still stem from Coca-Cola’s mature North American market, it obviously has a lot of work to do to boost volume in more tucked-in nations like Myanmar.  Such a feat should not be extremely difficult to execute, however, especially when considering Coca-Cola’s long track record of success in new markets. 

As a natural extension from its core United States market, for instance, Mexico was one of the first obvious growth markets for the corporation.  In 1990, per capita consumption of Coca-Cola in Mexico was 280 eight fluid ounce beverages per year.  Although this was well above the worldwide average per capita consumption of 43 per year, an increased focus on Mexico over the past two decades has boosted per capita consumption nearly 2.5-fold.  Mexico is now the corporation’s most robust market (in terms of the amount of product consumed per person). 

Seeing that many of the smaller Southeastern Asia nations are well below the worldwide per capita consumption average today, the increased focus on the region is a surefire way to fulfill the 2020 Vision milestones.  The general rise of middle class citizens and discretionary income levels in these markets, as predicted by CEO Kent, will continue the urbanization trend, create busier lives for working citizens, and increase the demand for pre-packaged foods/drinks.  Likewise, seeing that these regions are more profitable for Coca-Cola – Pacific region accounts for ~12% of company revenues and ~20+% of operating profits – the continued penetration of the region will also enhance the corporation’s profitability profile. 

In the end, even despite Coca-Cola’s 125+ year history and its invaluable brand assets, the corporation still has ample room to maintain an attractive growth profile for the foreseeable future.  The company’s penetration into emerging markets is still relatively low when compared to its operations in first world countries, and because the same can generally be said about its primary competitors, the next 10 years will be just as pivotal to Coca-Cola as were any other era in its operating history. 

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