The International Knockout
Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As someone highly interested in the consumer goods market, I am always investigating new products and attempt to trace them back to the source. The latest thing to flash on my radar is called "Thums Up," the most popular cola in India. Not surprising at all, the brand was bought out by the mighty Coca-Cola (NYSE: KO). The brand was introduced in 1977 following the expulsion of Coca Cola from India, only to be taken over in 1993 as another victim of the cola war with PepsiCo (NYSE: PEP). Although down from the 85% market share it enjoyed twenty years ago, Coca-Cola still enjoys a 42% market share of cola in India with the Thums Up brand.
Due to its storied history and aggressive advertising, one may think it doesn't get more American than Coca-Cola. While still an American company, 70% of revenue and 80% of operating profits are generated outside our borders. Instead of taking a risk with new companies in emerging markets, take a look at the soda giant for international exposure.
Coca-Cola owns over fifty operations involved in bottling, canning, and distributing their products. There are over 500 brands in 200 countries. Within an industry, Coca-Cola is about as dominant as it gets.
|Market Cap||Net Income||Median Operating Margin (%)|
|Coca-Cola||$167.4 B||$8,798 M||25.1|
|PepsiC||$110.6 B||$5,932 M||16.1|
|Dr Pepper Snapple Group, Inc. (NYSE: DPS)||$9.4 B||$625 M||17.5|
To some it is obvious that Coca-Cola is in charge, but others need a pinch to wake up when they think they see more Pepsi around than Coke. Margins set this leader ahead of the pack. Coca-Cola primarily produces bases and syrups of their products and lets other companies do the rest. I work in a similar type of company, but unlike any other, Coca-Cola owns the majority of their distributors. This allows Coca-Cola to keep costs down because they own operations around the world and have the capital to buy out smaller competitors when deemed necessary. Their competitors are excellent companies and have potential for growth, but they sit in the shadows of Coca-Cola, particularly abroad.
A brief examination of current news will further highlight Coca-Cola's influence on the world market. Its main Latin American distributor, Coca-Cola FEMSA, S.A.B. de C.V. (NYSE: KOF), is fueling the beverage giant's growth through rapidly-developing markets in Brazil, Mexico, Venezuela, and other countries in Central and South America. Again, KO owns the brands and the product, so it collects heavily through this subsidiary. Last month, KOF extended their reach by acquiring a majority stake in Coca-Cola Bottlers Philippines, Inc. As part of the deal, not only can KOF take over this entire company over the next seven years, it can also sell its stake to KO during the sixth year following the completion of the transaction. Coca-Cola has the potential to collect huge profits in the Pacific and have another path to tap into Eastern markets.
This isn't the only way the two Coke companies are working together. KO is rolling out the heavy artillery in the campaign for the $1 billion in Hispanic purchasing power, recently putting out an advertisement that highlights low-calorie and zero-calorie options as healthy choices. It's part of the brand's pledge to fight obesity. Health advocates claim that soft drinks of any kind contribute to obesity, but the massive popularity combined with better nutritional choices puts Coca-Cola on track for success in the Latino market. The company also has the cash ($6,554 million free cash flow for 2011-12) to fund excellent marketing causes, such as the $13 million pledged to fitness and nutrition programs around the US.
Blue-chip companies can't avoid the media, so swings in the stock price after "breaking news" are going to happen with Coca-Cola. Most of what ends up on nightly broadcasts lately is negative findings and events about the soft drink industry. Nutrition is more important to society than ever, but as far as the company and stock are concerned, ignore any cries of foul play. Listen to the background noise: just this month, Coca-Cola acquired the Sacramento Coca-Cola Bottling Company, which is the Coca-Cola distributor for most of northern California. Another pool will fill up with cash from this populated region, particularly from the previously mentioned Hispanic market. Free cash flow has the potential to leave $7 billion in the dust.
All of these absorptions may seem like a spending spree, but owning the bottlers and distributors will allow Coca-Cola to increase productivity, efficiency, and overall profit. With the Super Bowl looming, the soft drink king will be ready with the in-store marketing and on-screen advertising to strengthen their global brand. There are plenty of options in the beverage industry, but this juggernaut can compete with any public company in the ring of international competition.
KyleVaughan has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. 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!