This is The Real New Coke
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In their latest earnings announcement the world’s biggest beverage company Coca-Cola (NYSE: KO) made a number of statements that set the markets hopping. Most notably was the announcement of their first split in 16 years. Revenue was up almost 6%, earnings were up almost 8%. The most impressive feat was the expansion of volume sold in a failing North American market, 2%.
Stop me if you’ve heard that before.
If you look at the numbers the trends are clear, Coke, like Apple and others are growing in Asia. For Coke this is especially true in the Pacific Rim and India, where volume sales jumped a whopping 20%. This result occurred in a country where Coke has been under steady attack over water-usage issues for the past decade. The case unit growth in China was only 13%.
Doubling Down in Asia
While the North American unit is still dominant with 44% of the company’s revenue, the Pacific division was where a great deal of the real growth happened. As CEO Muhtar Kent said during the earnings call there will be between 800 million and 1 billion new consumers entering the middle class this decade, all around the world. For Coke this isn’t just about Asia, but I can tell you here in Vietnam they are a staple. From umbrellas shading every rented chair to every convenience store Coke’s products are everywhere.
In May 2011, Coke’s Vietnam subsidiary announced another $200 million investment to be deployed by the end of 2013. This comes on the heels of a $200 million investment announced in 2009 accelerating their plans at that time to deploy that money by 2015, but 26% growth rates have a way of changing plans. That is what Coke saw in Vietnam in 2010. Part of that money was put to use in community water quality projects as well as conservation efforts in conjunction with the WWF in the Mekong delta region.
They are accelerating their plans in China as well, investing another $4 billion between now and 2015, having doubled their business between 2005 and 2011. Coke plans to double it again by 2020. With 42 bottling facilities and greater than 60% market share they are well positioned to do just that.
Non-Sweetening the Deal
The key for Coke is not just their namesake product. In Japan they are looking to create a new product line to complement their green tea and mineral water sales based on Mate Tea. Being Coke allows them the resources to create brands; giving them the time they need to mature.
The real key, though, to Coke’s growth in Asia is in the bottled water market. Even though the cries about the waste and expense of bottled water continue to emanate from the political left in the West, water of a known and predictable quality is at the heart of that business and that cannot be replaced in a population whose relationship with access to clean drinking water has been tenuous. The public good production and distribution model for water has consistently failed to produce a product that people trust.
While Coke does not have a strong place in Vietnamese market for bottled water, as Nestle’s “La Vie” dominates, bottled water sales in North America have risen 3.8% on average the past two years and are immune to the commodity bull markets that have been ignited by the massive central bank intervention to stave off a banking implosion in the U.S. and Europe. Still beverage sales in the Pacific division grew twice as fast as their carbonated ones. Overall, their water business grew at 10% for 2011.
And this brings me to sugar cane. Stop and think about the issues surrounding Coke, their products and the criticism of them and it all comes back to sugar cane. As a crop sugar cane is extremely water intensive. The global rise in diabetes and high-blood sugar related health issues have severely impacted soft drink sales. Add to those things the shrinking margins in a low demand environment where the biggest input factor is rising in price due to higher costs for water and energy and it’s obvious that beverage companies like Coke almost need to diversify away from their core product to maintain margins.
Think about the COGS on a can of Coke vs. a bottle of Dasani for half a second and you get my point.
For the Locals
While Coke has toyed with the idea of getting their shares listed on the Shanghai exchange nothing has come of it yet. As well, in countries like Vietnam, Coke and their traditional competitors Pepsi and Nestle are going to begin facing challenges from local brands as they develop their own identities. Local conglomerate Masan Group recently acquired a controlling interest in VinaCafe , a local coffee brand. Brands like this will continue to emerge over time and it will be interesting to watch how players like Coke respond to them.
Investing in this space locally is difficult at this point and the best strategy I have come up with is to look at PET bottle manufacturers like Ngoc Nhgia as they supply many of the major players with the bottles used locally. They supply Pepsi (NYSE: PEP) with almost half of their needs and own about 35% of the plastic container market in Vietnam.
In the end Coke has a business model built, like many major U.S. companies, to take advantage of the enormous opportunity that is staring them in the face in Southeast Asia. For them to survive this century they will have to navigate adroitly. Headline economic indicators don’t tell you the story of what is happening on the ground. Coke’s revenues are the most diversified geographically of any of its competitors truly fulfilling the vision of its legendary ad of reaching out and serving the world.
Peter Pham has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company, and PepsiCo. Motley Fool newsletter services recommend PepsiCo, and The Coca-Cola Company. 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.