What Does Aujan Coca-Cola Taste Like?
Renia is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With 1.8 billion servings of Coca-Cola products made daily and a brand recognized as the most valuable in the world, observers of the beverage industry may want to know what good it would do a global firm to expand further in emerging markets such as the Middle East.
The question is relevant amid reports on Feb. 26, 2013, that Coca-Cola (NYSE: KO) and the Aujan Group Holding will create two new global beverage companies, Aujan Coca-Cola Beverages and Rani Refreshments after Coca-Cola, acquired half of Aujan’s beverage business for $1 billion. The deal is considered the largest ever investment by a multinational company in the Middle East’s consumer goods sector.
Rani will supply Aujan with proprietary concentrate that the latter will manufacture, sell, and distribute across Middle Eastern and other markets. Although Coca-Cola has over 500 sparkling and still brands consumed in about 200 nations, its new Middle Eastern partner has a strong presence in the region, and controls the top three market positions in the 70 countries where it operates, through the production of beverage brands Rani, Barbican, and Vimlo.
Popping the question
The corporate merger could be compared to a rich American millionaire marrying the daughter of a known Middle Eastern royal family member, which is not a traditional marital union, but has the potential of producing offspring with the best features of the American father and the Middle Eastern mother.
Such a real-life marriage would permit the husband and wife to live, travel and do business in both countries with minimal problems, and take business or R&R vacations in nearby North American and Middle Eastern countries. Coca-Cola’s dowry to the Aujan family includes a taste of popular and known brands such as Coke, Sprite, Powerade, Minute Maid, and Fanta. As a company, Coca-Cola is considered a good investment, valued at $170 billion, and is known for its steady growth, with earnings increasing over the past ten years at a compounded rate of 9%.
Another proof is the steady rise of dividends since the 1990's. On the last week of February 2013, Coca-Cola raised its quarterly dividend 10% to $0.28 per share, which translated to a 2.9% dividend yield, notably higher than what treasuries are paying. For its part, Aujan, registered sales of more than $850 million in 2011, more than twice revenues in 2007. For 2012, Aujan projected that it would break the $1 billion mark in sales.
Market growth outside North America
The move is seen as likely to boost growth of Coca-Cola in markets outside North America. At present, 55% of Coca-Cola’s net operating revenues, and almost 80% of unit case volume, are generated outside North America. With the Middle Eastern and African regions comprising only 7% of global beverage sales, according to a Euromonitor International Study, expanding further into these two regions would boost Coca-Cola’s presence in these areas. It would help make up for slower sales in North America and Western Europe, where consumers have cut down on fizzy drinks over health concerns and generally weak consumer spending.
Coca-Cola can take advantage of the rising demand for energy drinks and other healthier options offered by Aujan such as the Rani brand, which is a mixture of smooth juice and fruit chunks, Barbican’s flavored malt beverages for the young market, and Vimto, which offers traditional carbonated ready-to-drink colas.
The Euromonitor study forecast that for the five-year period from 2010 to 2015, off-trade volume growth is expected to the be the biggest in Middle East and Africa, surpassing that in North America and Western Europe, followed by the Asia Pacific region.
While Coca-Cola is making big strides in the Middle East, rival PepsiCo (NYSE: PEP) is suffering reverses in Thailand, where it is difficult to buy the product. This development is the result of Pepsi’s corporate divorce from its almost 60-year partnership with Thai bottler Serm Suk. Serm Suk established its own soft drink brand, in effect wiping Pepsi off Thailand’s map as the separation included zero access to Serm Suk’s distribution network, which delivers drinks to 200,000 retail and dining establishments.
But that was just a temporary setback because globally, Pepsi is doing well and reported a 17% boost in net revenue for the fourth quarter, upped its dividend by 5.6% to $2.27 a share, improving dividend yield to almost 3%. Given Pepsi’s turnaround from a weak position a year ago, the world’s second largest beverage firm announced plans to return $6.4 billion to shareholders in 2013.
Snapple snaps in Q4
In contrast, the third major beverage company, Dr. Pepper Snapple Group (NYSE: DPS) reported a disappointing fourth quarter after sales and profit fell below expectations. Although Q4 profit rose to $170 million or 81 cents a share from $166 million compared to a year earlier, sales volume went down by 1%. Despite this, the company was able to increase its quarterly dividend 12% to 38 cents a share.
To recover lost ground, Dr. Pepper Snapple will roll out 10 low-calorie sodas in 2013, in a bid to counter public concerns over sugary drinks. But this entails a $30 million marketing campaign that led the company to issue a weak 2013 guidance.
The best of both worlds
The new deal is definitely expected to benefit both Coca-Cola and Aujan as it provides the best of growth opportunities for the two companies. It shows that in the fast-growing food and retail good global market, mergers should not fizzle out, but provide more energy to companies that know how to tap their joint synergies, which should refresh their respective bottom lines even further. Coca-Cola and Aujan will surely drink to that.
ReniaBula 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!