Coca Cola: Strengths, Weaknesses, Opportunities and Threats
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Coca-Cola (NYSE: KO), a company best known for its flagship soda product, manufactures “liquid refreshment beverages” of multiple varieties. Overall the company sells its beverages either as syrups to be blended at Coca-Cola’s vast network of global bottlers or as a completed product in a container. Over the years Coca-Cola has performed well for long-time investors such as billionaire Warren Buffett; however, the past gives you 20/20 hindsight. It’s the future that should concern investors especially those who are considering an investment in Coca-Cola. I decided to evaluate this company from the angle of Strengths, Weaknesses, Opportunities and Threats.
Technology: I am not referring to Coca-Cola’s ability to make computer chips but rather the company’s definition of technology such as know-how, trade secrets such as recipes and software that aids in the logistics of getting its products to market.
Bottling Network: Coca-Cola partnerships with 275 bottling companies allow it to distribute products all over the world. The network also allows companies to cater to varying consumer tastes in different cultures, regions and countries. For example, if a local market prefers tea then the local bottler can mix and package the beverage for distribution. It has relationships with local retailers and final consumers to make that happen.
More bottling: Coca-Cola’s gross profit margins declined from 64% in 2009 to 60% in 2011.
Concentrates, which until 2010 comprised the majority of Coca-Cola’s revenue, commanded a higher margin. The remaining portion of revenue came from “finished products.” Bottlers bought the concentrates from Coca-Cola, taking on the added cost of mixing and bottling the beverage, and selling it as a finished product.
In October of 2010, Coca-Cola bought the North American assets of bottler Coca-Cola Enterprises (NYSE: CCE) or “CCE” for short, in order to strategically align operations on the continent. As a result Coca-Cola took on the additional task and cost of bottling beverages in addition to making the concentrates resulting in lower gross margins. CCE became a new company that bottles beverages for Coca-Cola in Europe.
New Markets: Believe it or not Coca-Cola still has markets to conquer. In the United States 403 servings of Coca-Cola per capita were served according to Coca-Cola’s 2011 annual review. China and India’s population had 38 and 12 servings per capita, respectively. Coca-Cola invests heavily in infrastructure in emerging markets to make it easier to sell products.
Healthy Options: Coca-Cola’s healthy drinks experienced the greatest growth in revenue and U.S. share gain in 2011. According to Beverage Digest, Coca-Cola’s bottled water brand Dasani gained the most volume in the liquid refreshment megabrand category in the United States. Case volume for water increased 10% globally according to Coca-Cola’s 2011 annual review. Contrast that with the 3% global case volume increase of Coca-Cola soda. Water and juice represents Coca-Cola’s biggest opportunities on the product front.
Health Concerns: The greatest threat to Coca-Cola’s dominance resides in general health concerns by the public related to obesity, diabetes and other diseases.
Market share data provided by Beverage Digest demonstrates increasing preference for non carbonated “healthy” drinks. The “Coca-Cola” soda and Pepsico’s (NYSE: PEP) “Pepsi Cola” saw 1% and 5% volume declines respectively in the carbonated soda brands category.
Statistics point to a declining market for diet carbonated soda as well. Diet Pepsi experienced an 8% volume decline in the carbonated soda drink category in 2011 according to Beverage Digest.
Coca-Cola’s “technology” or proprietary know how will help the company keep its edge on the carbonated soda front. The vast bottling network will help the company keep in touch with the final consumer, catering to local tastes. There are still new market opportunities for Coca-Cola especially in Asia and India. The 2010 acquisition of CCE’s North American assets will continue to drag down gross margins for Coca-Cola. Opportunities for Coca-Cola lie in new markets and “healthy” categories such as bottled water which addresses the public’s health concerns. Coca-Cola will utilize its strengths to take advantage of new opportunities making this company an investment with superior potential.
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