Is Your Soft Drink Still Sweet?
tarun is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Coca-Cola, (NYSE: KO) the beverage giant, announced its third quarter earnings this past Tuesday with a 3.9% increase in profit due to improvement in sales. Net income increased to $2.31 billion, up from $2.22 billion in the same period last year. Revenues have been hurt by uneven economies and other low-priced drinks.
Sales, Opportunities, and Innovations
Worldwide sales volume has improved by 4%, with developed markets of Europe and North America contributing a volume growth of 1% and 2%, respectively. The emerging markets provided Coke most of its revenue, hence supporting most of the growth. Volumes have increased by 3% in the Pacific region, 5% in Latin America, and 11% in the Eurasia and African region.
The company has huge expectations for emerging markets and plans to invest $5 billion in India; it has also re-entered Burma after a gap of 60 years. China's present economic slowdown may have a short-term effect on the company’s business, not to mention the industry as a whole. The country’s obesity problems are turning off many customers from Coke’s mainstay soda products. Coke Zero, the diet alternative introduced in 2005, saw a 9% growth in the recent quarter. The company is looking for newer and innovative products to survive the ever-changing consumer needs and stiff competition from the market.
Coca-Cola is also selling a larger variety of beverages, with healthier options like orange juice, water, and milk. The company predicts stronger growth in Europe and elsewhere if the economic conditions improve. The swiftly growing market of energy drinks also provides growth opportunities for Coke.
PepsiCo & Coca-Cola
The first impression when we hear Coca-Cola or Pepsico (NYSE: PEP) is that they are two large beverage giants competing neck and neck with one another. However, the fact is that they are two totally different businesses from investor’s point of view. Coke generates the entirety of its revenue from beverages, while Pepsi generates its revenue from both foods and beverages equally. Pepsi's snacks business enjoys much higher profit margins than its beverage business, and if the snack business continues to grow as a percentage of revenue, it can soon catch up to Coke's 60% gross margin.
Coke presently has a larger global distribution network than Pepsi, helping it in international penetration and expansion. Almost 70% of Coke's revenues come from outside the United States, while roughly 50% of Pepsi's revenue come from the states. Coke’s 2020 vision, its plan to double its business over the next ten years, can be accomplished with its international expansion prospects.
A look Around
Dr Pepper Snapple Group (NYSE: DPS) is extending awareness about its product by making Mott's and Snapple available in grocery stores. The company’s deal with Green Mountain Coffee Roasters to offer Snapple iced teas in single-serve packs for its Keurig and Vue brewers adds a lot business for the company. The marketing effort with the Latin Grammys, NBA, and Guy Fieri should further widen the demand for the company’s product. Innovative products, different marketing strategies and remunerative deals with other companies will stiffen competition for Coke.
Another competitor in the beverage industry is Monster Beverage (NASDAQ: MNST). Monster is focused mainly on alternative/energy beverages, which includes brands like Monster Energy and Java Monster. Energy drinks are the fastest growing segment in the beverages industry. The company though faces some regulation issues, but still has tremendous potential.
Monster has shown outstanding growth in the past three years. The company has a strong balance sheet, has no debt, and huge cash reserves, which can help it take the hit of a huge fine. Monster is adding two or three new countries to its portfolio every quarter, and adding more international markets and (hopefully) mroe growth.
The Foolish Conclusion
Coca-Cola has a powerful global distribution system, selling its product in almost every country in the world. Its aggressive international expansion plans create opportunities for further growth. I feel the company still has a lot of growth left as it is increasing its portfolio of drinks and trying to gain market share in places where it has a low penetration rate. The only negative side for Coca-Cola, apart from a slow economy, is its negative cash flow of $3.1 billion. Presently, the company has enough cash to pay dividends and service its debts, but if the company’s growth slows down its dividend might also be affected. I would suggest holding the stock for now.
tarunbachhawat has no positions in the stocks mentioned above. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services recommend The Coca-Cola Company, Monster Beverage, PepsiCo, and 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.If you have questions about this post or the Fool’s blog network, click here for information.