Can Coke Stay Afloat?

Ted 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) serves as everyone's example of a wide-moat company. Its products are sold in every corner of the planet and its customers display unusually strong loyalty to the brand. However, there is reason to believe that Coke may be dethroned in the coming years.

As cola consumption stagnates in the developed world, Coke's lack of product diversity threatens to expose it to a more diversified competitor like PepsiCo (NYSE: PEP). In addition, Dr. Pepper Snapple (NYSE: DPS) is making enormous strides to catch up with the two leaders in the carbonated soft drink market and may one day be a serious competitor. Finally, soft drinks are giving way to demand for energy drinks. Monster Beverage (NASDAQ: MNST) has a long runway for growth that could put a serious dent in the demand for Coke's products.

How They'll Do It

PepsiCo goes head-to-head with Coca-Cola in the carbonated soft drink market, but it also owns the largest snack food company in the world. Its snacks business proved resilient during the Great Recession and it also provides a high degree of diversification from the fading domestic cola market.

In addition, Pepsi re-acquired its domestic bottlers after having spun them off of the company over a decade ago. The original spin-off was a sign to Coke that Pepsi was willing to play ball by not focusing on direct competition with its larger competitor. Now, with substantially higher revenue than Coke, Pepsi has decided it has the muscle to out compete Coke in a bloody battle in the U.S.

Dr. Pepper Snapple, on the other hand, is still much smaller than Coke, but it has a number of opportunities to improve its operations and pick up market share. For instance, it is focusing on the high-margin single-serve channels instead of building out an expensive distribution network like those of Coke and Pepsi. In addition, Dr. Pepper Snapple has a strong position in alternative drinks, like flavored sparkling drinks. The company's focus on non-mainstream products has enabled the majority of its brands to capture a market-leading position in their respective categories.

All soft drinks have been losing market share to energy drinks. Monster Beverage has the largest energy drink share of U.S. convenience stores. The company has not yet made an explicit push into international markets, which represent the company's greatest growth opportunity. In addition, Monster uses third-party distributors for its product; this enables it to earn high returns on capital.

This Coke Still Floats

Coke's rivals may be growing rapidly and improving operations, but it will take multiple generations before another drink can put a dent in Coke's brand loyalty. The company maintains the number one market share in carbonated soft drinks, and will do so for the foreseeable future. It already sells its products in over 200 countries through its own distribution network, but there are still many countries with relatively low Coke consumption. This represents the company's growth opportunity.

titans8904 has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Monster Beverage, and PepsiCo. The Motley Fool owns shares of Monster Beverage 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus