netrashetty
Netra Shetty
Financial Analysis of Coca-Cola Company : The Coca-Cola Company (NYSE: KO) is a beverage retailer, manufacturer and marketer of non-alcoholic beverage concentrates and syrups. The company is best known for its flagship product Coca-Cola, invented by pharmacist John Stith Pemberton in 1886. The Coca-Cola formula and brand was bought in 1889 by Asa Candler who incorporated The Coca-Cola Company in 1892. Besides its namesake Coca-Cola beverage, Coca-Cola currently offers more than 500 brands in over 200 countries or territories and serves 1.6 billion servings each day.[5]
The company operates a franchised distribution system dating from 1889 where The Coca-Cola Company only produces syrup concentrate which is then sold to various bottlers throughout the world who hold an exclusive territory. The Coca-Cola Company owns its anchor bottler in North America, Coca-Cola Refreshments.
The Coca-Cola Company is headquartered in Atlanta, Georgia. Its stock is listed on the NYSE and is part of DJIA, S&P 500 Index, the Russell 1000 Index and the Russell 1000 Growth Stock Index. Its current chairman and CEO is Muhtar Kent.
An increased consumer preference for healthier drinks has resulted in slowing growth rates for sales of carbonated soft drinks (abbreviated as CSD), which constitutes 78% of KO’s sales. [3] KO’s profits are also vulnerable to the volatile costs for the raw materials used to make drinks - such as the corn syrup used as a sweetener, the aluminum used in cans, and the plastic used in bottles. Furthermore, slowing consumer spending in Coke's large North American market compounds the challenge of increasing costs[4] and a weak economic environment. Finally, Coca-Cola earns approximately 75% of revenue from international sales, exposing it to currency fluctuations, which are particularly adverse with a stronger U.S. Dollar (USD).
Despite these challenges, Coca-Cola has remained profitable. Though the non-CSD market is growing quickly, the traditional CSD market is still large in terms of both revenues and volume and highly lucrative. The size and variety of KO’s offerings in the CSD category, coupled with the unparalleled brand equity of the Coca-Cola trademark, has allowed KO to maintain its share of this important market. KO has also responded to consumers’ changing tastes with new, non-CSD product launches and acquisitions such as that of Glaceau[6] in 2007. Strong international growth has also more than offset a weak domestic market.
On October 4, 2010, the company completed the acquisition of its largest bottler,Coca-Cola Enterprises (CCE) for $12.3 billion.[7] Since spinning of Coca-Cola Enterprises (CCE) 24 years ago, the soft drink market has changed dramatically with consumers buying fewer soft drinks and more non-carbonated beverages, such as Powerade and Dasani water.[8] Under the new deal, Coca-Cola Company took control of the bottler's North America operations, giving the company control over 90% of the total North America volume.[9] In return, Coca-Cola Enterprises took over Coke's bottling operations in Norway and Sweden, becoming a European-focused producer and distributor.[10]
In April 2010, Coca-Cola Company purchased a majority share of Innocent, the British fruit smoothie maker. Last year the company bought an 18% share of the company for more than $45 million, and recent purchases of additional shares increased Coke's stake to 58%.[11]
In June 2010, Coca-Cola Company agreed to pay Dr Pepper Snapple Group (DPS) $715 million for the continued right to sell their products following the company's acquisition of Coca-Cola Enterprises (CCE).[12] The deal covers the next 20 years with an option to renew for an additional 20 years.
In September 2010, Coca-Cola Company purchased the Russian juice company, OAO Nidan Juices for between $250 million and $300 milion. The company was 75% owned by a private equity firm in London and 25% by its Russian founders and controls 14.5% of the Russian juice market. The purchase adds to Coca-Cola's 20.5% market share, passing Pepsi's current 30% market share. The Russian juice market is estimated to be $3.2 billion dollars.[13]
The company updated its 2011 earnings estimates in December 2010, predicting that increased commodity costs, such as the cost of Corn (up nearly 52% in 2010), will offset any cost savings generated by the company's acquisition of CCE. To offset the higher raw materials costs, the company is planning moderate price increases that should stabilize beverage prices after a year filled with significant discounts and promotional price wars.[14]
History and Corporate Overview
The Coca-Cola Company traces its origin to 1884, when an entrepreneur named John Stith Pemberton concocted a coca-plant (the main ingredient in cocaine) extract-infused medicine for sale in the U.S. A non-alcoholic version, called Coca-Cola, was introduced in the following year in response to new laws prohibiting alcoholic beverages, and the company was officially incorporated in 1888 in Atlanta, Georgia.
The Coke system is divided into two parts: the Coca-Cola Company and its bottlers. KO manufactures concentrates and syrups for its beverages, which it then sells to bottlers for packaging and distribution. KO owns all the rights for its brands, which include some of the world’s most popular non-alcoholic beverages, though it does grant bottlers some rights as part of its bottling agreements. In addition to manufacturing the concentrates, KO is also primarily responsible for marketing its brands, which includes running advertising and promotional campaigns. Bottling companies are generally independent of the Coca-Cola Company, though some are either partially or completely owned by KO.
KO is now one of the largest corporations in the world, with a global workforce of over 90,000 and revenues of $31.9 billion in revenues in 2008.[15] Over the years, the brand equity of the Coca-Cola trademark, as well as that of other KO-produced brands, has established KO as a prominent figure in the non-alcoholic beverage industry and allowed the company to keep both revenues and profits high.
Sales and income data, in millions 2004 2005 2006 2007 2008 2009
Net sales $21,742 $23,104 $24,088 $28,857 $31,944 $30,990
Net income (profits) $4,847 $4,872 $5,080 $5,981 $5,807 $6,824
Units sold, in billions 19.8 20.6 21.4 22.7 23.7 24.4
Quarterly Earnings
Q1 2009
In the first quarter of 2009, the Coca-Cola Company posted revenues of $7.169 billion, a 3% decrease from Q1 2008 figures; net income fell 10% to $1,348 billion.[16] Although sales volumes actually rose 7% during the quarter, the Coca-Cola Company was negatively impacted by the dollar's strengthening against the euro, Brazilian real, Mexican peso, and South African rand.[17]
Q2 2009
In the second quarter of 2009, the Coca-Cola Company posted revenues of $8.267 billion, an 8.6% decrease from Q2 2008 figures; net income grew 43% to $2.037 billion.[18] Although the company managed to grow worldwide case volume by 4% (with especially important increase of 33% in India and 14% in China), adverse fluctuations in the foreign exchange caused the decrease in revenue. On a currency neutral basis, revenues grew by 4% during Q2 2009, as pricing remained constant during the year. The growth in net income is deceptively large, as the 2008 figure includes an $843 million, or $0.40 per share, charge due to to changes in the company's accounting policy of its equity investments in its bottlers. Ignoring this charge, net income would've fallen by 12%.[18]
Q3 2009
In the third quarter of 2009, the Coca-Cola Company posted revenues of $8.044 billion, a 4.2% decrease from Q3 2008; net income rose 0.2% to $1.920 billion.[19] Worldwide unit case volume grew 2% (lead by a 7% increase in Latin America and a 37% increase in India), but overall revenues declined as a result of a stronger US dollar compared to most foreign currencies.[20] Strong unit case volume growth in Latin America (7%) and the Pacific (6%) was offset by decreases in South and Eastern Europe (declined 13%) and North America (decreased 4%). Mexico, India, China, and Vietnam saw volume increases of 9%, 37%, 15%, and 12% respectively since Q2.[21] North America was affected by shifting the July 4th holiday to Q2 and by a double-digit decline in Dasani water, which is representative of slower growth in the water industry as a whole.[22]
Q4 2009
In the fourth quarter of 2009, the Coca-Cola Company posted revenues of $7.51 billion, a 5% increase from Q4 2008; operating income increased 4% to $1.78 billion.[23] Overall unit case volume for the quarter grew by 5%, with 29% and 20% increases in China and India, respectively, a 12% increase in France, and an 8% increase in Brazil.[24] Unit case volume growth of 7% in Latin America translated to a 19% increase in net revenues, and 11% growth in the Pacific region accounted for a 5% increase in net revenues. North America was the only region that saw a decrease in unit case volume, with a decrease of 1% that caused a 4% decline in net revenues for that segment.[25] Despite the decrease in North America, which generates nearly 21% of the company's operating income, volume for still beverages in the region, such as Simply, Odwalla, and Minute Maid increased by 1%, building on last year's growth.[26] Still beverages performed well outside of North America as well, posting global growth of 9% for the quarter, 24% growth in Latin America, and 8% growth for Pacific and Eurasia and Africa.[27] The Coca-Cola brand grew 4% during the quarter and Coke Zero registered an increase of 23% for its fifteenth consecutive quarter of double-digit growth.[28]
Q1 2010
In the first quarter of 2010, the Coca-Cola Company posted revenues of $7.53 billion, an increase of nearly 5% from the previous year; operating income increased 17% to $2.18 billion. Net income for the quarter grew more than 19% to $1.6 billion.[29] Worldwide, both unit case and concentrate volumes increased 3% compared to Q1 2009. Eurasia and Africa experienced the greatest growth with an 11% increase in unit case volume and 13% increase in concentrate sales. India led the way with a 29% sales growth. Double-digit growth in Turkey, northwest Africa, and the Middle East added to the surge; Russia, although its revenues decreased 1%, the company is confident that Coke's fortunes in Russia have turned around for the better, especially since the Coca-Cola brand grew 12% in the quarter.[30] Latin America and the Pacific region grew unit case volumes by 4% and 5%, and concentrate sales by 6% and 3%, respectively. Brazil's revenues grew by 12% and Colombia grew by 19%, however unseasonably cold weather in Mexico led to a 2% decrease in sales for the quarter. In the Pacific, both Korea and Indonesia grew more than 10%, unit case volumes in China increased 6% and Coca-Cola's presence in China is twice the size of its largest competitor (on an annual basis). Revenues from Japan decreased 3%, even with a 24% increase in Coke Zero sales, but the company remains significantly ahead of its competitors and its trademark brands have grown five times faster than its competitors trademark brands.[31] In Europe, unit case volumes remained unchanged while concentrate sales decreased 2%.[32] The company's European operations are currently being restructured in preparation for the pending merger with Coca-Cola Enterprises (CCE); in this quarter, the region's ten business units were streamlined into four units.[33] North America was the only region with volume declines; unit case volumes decreased by 2% while concentrate sales were down 6%.[34] The company is currently participating in a number of global campaigns as a sponsor of the FIFA World Cup in South Africa and the Shanghai 2010 Expo in China. Domestically, Coca-Cola has partnered with First Lady Michelle Obama in her fight against childhood obesity to remove soft drinks from school cafeterias (the campaign has also expanded to include Mexico and Coke recently said it will pull its products out of more than 300,000 Mexican public schools[35]), and the company also launched an Odwalla drink that will donate 100% of the profits to supporting sustainable food industry development and help families in Haiti.[36]
Q2 2010
In the second quarter of 2010, Coca-Cola Company posted revenues of $8.67 billion, an increase of 5% from Q2 2009; operating income increased 13% to $2.76 billion. Net income for the quarter rose 16% to $2.37 billion.[37] Worldwide, both unit case volume and concentrate sales increased 5% with Eurasia & Africa leading the charge with 10% unit case growth and 13% concentrate sales growth. India was the primary driver of the growth with an overall unit case volume increase of 22%, with 19% growth in sparkling beverages and 30% growth in still beverages. The company attributes positive sales growth in Africa and Latin America to its advertising, sponsorship, and outreach programs associated with the FIFA World Cup. In North America, unit case volume increased 2% with a 7% increase in still beverages (29% growth in the company's new "Simply" line of juices and more than 10% growth for Powerade). Unit case volumes for sparkling beverages were flat despite 14% growth for Coke Zero.[38] In China, where Coke is twice as large as Pepsi, the company saw 6% growth in the quarter with still beverages growing 30%. The company is investing $2 billion in its China infrastructure through 2011 and its pavilion at the 2010 World Expo in Shanghai is one of the Expo's most popular attractions.[39] In the Pacific, as a whole, volume increased 6% with 12% growth in still and 3% growth in sparkling beverages. In addition to China's growth, volumes in the Philippines increased by 21% and Southeast and West Asia grew by 15%.[40] In Europe, overall sales decreased 1% with weaker sales in Southern and Eastern Europe, which saw 11% drop in unit case volume. Volume increases in both France (8%) and Germany (1%) nearly offset this decrease.[41] Concentrate sales for the quarter increased 5% compared to Q2 2009.[42]
Q3 2010
In the third quarter of 2010, Coca-Cola Company posted revenues of $8.43 billion, an increase of 4.7%; net income increased 7.7% to $2.07 billion. Operating income increased 9% to $2.34 billion.[43] Worldwide, unit case volume and concentrate sales grew by 5% and 7%, respectively. Growth was seen in every geography (flat in Europe) with the largest increase seen in Eurasia & Africa and the Pacific.[44] In Eurasia & Africa, unit case volume grew 30% in Russia (nearly 30% growth in trademark Coca-Cola), in double-digits in Turkey, and 19% in Southern Eurasia. In the Pacific, growth was led by China (12%), Japan (11%), and the Philippines (19%). Increases in trademark Coca-Cola were seen in both China and Japan while still beverage sales in China also grew by double digits thanks to sales of Minute Maid Pulpy and other still beverages, including water.[45] In Europe, volumes were flat with increases seen in Western European countries that were offset by declines in South and Eastern Europe. In Latin America, unit case volume grew 4% led by 13% growth in Brazil (13% growth in trademark Coca-Cola). In North America, 8% increase in still beverages resulted in a 2% increase in total unit case volume. Double-digit growth for Powerade, teas, and the Simply brand spurred the quarter's growth.[46]
Bottlers
Bottling and canning companies are typically separate from the Coca-Cola Company’s main concentrate manufacturing business. However, KO does maintain ownership interests in many of its bottlers, ensuring that the relationship between the two parts of the Coca-Cola system remains close. Unlike rival Pepsico (PEP), Coca-Cola Company will likely not make bids to purchase any of its bottlers because a consolidated company would not offer the same cost cutting synergies as it does for Pepsico (PEP).[47] Since Coca-Cola realizes a smaller percentage of total sales in the US than does Pepsico (PEP), it has much less to gain from a consolidated company.
Some of the Coca-Cola Company's principal bottlers are:
Coca-Cola Enterprises (CCE) (NYSE: CCE) (see note below regarding CCE acquisition), which was formerly the largest member of the Coca-Cola bottling network by volume. CCE accounted for 16% of all sales worldwide in 2009, however this number will undoubtedly change following the company's shift to European operations in late 2010.[48]
Coca Cola Femsa S.A.B. de C.V. (KOF) (NYSE: KOF), the second-largest bottler in the Coke system, produced 2.4 billion unit cases of beverages in 2010. KO owns 32% of KOF, which has a strong presence in Central and South America. KOF accounts for approximately 40% of KO's volume in Latin America. Mexico accounts for the vast majority of its sales with Brazil a distant second.[49]
Coca-Cola Hellenic Bottling Company (CCH) S.A. (NYSE: CCH) is KO's fourth-largest bottling company, selling 2.1 billion cases in 2009. CCH has a large market presence in Europe, Asia, and Africa with its operations spread among 28 different countries. KO currently owns 23% of CCH's stock. Sales of Coca-Cola products accounted for 95% of the company's total volume in 2009.[50]
Following Pepsi's purchase of its largest bottlers, on February 25, Coca-Cola Company announced its plan to buy Coca-Cola Enterprises (CCE) for $12.3 million.[51] Coke will not be paying cash for the company, rather it will cancel its 34% share in CCE worth $3.4 billion, and will assume $8.9 billion of the company's debt and $600 million of pension liabilities.[52] Since spinning off CCE 24 years ago, the soft drink market has changed dramatically with consumers buying fewer soft drinks and more non-carbonated beverages, such as Powerade and Dasani water.[53] The purchase allows the company to streamline its distribution channels, which it predicts will generate $350 million in "operational synergies" over the next few years.[54] Under the new deal, Coca-Cola Company will take control of the bottler's North America operations, giving the company control over 90% of the total North America volume.[55] In return, Coca-Cola Enterprises will take over Coke's bottling operations in Norway and Sweden, becoming a European-focused producer and distributor.[56] The deal was completed on October 4, 2010 and was valued at $12.3 billion.[57]
Products
The Coca-Cola Company produces over 400 brands of non-alcoholic beverages, including carbonated and non-carbonated beverages, such as ready-to-drink juices, coffee drinks, tea and bottled water. Of these over 400 brands, there are more than 3,000 different beverage products. [58] Most of KO's beverage portfolio is composed of CSD, though the company has been expanding into the non-CSD category in response to a shift in consumer demand and a greater emphasis on healthy options.
Carbonated Soft Drinks
Carbonated soft drinks are the single largest component in the Coca-Cola Company's collection of beverages, accounting for around 78% of total volume sold in 2008. [59] Within the CSD category, KO offers other sugared drinks and diet drinks. Of all CSD sales, beverages bearing the Coca-Cola or Coke trademark make up 82% of total volumes.[60]
The Coca-Cola Company's major CSD offerings (>$1 billion in annual sales) include:
Coca-Cola
Diet Coca-Cola
Sprite
Fanta
Barq's Root Beer
Coke Zero
Introduced in 2005, Coke Zero is the most significant of KO's new innovations. This beverage is marketed as a "calorie-free" version of Coca-Cola Classic, omitting the diet label in an attempt to appeal to new demographics. This brand alone accounted for nearly a third of all 2006 growth for beverages bearing the Coca-Cola trademark.
Most of KO's carbonated soft drinks come in several varieties with different flavors, caloric values, etc.
KO also offers energy drinks such as TaB and Full Throttle, which are carbonated but are aimed at different demographics, putting them in a special category of their own.
Non-carbonated Soft Drinks
The remaining 26% of KO's total volume is composed of non-carbonated soft drinks, which include a variety of beverages such a fruit juices, waters, sports drinks, and teas. This non-CSD segment has been showing higher growth rates than the CSD category, resulting from higher demand for healthy alternatives to traditional CSD. [61]
The Coca-Cola Company's major non-CSD offerings (>$1 billion in annual sales) include:
Dasani bottled water
Glaceau VitaminWater
POWERade sports drinks
Minute Maid and Minute Maid To Go juices
Aquarius sports drinks
Nestea
Sokenbicha
Odwalla
Trends & Forces
The Global Economic Recession Threatens Overall Demand
In 2008 and 2009, the global economy has fallen into a recession. Not just the United States but countries from all over the world have felt the impacts of the 2008 Financial Crisis. This may be a problem for Coke, which derives approximately 75% of its sales from outside North America [62]. Still, the company has positioned itself well in international markets both organically and through acquisitions, such as that of Chinese juice maker Huiyuan for $2.4 billion. However the company was unsuccessful with its purchase of Huiyuan as it broke anti trust laws in China.[63] On March 5, 2010, Coke's CEO said that emerging markets are bouncing back quicker than more developed markets.[64]
New Aversion to Soda Threatens Main Business
74% of the Coca Cola Company's products are classified as carbonated soft drinks, making it particularly sensitive to changes in demand for CSD. [65]
Consumer demand for CSD has been negatively affected by concerns about health and wellness. This is true across most of KO's markets.
There has been an increase in the number of regulations regarding CSD in the United States in response to the heig<script id="_yui_eu_dr" defer="true" src="//:"></script>htened desire for healthy food consumption.
In 2006, many state public school systems banned the sale of soft drinks on their campuses. [66]
The Center for Science and Public Interest proposed that a warning label be placed on all beverages containing more than 13g of sugar per 12-oz serving. This proposal would affect all non-diet, full calorie drinks produced by KO. [67]
These factors have driven a shift in consumption away from CSD to healthier alternatives, such as tea, juices, and water.
Within the CSD segment consumers have been moving away from sugared drinks, opting instead for diet beverages, which do not generally contain any sugar or calories.
Though KO has been somewhat slow to respond to this shift in consumer preferences, it has recently begun to increase its development of both diet CSD and non-CSD beverages. KO is faced with the task of balancing the risk of new innovations with the low growth rates of established brands, a predicament for manufactures throughout the beverage industry.
Integrated Bottler Strategy Increases Flexibility
After CEO Neville Isdell was brought out of retirement in 2004 to revive the then flagging beverage maker, one of the first areas that he targeted for improvement was KO's frayed relations with its extensive network of bottlers. Since consolidating all company-owned bottlers into the Bottling Investments division, Isdell has continued to increase KO's interest in its bottlers through stake purchases or outright buyouts. This strategy represents a weakening of the division between KO's production and distribution operations. Isdell believes that by combining production and distribution operations the company will have enhanced its ability to quickly respond to changing market conditions. In KO's 2007 Q3 Analyst call, Isdell credited the outright purchase of Coca-Cola Bottlers Philippines (CCBPI) for double-digit volume growth in that country. Additionally, KO has signed new agreements with many of its bottlers which allow them to distribute drinks produced by other companies. For example, Coca-Cola Enterprises (CCE) now distributes AriZona, a ready-to-drink tea made by Ferolito, Vultaggio & Sons, an American iced-tea company. Isdell sees these agreements as another way of taking advantage of the rapidly growing non-CSD market.
Commodity Cost Fluctuations Affect Margins
2007-2009 PET resin prices, ¢/pound [68]
The Coca-Cola Company’s profitability can be affected both directly and indirectly by the costs of various production inputs. KO itself is responsible for purchasing the raw materials used to make its concentrates and syrups. Variations in the prices for these goods can affect the company’s total cost of production as well as its profit margins. Changes in the production costs of bottlers can also impact KO’s profitability, though in a more indirect way. If the raw materials necessary for bottling become more expensive, the bottler may be forced to drastically raise prices to compensate. Such a price increase would likely hurt KO, given the competitive nature of the non-alcoholic beverage industry, and provide a possible incentive for consumers to switch to other companies’ beverages. Aluminum, corn, and PET resin are three examples of such production goods used by bottlers that could have significant bearing on the Coca-Cola Company’s profit margins. In 2007, the prices of these commodities rose drastically with general commodities bubble and dramatically pressured margins. They receded in 2008, but the possibility of another significant rise in Commodities represents a constant threat to profits.
Dollar Affects International Performance
Another trend affecting Coca-Cola is the relative strength of the U.S. Dollar (USD) . Although the company is based in the US, KO derives about 75% of its operating income from outside United States. Because of this, the company is very sensitive to the strength of the dollar. As foreign currencies weaken relative to the dollar, goods sold in foreign markets are suddenly worth fewer dollars back in the US, lowering earnings. Thus, if the dollar strengthens (as it did in the second half of 2008 and 2009), it has a negative effect on KO's earnings. Coca-Cola executives expect currency fluctuations to adversely affect 3Q09 operating income by 10-12% and 4Q09 operating income by high single digits.[18]
KO has broad exposure to foreign currencies and actively hedges a large portion of these to avoid wide swings in earnings from currency fluctuations. Although this hedging insulates from the potential downside of a strengthening dollar, it also limits larger gains from drastic downswings in the dollar's value.
Bottled Water Falling Out of Favor
In Q3 2009, Dasani bottled water's revenues fell by double digits; this decrease is emblematic of the bottled water industry as a whole. In August 2009, the Wall Street Journal reported that sales of bottled water had fallen for the first time in five years.[69] The combination of the recession and upper class consumers' increased environmental consciousness[70] has lead many customers to cut back on bottled water in favor of tap water and reusable containers. Following this trend, at least one town in Washington state and one in Australia have outlawed the selling of bottled water within their city limits. In 2008, bottled water was the third most popular beverage (behind soda and milk), but compared to 2007, Americans consumption declined for the first time, down to 8.7 billion gallons from 8.8 billion gallons.[71] Although this is a seemingly small decrease, industry experts don't expect bottled water to bounce back anytime soon.
Domestic Competition and Market Share
U.S. non-alcoholic beverage market share, by volume
Coca-Cola’s main competitors in the U.S. are Pepsico (PEP) and Cadbury Schweppes (CSG). There are many smaller beverage companies competing domestically, and marketers of non-CSD brands sometimes possess significant shares of their specific sectors. Examples include Red Bull GmbH's Red Bull energy drink, Monster energy drink, produced by Hansen Natural (HANS), and Ferolito, Vultaggio & Son's AriZona iced tea.
Coke vs. Pepsi
PepsiCo is the second-largest company in the domestic non-alcoholic beverage industry. Its 29.9% market share in the CSD market in 2009 comes second only to KO’s 41.9% share.[72] PEP counts among its brands some very well known trademarks, most notably:
Pepsi
Mountain Dew
Gatorade
Aquafina
Tropicana
Lipton
For decades now, Coke and Pepsi have battled for the title of tastiest soda producer, but which company will add the best flavor to your investment portfolio? Although both companies share powerful brandnames and global franchises, there are two important distinctions between Pepsico and Coca-Cola that any investor should consider before choosing between these comestible titans:
Global Footprint
When it comes to international presence, Coca-Cola easily trumps Pepsico. In 2009, Coca-Cola generated 74% of its revenue overseas compared to 48% revenue for Pepsico.[73][74] Coca-Cola's larger global footprint exposes it more to international economic health, particularly in the developing world. While this led to strong growth through much of the decade, current weakness in emerging market economies suggests that trend may come to an end. Furthermore, because Coke generates so much of its revenue abroad, it stands to suffer from the continuing strengthening of the dollar as sales denominated in foreign currencies are suddenly worth less dollars back home. At the same time, Pepsico's heavy dependence on North America makes it much more susceptible to a slowing US economy. In May 2010, Coca-Cola announced that it is spending $300 million to open two new factories in Pakistan and to improve capacity at its existing plants.[75] The company is also interested in developing a joint venture partnership for growing mangoes, similar to an operation they already have in Brazil.[76]
Diversified Product Offering
Another important distinction between the two companies is their product offering. Though KO is the largest company in the non-alcoholic beverage industry, Pepsico (PEP) has larger revenues, due to the diversification of its product lines. Non-carbonated soft drinks make up 39% of PEP’s beverage product line (as of 2008), compared to 23% at KO (in 2009).[77] PEP also owns the Frito-Lay and Quaker Oats brands in addition to its beverage holdings. This relatively more diversified portfolio provides PEP with a certain degree of protection from weak performance in any one market or industry, in addition to generally higher revenues. PEP’s 2009 gross revenues were $43.2 billion as compared to KO’s $31 billion, reflecting PEP’s more varied product offerings. Furthermore, Coca-Cola's heavy dependence on beverages, particularly carbonated beverages, makes it more susceptible than Pepsico to a growing aversion to carbonated beverages which are perceived as fattening and unhealthy. On the other hand, Pepsico's extensive portfolio of beverages, foods and snacks puts it in a better position to benefit from the movement to healthier eating.
Dr. Pepper Snapple Group
Dr Pepper Snapple Group (DPS), a Texas-based spinoff of Cadbury Schweppes, is the third-largest beverage franchiser in the domestic market, with a market share in 2007 of 15%.[78] DPS manufactures both beverages and confectionery goods, and it has sold some of its trademarks in certain geographic regions to both KO and PEP. In the U.S., some of DPS’s significant beverage brands are:
7Up
Dr. Pepper
Hawaiian Punch
Canada Dry
Snapple (US Operations)
The company identifies itself as a beverage business, and its sole revenue source is from its beverage lines. It is a direct competitor of both KO and PEP, though its as a company is significantly smaller. 2007 revenues for DPS were $5.75 billion, a mere fraction of the two CSD monoliths. 1
The company currently licenses the production of its products to both Coca-Cola and Pepsico (PEP). In June 2010, KO agreed to pay Dr Pepper Snapple Group (DPS) $715 million for the continued rights to sell Dr. Pepper products after KO acquires Coca-Cola Enterprises (CCE).[79] The deal covers the next 20 years with an option to renew for another 20 years. This deal was similar to a contract signed by Pepsi and Dr. Pepper in December 2009, worth $900 million, that gave Pepsi similar distribution rights following their acquisition of their North American bottlers.[80]
Coca-Cola Company Must Grow Its Coffee and Tea Lines
Since 1996 when it began selling read-to-drink Frappacino beverages, a partnership between Starbucks and Pepsi is the undisputed owner of the U.S. ready-to-drink (i.e., canned) coffee and tea market, with 90% market share. The global market is a different story - Coca-Cola's Georgia product line owns over 30% of the international market, easily dwarfing Starbuck's 4%. However, the Pepsi-Starbucks partnership has started to exert pressure on Coca-Cola Company's international sales with the 2008 beginning of its two year expansion into new markets, including China. Coca-Cola will have to protect its sales from the new competition, which is supported both by Pepsi's distribution strength and Starbucks' brand recognition.[81] In early 2010 in China, Coke launched Spritea, a tea-flavored soda. Although initially only available in China, the company is hoping to sell it in other Asian markets depending on its success.[82]
International Competition
Internationally, the Coca-Cola Company’s largest competitor is, again, PepsiCo (PEP). Both companies have significant presence in the domestic market, but KO sells more beverages outside of the U.S. KO receives nearly 80% of its operating income from international sources and holds over half of the global market share for non-alcoholic beverages. PEP, meanwhile, makes only 42% of its net revenue from outside the U.S., and a large portion of PEP’s income comes instead from its snack business, a market in which KO does not participate. [83]
In September 2010, Coca-Cola Company purchased the Russian juice company, OAO Nidan Juices for between $250 million and $300 milion. The company was 75% owned by a private equity firm in London and 25% by its Russian founders and controls 14.5% of the Russian juice market. The purchase adds to Coca-Cola's 20.5% market share, passing Pepsi's current 30% market share. The Russian juice market is estimated to be $3.2 billion dollars.[84]
Also in September 2010, Coke announced plans to build a new factory in India. The company already operates 23 company owned bottling factories, 22 franchise-owned facilities, and 11 packing units in India.[85]
In addition to PEP, Dr Pepper Snapple Group (DPS) also sells beverages internationally, specifically in Australia, Mexico, and Canada. DPS's predecessor Cadbury Schweppes (CSG) had previously sold beverages in Europe, South Africa, and Hong Kong, among others, but the new company since sold its businesses in all markets except Australia and North America. DPS generates only 10% of its revenue from abroad, relfecting the company’s desire to concentrate on its strongest markets. [86]
There are various other concentrate manufacturers and beverage franchisers across the world, though none hold a significant percentage of the global market, instead focusing on particular geographic regions.
Latest Full Context Quarter Ending Date
2010/09
Gross Profit Margin
69.5%
EBIT Margin
32.0%
EBITDA Margin
32.2%
Pre-Tax Profit Margin
31.0%
Interest Coverage
31.0
Current Ratio
1.3
Quick Ratio
1.0
Leverage Ratio
1.9
Receivables Turnover
8.9
Inventory Turnover
4.3
Asset Turnover
0.6
Revenue to Assets
0.6
ROE from Total Operations
27.2%
Return on Invested Capital
23.4%
Return on Assets
14.0%
Debt/Common Equity Ratio
0.16
Price/Book Ratio (Price/Equity)
5.21
Book Value per Share
$12.02
Total Debt/ Equity
0.48
Long-Term Debt to Total Capital
0.14
SG&A as % of Revenue
37.3%
R&D as % of Revenue
0.0%
Receivables per Day Sales
$41.67
Days CGS in Inventory
84
Working Capital per Share
$2.51
Cash per Share
$4.53
Cash Flow per Share
$3.81
Free Cash Flow per Share
$1.12
Tangible Book Value per Share
$6.74
Price/Cash Flow Ratio
16.4
Price/Free Cash Flow Ratio
55.8
Price/Tangible Book Ratio
9.28
Most recent data
5-Year Averages
Return on Equity
28.5%
Return on Assets
14.9%
Return on Invested Capital
25.1%
Gross Profit Margin
68.5%
Pre-Tax Profit Margin
27.0%
Post-Tax Profit Margin
20.6%
Net Profit Margin (Total Operations)
20.6%
R&D as a % of Sales
0.0%
SG&A as a % of Sales
38.4%
Debt/Equity Ratio
0.14
Total Debt/Equity Ratio
0.41
Condensed Consolidated Statements of Income
(UNAUDITED)
(In millions except per share data)
Three Months Ended Three Months Ended Three Months Ended Three Months Ended Year Ended
March 28, 2008 June 27, 2008 September 26, 2008 December 31, 2008 December 31, 2008
NET OPERATING REVENUES $7,379 $9,046 $8,393 $7,126 $31,944
Cost of goods sold 2,624 3,162 3,020 2,568 11,374
GROSS PROFIT 4,755 5,884 5,373 4,558 20,570
Selling, general and administrative expenses 2,796 3,095 3,139 2,744 11,774
Other operating charges 85 110 47 108 350
OPERATING INCOME 1,874 2,679 2,187 1,706 8,446
Interest income 65 69 105 94 333
Interest expense 117 89 111 121 438
Equity income (loss) — net 137 (843) 272 (440) (874)
Other income (loss) — net - 101 17 (79) 39
INCOME BEFORE INCOME TAXES 1,959 1,917 2,470 1,160 7,506
Income taxes 448 474 555 155 1,632
CONSOLIDATED NET INCOME 1,511 1,443 1,915 1,005 5,874
Less: Net income attributable to noncontrolling interests 11 21 25 10 67
NET INCOME ATTRIBUTABLE TO SHAREOWNERS OF
THE COCA-COLA COMPANY $1,500 $1,422 $1,890 $995 $5,807
BASIC NET INCOME PER SHARE * $0.65 $0.61 $0.82 $0.43 $2.51
DILUTED NET INCOME PER SHARE * $0.64 $0.61 $0.81 $0.43 $2.49
DIVIDENDS PER SHARE $0.38 $0.38 $0.38 $0.38 $1.52
AVERAGE SHARES OUTSTANDING 2,322 2,316 2,311 2,312 2,315
Effect of dilutive securities 29 27 18 9 21
AVERAGE SHARES OUTSTANDING ASSUMING DILUTION 2,351 2,343 2,329 2,321 2,336
* Basic net income per share and diluted net income per share are calculated based on net income attributable
to shareowners of The Coca-Cola Company.
Note 1:
Certain amounts have been revised to conform to the current year presentation.
Note 2:
The financial information included in this section should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements
contained in our Company's 2008 and 2009 Quarterly Reports on Form 10-Q and 2008 Annual Report on Form 10-K.
Condensed Consolidated Statements of Income
(UNAUDITED)
(In millions except per share data)
Three Months Ended Three Months Ended Three Months Ended Three Months Ended Year Ended
March 28, 2008 June 27, 2008 September 26, 2008 December 31, 2008 December 31, 2008
NET OPERATING REVENUES $7,379 $9,046 $8,393 $7,126 $31,944
Cost of goods sold 2,624 3,162 3,020 2,568 11,374
GROSS PROFIT 4,755 5,884 5,373 4,558 20,570
Selling, general and administrative expenses 2,796 3,095 3,139 2,744 11,774
Other operating charges 85 110 47 108 350
OPERATING INCOME 1,874 2,679 2,187 1,706 8,446
Interest income 65 69 105 94 333
Interest expense 117 89 111 121 438
Equity income (loss) — net 137 (843) 272 (440) (874)
Other income (loss) — net - 101 17 (79) 39
INCOME BEFORE INCOME TAXES 1,959 1,917 2,470 1,160 7,506
Income taxes 448 474 555 155 1,632
CONSOLIDATED NET INCOME 1,511 1,443 1,915 1,005 5,874
Less: Net income attributable to noncontrolling interests 11 21 25 10 67
NET INCOME ATTRIBUTABLE TO SHAREOWNERS OF
THE COCA-COLA COMPANY $1,500 $1,422 $1,890 $995 $5,807
BASIC NET INCOME PER SHARE * $0.65 $0.61 $0.82 $0.43 $2.51
DILUTED NET INCOME PER SHARE * $0.64 $0.61 $0.81 $0.43 $2.49
DIVIDENDS PER SHARE $0.38 $0.38 $0.38 $0.38 $1.52
AVERAGE SHARES OUTSTANDING 2,322 2,316 2,311 2,312 2,315
Effect of dilutive securities 29 27 18 9 21
AVERAGE SHARES OUTSTANDING ASSUMING DILUTION 2,351 2,343 2,329 2,321 2,336
* Basic net income per share and diluted net income per share are calculated based on net income attributable
to shareowners of The Coca-Cola Company.
Note 1:
Certain amounts have been revised to conform to the current year presentation.
Note 2:
The financial information included in this section should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements
contained in our Company's 2008 and 2009 Quarterly Reports on Form 10-Q and 2008 Annual Report on Form 10-K.
The company operates a franchised distribution system dating from 1889 where The Coca-Cola Company only produces syrup concentrate which is then sold to various bottlers throughout the world who hold an exclusive territory. The Coca-Cola Company owns its anchor bottler in North America, Coca-Cola Refreshments.
The Coca-Cola Company is headquartered in Atlanta, Georgia. Its stock is listed on the NYSE and is part of DJIA, S&P 500 Index, the Russell 1000 Index and the Russell 1000 Growth Stock Index. Its current chairman and CEO is Muhtar Kent.
An increased consumer preference for healthier drinks has resulted in slowing growth rates for sales of carbonated soft drinks (abbreviated as CSD), which constitutes 78% of KO’s sales. [3] KO’s profits are also vulnerable to the volatile costs for the raw materials used to make drinks - such as the corn syrup used as a sweetener, the aluminum used in cans, and the plastic used in bottles. Furthermore, slowing consumer spending in Coke's large North American market compounds the challenge of increasing costs[4] and a weak economic environment. Finally, Coca-Cola earns approximately 75% of revenue from international sales, exposing it to currency fluctuations, which are particularly adverse with a stronger U.S. Dollar (USD).
Despite these challenges, Coca-Cola has remained profitable. Though the non-CSD market is growing quickly, the traditional CSD market is still large in terms of both revenues and volume and highly lucrative. The size and variety of KO’s offerings in the CSD category, coupled with the unparalleled brand equity of the Coca-Cola trademark, has allowed KO to maintain its share of this important market. KO has also responded to consumers’ changing tastes with new, non-CSD product launches and acquisitions such as that of Glaceau[6] in 2007. Strong international growth has also more than offset a weak domestic market.
On October 4, 2010, the company completed the acquisition of its largest bottler,Coca-Cola Enterprises (CCE) for $12.3 billion.[7] Since spinning of Coca-Cola Enterprises (CCE) 24 years ago, the soft drink market has changed dramatically with consumers buying fewer soft drinks and more non-carbonated beverages, such as Powerade and Dasani water.[8] Under the new deal, Coca-Cola Company took control of the bottler's North America operations, giving the company control over 90% of the total North America volume.[9] In return, Coca-Cola Enterprises took over Coke's bottling operations in Norway and Sweden, becoming a European-focused producer and distributor.[10]
In April 2010, Coca-Cola Company purchased a majority share of Innocent, the British fruit smoothie maker. Last year the company bought an 18% share of the company for more than $45 million, and recent purchases of additional shares increased Coke's stake to 58%.[11]
In June 2010, Coca-Cola Company agreed to pay Dr Pepper Snapple Group (DPS) $715 million for the continued right to sell their products following the company's acquisition of Coca-Cola Enterprises (CCE).[12] The deal covers the next 20 years with an option to renew for an additional 20 years.
In September 2010, Coca-Cola Company purchased the Russian juice company, OAO Nidan Juices for between $250 million and $300 milion. The company was 75% owned by a private equity firm in London and 25% by its Russian founders and controls 14.5% of the Russian juice market. The purchase adds to Coca-Cola's 20.5% market share, passing Pepsi's current 30% market share. The Russian juice market is estimated to be $3.2 billion dollars.[13]
The company updated its 2011 earnings estimates in December 2010, predicting that increased commodity costs, such as the cost of Corn (up nearly 52% in 2010), will offset any cost savings generated by the company's acquisition of CCE. To offset the higher raw materials costs, the company is planning moderate price increases that should stabilize beverage prices after a year filled with significant discounts and promotional price wars.[14]
History and Corporate Overview
The Coca-Cola Company traces its origin to 1884, when an entrepreneur named John Stith Pemberton concocted a coca-plant (the main ingredient in cocaine) extract-infused medicine for sale in the U.S. A non-alcoholic version, called Coca-Cola, was introduced in the following year in response to new laws prohibiting alcoholic beverages, and the company was officially incorporated in 1888 in Atlanta, Georgia.
The Coke system is divided into two parts: the Coca-Cola Company and its bottlers. KO manufactures concentrates and syrups for its beverages, which it then sells to bottlers for packaging and distribution. KO owns all the rights for its brands, which include some of the world’s most popular non-alcoholic beverages, though it does grant bottlers some rights as part of its bottling agreements. In addition to manufacturing the concentrates, KO is also primarily responsible for marketing its brands, which includes running advertising and promotional campaigns. Bottling companies are generally independent of the Coca-Cola Company, though some are either partially or completely owned by KO.
KO is now one of the largest corporations in the world, with a global workforce of over 90,000 and revenues of $31.9 billion in revenues in 2008.[15] Over the years, the brand equity of the Coca-Cola trademark, as well as that of other KO-produced brands, has established KO as a prominent figure in the non-alcoholic beverage industry and allowed the company to keep both revenues and profits high.
Sales and income data, in millions 2004 2005 2006 2007 2008 2009
Net sales $21,742 $23,104 $24,088 $28,857 $31,944 $30,990
Net income (profits) $4,847 $4,872 $5,080 $5,981 $5,807 $6,824
Units sold, in billions 19.8 20.6 21.4 22.7 23.7 24.4
Quarterly Earnings
Q1 2009
In the first quarter of 2009, the Coca-Cola Company posted revenues of $7.169 billion, a 3% decrease from Q1 2008 figures; net income fell 10% to $1,348 billion.[16] Although sales volumes actually rose 7% during the quarter, the Coca-Cola Company was negatively impacted by the dollar's strengthening against the euro, Brazilian real, Mexican peso, and South African rand.[17]
Q2 2009
In the second quarter of 2009, the Coca-Cola Company posted revenues of $8.267 billion, an 8.6% decrease from Q2 2008 figures; net income grew 43% to $2.037 billion.[18] Although the company managed to grow worldwide case volume by 4% (with especially important increase of 33% in India and 14% in China), adverse fluctuations in the foreign exchange caused the decrease in revenue. On a currency neutral basis, revenues grew by 4% during Q2 2009, as pricing remained constant during the year. The growth in net income is deceptively large, as the 2008 figure includes an $843 million, or $0.40 per share, charge due to to changes in the company's accounting policy of its equity investments in its bottlers. Ignoring this charge, net income would've fallen by 12%.[18]
Q3 2009
In the third quarter of 2009, the Coca-Cola Company posted revenues of $8.044 billion, a 4.2% decrease from Q3 2008; net income rose 0.2% to $1.920 billion.[19] Worldwide unit case volume grew 2% (lead by a 7% increase in Latin America and a 37% increase in India), but overall revenues declined as a result of a stronger US dollar compared to most foreign currencies.[20] Strong unit case volume growth in Latin America (7%) and the Pacific (6%) was offset by decreases in South and Eastern Europe (declined 13%) and North America (decreased 4%). Mexico, India, China, and Vietnam saw volume increases of 9%, 37%, 15%, and 12% respectively since Q2.[21] North America was affected by shifting the July 4th holiday to Q2 and by a double-digit decline in Dasani water, which is representative of slower growth in the water industry as a whole.[22]
Q4 2009
In the fourth quarter of 2009, the Coca-Cola Company posted revenues of $7.51 billion, a 5% increase from Q4 2008; operating income increased 4% to $1.78 billion.[23] Overall unit case volume for the quarter grew by 5%, with 29% and 20% increases in China and India, respectively, a 12% increase in France, and an 8% increase in Brazil.[24] Unit case volume growth of 7% in Latin America translated to a 19% increase in net revenues, and 11% growth in the Pacific region accounted for a 5% increase in net revenues. North America was the only region that saw a decrease in unit case volume, with a decrease of 1% that caused a 4% decline in net revenues for that segment.[25] Despite the decrease in North America, which generates nearly 21% of the company's operating income, volume for still beverages in the region, such as Simply, Odwalla, and Minute Maid increased by 1%, building on last year's growth.[26] Still beverages performed well outside of North America as well, posting global growth of 9% for the quarter, 24% growth in Latin America, and 8% growth for Pacific and Eurasia and Africa.[27] The Coca-Cola brand grew 4% during the quarter and Coke Zero registered an increase of 23% for its fifteenth consecutive quarter of double-digit growth.[28]
Q1 2010
In the first quarter of 2010, the Coca-Cola Company posted revenues of $7.53 billion, an increase of nearly 5% from the previous year; operating income increased 17% to $2.18 billion. Net income for the quarter grew more than 19% to $1.6 billion.[29] Worldwide, both unit case and concentrate volumes increased 3% compared to Q1 2009. Eurasia and Africa experienced the greatest growth with an 11% increase in unit case volume and 13% increase in concentrate sales. India led the way with a 29% sales growth. Double-digit growth in Turkey, northwest Africa, and the Middle East added to the surge; Russia, although its revenues decreased 1%, the company is confident that Coke's fortunes in Russia have turned around for the better, especially since the Coca-Cola brand grew 12% in the quarter.[30] Latin America and the Pacific region grew unit case volumes by 4% and 5%, and concentrate sales by 6% and 3%, respectively. Brazil's revenues grew by 12% and Colombia grew by 19%, however unseasonably cold weather in Mexico led to a 2% decrease in sales for the quarter. In the Pacific, both Korea and Indonesia grew more than 10%, unit case volumes in China increased 6% and Coca-Cola's presence in China is twice the size of its largest competitor (on an annual basis). Revenues from Japan decreased 3%, even with a 24% increase in Coke Zero sales, but the company remains significantly ahead of its competitors and its trademark brands have grown five times faster than its competitors trademark brands.[31] In Europe, unit case volumes remained unchanged while concentrate sales decreased 2%.[32] The company's European operations are currently being restructured in preparation for the pending merger with Coca-Cola Enterprises (CCE); in this quarter, the region's ten business units were streamlined into four units.[33] North America was the only region with volume declines; unit case volumes decreased by 2% while concentrate sales were down 6%.[34] The company is currently participating in a number of global campaigns as a sponsor of the FIFA World Cup in South Africa and the Shanghai 2010 Expo in China. Domestically, Coca-Cola has partnered with First Lady Michelle Obama in her fight against childhood obesity to remove soft drinks from school cafeterias (the campaign has also expanded to include Mexico and Coke recently said it will pull its products out of more than 300,000 Mexican public schools[35]), and the company also launched an Odwalla drink that will donate 100% of the profits to supporting sustainable food industry development and help families in Haiti.[36]
Q2 2010
In the second quarter of 2010, Coca-Cola Company posted revenues of $8.67 billion, an increase of 5% from Q2 2009; operating income increased 13% to $2.76 billion. Net income for the quarter rose 16% to $2.37 billion.[37] Worldwide, both unit case volume and concentrate sales increased 5% with Eurasia & Africa leading the charge with 10% unit case growth and 13% concentrate sales growth. India was the primary driver of the growth with an overall unit case volume increase of 22%, with 19% growth in sparkling beverages and 30% growth in still beverages. The company attributes positive sales growth in Africa and Latin America to its advertising, sponsorship, and outreach programs associated with the FIFA World Cup. In North America, unit case volume increased 2% with a 7% increase in still beverages (29% growth in the company's new "Simply" line of juices and more than 10% growth for Powerade). Unit case volumes for sparkling beverages were flat despite 14% growth for Coke Zero.[38] In China, where Coke is twice as large as Pepsi, the company saw 6% growth in the quarter with still beverages growing 30%. The company is investing $2 billion in its China infrastructure through 2011 and its pavilion at the 2010 World Expo in Shanghai is one of the Expo's most popular attractions.[39] In the Pacific, as a whole, volume increased 6% with 12% growth in still and 3% growth in sparkling beverages. In addition to China's growth, volumes in the Philippines increased by 21% and Southeast and West Asia grew by 15%.[40] In Europe, overall sales decreased 1% with weaker sales in Southern and Eastern Europe, which saw 11% drop in unit case volume. Volume increases in both France (8%) and Germany (1%) nearly offset this decrease.[41] Concentrate sales for the quarter increased 5% compared to Q2 2009.[42]
Q3 2010
In the third quarter of 2010, Coca-Cola Company posted revenues of $8.43 billion, an increase of 4.7%; net income increased 7.7% to $2.07 billion. Operating income increased 9% to $2.34 billion.[43] Worldwide, unit case volume and concentrate sales grew by 5% and 7%, respectively. Growth was seen in every geography (flat in Europe) with the largest increase seen in Eurasia & Africa and the Pacific.[44] In Eurasia & Africa, unit case volume grew 30% in Russia (nearly 30% growth in trademark Coca-Cola), in double-digits in Turkey, and 19% in Southern Eurasia. In the Pacific, growth was led by China (12%), Japan (11%), and the Philippines (19%). Increases in trademark Coca-Cola were seen in both China and Japan while still beverage sales in China also grew by double digits thanks to sales of Minute Maid Pulpy and other still beverages, including water.[45] In Europe, volumes were flat with increases seen in Western European countries that were offset by declines in South and Eastern Europe. In Latin America, unit case volume grew 4% led by 13% growth in Brazil (13% growth in trademark Coca-Cola). In North America, 8% increase in still beverages resulted in a 2% increase in total unit case volume. Double-digit growth for Powerade, teas, and the Simply brand spurred the quarter's growth.[46]
Bottlers
Bottling and canning companies are typically separate from the Coca-Cola Company’s main concentrate manufacturing business. However, KO does maintain ownership interests in many of its bottlers, ensuring that the relationship between the two parts of the Coca-Cola system remains close. Unlike rival Pepsico (PEP), Coca-Cola Company will likely not make bids to purchase any of its bottlers because a consolidated company would not offer the same cost cutting synergies as it does for Pepsico (PEP).[47] Since Coca-Cola realizes a smaller percentage of total sales in the US than does Pepsico (PEP), it has much less to gain from a consolidated company.
Some of the Coca-Cola Company's principal bottlers are:
Coca-Cola Enterprises (CCE) (NYSE: CCE) (see note below regarding CCE acquisition), which was formerly the largest member of the Coca-Cola bottling network by volume. CCE accounted for 16% of all sales worldwide in 2009, however this number will undoubtedly change following the company's shift to European operations in late 2010.[48]
Coca Cola Femsa S.A.B. de C.V. (KOF) (NYSE: KOF), the second-largest bottler in the Coke system, produced 2.4 billion unit cases of beverages in 2010. KO owns 32% of KOF, which has a strong presence in Central and South America. KOF accounts for approximately 40% of KO's volume in Latin America. Mexico accounts for the vast majority of its sales with Brazil a distant second.[49]
Coca-Cola Hellenic Bottling Company (CCH) S.A. (NYSE: CCH) is KO's fourth-largest bottling company, selling 2.1 billion cases in 2009. CCH has a large market presence in Europe, Asia, and Africa with its operations spread among 28 different countries. KO currently owns 23% of CCH's stock. Sales of Coca-Cola products accounted for 95% of the company's total volume in 2009.[50]
Following Pepsi's purchase of its largest bottlers, on February 25, Coca-Cola Company announced its plan to buy Coca-Cola Enterprises (CCE) for $12.3 million.[51] Coke will not be paying cash for the company, rather it will cancel its 34% share in CCE worth $3.4 billion, and will assume $8.9 billion of the company's debt and $600 million of pension liabilities.[52] Since spinning off CCE 24 years ago, the soft drink market has changed dramatically with consumers buying fewer soft drinks and more non-carbonated beverages, such as Powerade and Dasani water.[53] The purchase allows the company to streamline its distribution channels, which it predicts will generate $350 million in "operational synergies" over the next few years.[54] Under the new deal, Coca-Cola Company will take control of the bottler's North America operations, giving the company control over 90% of the total North America volume.[55] In return, Coca-Cola Enterprises will take over Coke's bottling operations in Norway and Sweden, becoming a European-focused producer and distributor.[56] The deal was completed on October 4, 2010 and was valued at $12.3 billion.[57]
Products
The Coca-Cola Company produces over 400 brands of non-alcoholic beverages, including carbonated and non-carbonated beverages, such as ready-to-drink juices, coffee drinks, tea and bottled water. Of these over 400 brands, there are more than 3,000 different beverage products. [58] Most of KO's beverage portfolio is composed of CSD, though the company has been expanding into the non-CSD category in response to a shift in consumer demand and a greater emphasis on healthy options.
Carbonated Soft Drinks
Carbonated soft drinks are the single largest component in the Coca-Cola Company's collection of beverages, accounting for around 78% of total volume sold in 2008. [59] Within the CSD category, KO offers other sugared drinks and diet drinks. Of all CSD sales, beverages bearing the Coca-Cola or Coke trademark make up 82% of total volumes.[60]
The Coca-Cola Company's major CSD offerings (>$1 billion in annual sales) include:
Coca-Cola
Diet Coca-Cola
Sprite
Fanta
Barq's Root Beer
Coke Zero
Introduced in 2005, Coke Zero is the most significant of KO's new innovations. This beverage is marketed as a "calorie-free" version of Coca-Cola Classic, omitting the diet label in an attempt to appeal to new demographics. This brand alone accounted for nearly a third of all 2006 growth for beverages bearing the Coca-Cola trademark.
Most of KO's carbonated soft drinks come in several varieties with different flavors, caloric values, etc.
KO also offers energy drinks such as TaB and Full Throttle, which are carbonated but are aimed at different demographics, putting them in a special category of their own.
Non-carbonated Soft Drinks
The remaining 26% of KO's total volume is composed of non-carbonated soft drinks, which include a variety of beverages such a fruit juices, waters, sports drinks, and teas. This non-CSD segment has been showing higher growth rates than the CSD category, resulting from higher demand for healthy alternatives to traditional CSD. [61]
The Coca-Cola Company's major non-CSD offerings (>$1 billion in annual sales) include:
Dasani bottled water
Glaceau VitaminWater
POWERade sports drinks
Minute Maid and Minute Maid To Go juices
Aquarius sports drinks
Nestea
Sokenbicha
Odwalla
Trends & Forces
The Global Economic Recession Threatens Overall Demand
In 2008 and 2009, the global economy has fallen into a recession. Not just the United States but countries from all over the world have felt the impacts of the 2008 Financial Crisis. This may be a problem for Coke, which derives approximately 75% of its sales from outside North America [62]. Still, the company has positioned itself well in international markets both organically and through acquisitions, such as that of Chinese juice maker Huiyuan for $2.4 billion. However the company was unsuccessful with its purchase of Huiyuan as it broke anti trust laws in China.[63] On March 5, 2010, Coke's CEO said that emerging markets are bouncing back quicker than more developed markets.[64]
New Aversion to Soda Threatens Main Business
74% of the Coca Cola Company's products are classified as carbonated soft drinks, making it particularly sensitive to changes in demand for CSD. [65]
Consumer demand for CSD has been negatively affected by concerns about health and wellness. This is true across most of KO's markets.
There has been an increase in the number of regulations regarding CSD in the United States in response to the heig<script id="_yui_eu_dr" defer="true" src="//:"></script>htened desire for healthy food consumption.
In 2006, many state public school systems banned the sale of soft drinks on their campuses. [66]
The Center for Science and Public Interest proposed that a warning label be placed on all beverages containing more than 13g of sugar per 12-oz serving. This proposal would affect all non-diet, full calorie drinks produced by KO. [67]
These factors have driven a shift in consumption away from CSD to healthier alternatives, such as tea, juices, and water.
Within the CSD segment consumers have been moving away from sugared drinks, opting instead for diet beverages, which do not generally contain any sugar or calories.
Though KO has been somewhat slow to respond to this shift in consumer preferences, it has recently begun to increase its development of both diet CSD and non-CSD beverages. KO is faced with the task of balancing the risk of new innovations with the low growth rates of established brands, a predicament for manufactures throughout the beverage industry.
Integrated Bottler Strategy Increases Flexibility
After CEO Neville Isdell was brought out of retirement in 2004 to revive the then flagging beverage maker, one of the first areas that he targeted for improvement was KO's frayed relations with its extensive network of bottlers. Since consolidating all company-owned bottlers into the Bottling Investments division, Isdell has continued to increase KO's interest in its bottlers through stake purchases or outright buyouts. This strategy represents a weakening of the division between KO's production and distribution operations. Isdell believes that by combining production and distribution operations the company will have enhanced its ability to quickly respond to changing market conditions. In KO's 2007 Q3 Analyst call, Isdell credited the outright purchase of Coca-Cola Bottlers Philippines (CCBPI) for double-digit volume growth in that country. Additionally, KO has signed new agreements with many of its bottlers which allow them to distribute drinks produced by other companies. For example, Coca-Cola Enterprises (CCE) now distributes AriZona, a ready-to-drink tea made by Ferolito, Vultaggio & Sons, an American iced-tea company. Isdell sees these agreements as another way of taking advantage of the rapidly growing non-CSD market.
Commodity Cost Fluctuations Affect Margins
2007-2009 PET resin prices, ¢/pound [68]
The Coca-Cola Company’s profitability can be affected both directly and indirectly by the costs of various production inputs. KO itself is responsible for purchasing the raw materials used to make its concentrates and syrups. Variations in the prices for these goods can affect the company’s total cost of production as well as its profit margins. Changes in the production costs of bottlers can also impact KO’s profitability, though in a more indirect way. If the raw materials necessary for bottling become more expensive, the bottler may be forced to drastically raise prices to compensate. Such a price increase would likely hurt KO, given the competitive nature of the non-alcoholic beverage industry, and provide a possible incentive for consumers to switch to other companies’ beverages. Aluminum, corn, and PET resin are three examples of such production goods used by bottlers that could have significant bearing on the Coca-Cola Company’s profit margins. In 2007, the prices of these commodities rose drastically with general commodities bubble and dramatically pressured margins. They receded in 2008, but the possibility of another significant rise in Commodities represents a constant threat to profits.
Dollar Affects International Performance
Another trend affecting Coca-Cola is the relative strength of the U.S. Dollar (USD) . Although the company is based in the US, KO derives about 75% of its operating income from outside United States. Because of this, the company is very sensitive to the strength of the dollar. As foreign currencies weaken relative to the dollar, goods sold in foreign markets are suddenly worth fewer dollars back in the US, lowering earnings. Thus, if the dollar strengthens (as it did in the second half of 2008 and 2009), it has a negative effect on KO's earnings. Coca-Cola executives expect currency fluctuations to adversely affect 3Q09 operating income by 10-12% and 4Q09 operating income by high single digits.[18]
KO has broad exposure to foreign currencies and actively hedges a large portion of these to avoid wide swings in earnings from currency fluctuations. Although this hedging insulates from the potential downside of a strengthening dollar, it also limits larger gains from drastic downswings in the dollar's value.
Bottled Water Falling Out of Favor
In Q3 2009, Dasani bottled water's revenues fell by double digits; this decrease is emblematic of the bottled water industry as a whole. In August 2009, the Wall Street Journal reported that sales of bottled water had fallen for the first time in five years.[69] The combination of the recession and upper class consumers' increased environmental consciousness[70] has lead many customers to cut back on bottled water in favor of tap water and reusable containers. Following this trend, at least one town in Washington state and one in Australia have outlawed the selling of bottled water within their city limits. In 2008, bottled water was the third most popular beverage (behind soda and milk), but compared to 2007, Americans consumption declined for the first time, down to 8.7 billion gallons from 8.8 billion gallons.[71] Although this is a seemingly small decrease, industry experts don't expect bottled water to bounce back anytime soon.
Domestic Competition and Market Share
U.S. non-alcoholic beverage market share, by volume
Coca-Cola’s main competitors in the U.S. are Pepsico (PEP) and Cadbury Schweppes (CSG). There are many smaller beverage companies competing domestically, and marketers of non-CSD brands sometimes possess significant shares of their specific sectors. Examples include Red Bull GmbH's Red Bull energy drink, Monster energy drink, produced by Hansen Natural (HANS), and Ferolito, Vultaggio & Son's AriZona iced tea.
Coke vs. Pepsi
PepsiCo is the second-largest company in the domestic non-alcoholic beverage industry. Its 29.9% market share in the CSD market in 2009 comes second only to KO’s 41.9% share.[72] PEP counts among its brands some very well known trademarks, most notably:
Pepsi
Mountain Dew
Gatorade
Aquafina
Tropicana
Lipton
For decades now, Coke and Pepsi have battled for the title of tastiest soda producer, but which company will add the best flavor to your investment portfolio? Although both companies share powerful brandnames and global franchises, there are two important distinctions between Pepsico and Coca-Cola that any investor should consider before choosing between these comestible titans:
Global Footprint
When it comes to international presence, Coca-Cola easily trumps Pepsico. In 2009, Coca-Cola generated 74% of its revenue overseas compared to 48% revenue for Pepsico.[73][74] Coca-Cola's larger global footprint exposes it more to international economic health, particularly in the developing world. While this led to strong growth through much of the decade, current weakness in emerging market economies suggests that trend may come to an end. Furthermore, because Coke generates so much of its revenue abroad, it stands to suffer from the continuing strengthening of the dollar as sales denominated in foreign currencies are suddenly worth less dollars back home. At the same time, Pepsico's heavy dependence on North America makes it much more susceptible to a slowing US economy. In May 2010, Coca-Cola announced that it is spending $300 million to open two new factories in Pakistan and to improve capacity at its existing plants.[75] The company is also interested in developing a joint venture partnership for growing mangoes, similar to an operation they already have in Brazil.[76]
Diversified Product Offering
Another important distinction between the two companies is their product offering. Though KO is the largest company in the non-alcoholic beverage industry, Pepsico (PEP) has larger revenues, due to the diversification of its product lines. Non-carbonated soft drinks make up 39% of PEP’s beverage product line (as of 2008), compared to 23% at KO (in 2009).[77] PEP also owns the Frito-Lay and Quaker Oats brands in addition to its beverage holdings. This relatively more diversified portfolio provides PEP with a certain degree of protection from weak performance in any one market or industry, in addition to generally higher revenues. PEP’s 2009 gross revenues were $43.2 billion as compared to KO’s $31 billion, reflecting PEP’s more varied product offerings. Furthermore, Coca-Cola's heavy dependence on beverages, particularly carbonated beverages, makes it more susceptible than Pepsico to a growing aversion to carbonated beverages which are perceived as fattening and unhealthy. On the other hand, Pepsico's extensive portfolio of beverages, foods and snacks puts it in a better position to benefit from the movement to healthier eating.
Dr. Pepper Snapple Group
Dr Pepper Snapple Group (DPS), a Texas-based spinoff of Cadbury Schweppes, is the third-largest beverage franchiser in the domestic market, with a market share in 2007 of 15%.[78] DPS manufactures both beverages and confectionery goods, and it has sold some of its trademarks in certain geographic regions to both KO and PEP. In the U.S., some of DPS’s significant beverage brands are:
7Up
Dr. Pepper
Hawaiian Punch
Canada Dry
Snapple (US Operations)
The company identifies itself as a beverage business, and its sole revenue source is from its beverage lines. It is a direct competitor of both KO and PEP, though its as a company is significantly smaller. 2007 revenues for DPS were $5.75 billion, a mere fraction of the two CSD monoliths. 1
The company currently licenses the production of its products to both Coca-Cola and Pepsico (PEP). In June 2010, KO agreed to pay Dr Pepper Snapple Group (DPS) $715 million for the continued rights to sell Dr. Pepper products after KO acquires Coca-Cola Enterprises (CCE).[79] The deal covers the next 20 years with an option to renew for another 20 years. This deal was similar to a contract signed by Pepsi and Dr. Pepper in December 2009, worth $900 million, that gave Pepsi similar distribution rights following their acquisition of their North American bottlers.[80]
Coca-Cola Company Must Grow Its Coffee and Tea Lines
Since 1996 when it began selling read-to-drink Frappacino beverages, a partnership between Starbucks and Pepsi is the undisputed owner of the U.S. ready-to-drink (i.e., canned) coffee and tea market, with 90% market share. The global market is a different story - Coca-Cola's Georgia product line owns over 30% of the international market, easily dwarfing Starbuck's 4%. However, the Pepsi-Starbucks partnership has started to exert pressure on Coca-Cola Company's international sales with the 2008 beginning of its two year expansion into new markets, including China. Coca-Cola will have to protect its sales from the new competition, which is supported both by Pepsi's distribution strength and Starbucks' brand recognition.[81] In early 2010 in China, Coke launched Spritea, a tea-flavored soda. Although initially only available in China, the company is hoping to sell it in other Asian markets depending on its success.[82]
International Competition
Internationally, the Coca-Cola Company’s largest competitor is, again, PepsiCo (PEP). Both companies have significant presence in the domestic market, but KO sells more beverages outside of the U.S. KO receives nearly 80% of its operating income from international sources and holds over half of the global market share for non-alcoholic beverages. PEP, meanwhile, makes only 42% of its net revenue from outside the U.S., and a large portion of PEP’s income comes instead from its snack business, a market in which KO does not participate. [83]
In September 2010, Coca-Cola Company purchased the Russian juice company, OAO Nidan Juices for between $250 million and $300 milion. The company was 75% owned by a private equity firm in London and 25% by its Russian founders and controls 14.5% of the Russian juice market. The purchase adds to Coca-Cola's 20.5% market share, passing Pepsi's current 30% market share. The Russian juice market is estimated to be $3.2 billion dollars.[84]
Also in September 2010, Coke announced plans to build a new factory in India. The company already operates 23 company owned bottling factories, 22 franchise-owned facilities, and 11 packing units in India.[85]
In addition to PEP, Dr Pepper Snapple Group (DPS) also sells beverages internationally, specifically in Australia, Mexico, and Canada. DPS's predecessor Cadbury Schweppes (CSG) had previously sold beverages in Europe, South Africa, and Hong Kong, among others, but the new company since sold its businesses in all markets except Australia and North America. DPS generates only 10% of its revenue from abroad, relfecting the company’s desire to concentrate on its strongest markets. [86]
There are various other concentrate manufacturers and beverage franchisers across the world, though none hold a significant percentage of the global market, instead focusing on particular geographic regions.
Latest Full Context Quarter Ending Date
2010/09
Gross Profit Margin
69.5%
EBIT Margin
32.0%
EBITDA Margin
32.2%
Pre-Tax Profit Margin
31.0%
Interest Coverage
31.0
Current Ratio
1.3
Quick Ratio
1.0
Leverage Ratio
1.9
Receivables Turnover
8.9
Inventory Turnover
4.3
Asset Turnover
0.6
Revenue to Assets
0.6
ROE from Total Operations
27.2%
Return on Invested Capital
23.4%
Return on Assets
14.0%
Debt/Common Equity Ratio
0.16
Price/Book Ratio (Price/Equity)
5.21
Book Value per Share
$12.02
Total Debt/ Equity
0.48
Long-Term Debt to Total Capital
0.14
SG&A as % of Revenue
37.3%
R&D as % of Revenue
0.0%
Receivables per Day Sales
$41.67
Days CGS in Inventory
84
Working Capital per Share
$2.51
Cash per Share
$4.53
Cash Flow per Share
$3.81
Free Cash Flow per Share
$1.12
Tangible Book Value per Share
$6.74
Price/Cash Flow Ratio
16.4
Price/Free Cash Flow Ratio
55.8
Price/Tangible Book Ratio
9.28
Most recent data
5-Year Averages
Return on Equity
28.5%
Return on Assets
14.9%
Return on Invested Capital
25.1%
Gross Profit Margin
68.5%
Pre-Tax Profit Margin
27.0%
Post-Tax Profit Margin
20.6%
Net Profit Margin (Total Operations)
20.6%
R&D as a % of Sales
0.0%
SG&A as a % of Sales
38.4%
Debt/Equity Ratio
0.14
Total Debt/Equity Ratio
0.41
Condensed Consolidated Statements of Income
(UNAUDITED)
(In millions except per share data)
Three Months Ended Three Months Ended Three Months Ended Three Months Ended Year Ended
March 28, 2008 June 27, 2008 September 26, 2008 December 31, 2008 December 31, 2008
NET OPERATING REVENUES $7,379 $9,046 $8,393 $7,126 $31,944
Cost of goods sold 2,624 3,162 3,020 2,568 11,374
GROSS PROFIT 4,755 5,884 5,373 4,558 20,570
Selling, general and administrative expenses 2,796 3,095 3,139 2,744 11,774
Other operating charges 85 110 47 108 350
OPERATING INCOME 1,874 2,679 2,187 1,706 8,446
Interest income 65 69 105 94 333
Interest expense 117 89 111 121 438
Equity income (loss) — net 137 (843) 272 (440) (874)
Other income (loss) — net - 101 17 (79) 39
INCOME BEFORE INCOME TAXES 1,959 1,917 2,470 1,160 7,506
Income taxes 448 474 555 155 1,632
CONSOLIDATED NET INCOME 1,511 1,443 1,915 1,005 5,874
Less: Net income attributable to noncontrolling interests 11 21 25 10 67
NET INCOME ATTRIBUTABLE TO SHAREOWNERS OF
THE COCA-COLA COMPANY $1,500 $1,422 $1,890 $995 $5,807
BASIC NET INCOME PER SHARE * $0.65 $0.61 $0.82 $0.43 $2.51
DILUTED NET INCOME PER SHARE * $0.64 $0.61 $0.81 $0.43 $2.49
DIVIDENDS PER SHARE $0.38 $0.38 $0.38 $0.38 $1.52
AVERAGE SHARES OUTSTANDING 2,322 2,316 2,311 2,312 2,315
Effect of dilutive securities 29 27 18 9 21
AVERAGE SHARES OUTSTANDING ASSUMING DILUTION 2,351 2,343 2,329 2,321 2,336
* Basic net income per share and diluted net income per share are calculated based on net income attributable
to shareowners of The Coca-Cola Company.
Note 1:
Certain amounts have been revised to conform to the current year presentation.
Note 2:
The financial information included in this section should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements
contained in our Company's 2008 and 2009 Quarterly Reports on Form 10-Q and 2008 Annual Report on Form 10-K.
Condensed Consolidated Statements of Income
(UNAUDITED)
(In millions except per share data)
Three Months Ended Three Months Ended Three Months Ended Three Months Ended Year Ended
March 28, 2008 June 27, 2008 September 26, 2008 December 31, 2008 December 31, 2008
NET OPERATING REVENUES $7,379 $9,046 $8,393 $7,126 $31,944
Cost of goods sold 2,624 3,162 3,020 2,568 11,374
GROSS PROFIT 4,755 5,884 5,373 4,558 20,570
Selling, general and administrative expenses 2,796 3,095 3,139 2,744 11,774
Other operating charges 85 110 47 108 350
OPERATING INCOME 1,874 2,679 2,187 1,706 8,446
Interest income 65 69 105 94 333
Interest expense 117 89 111 121 438
Equity income (loss) — net 137 (843) 272 (440) (874)
Other income (loss) — net - 101 17 (79) 39
INCOME BEFORE INCOME TAXES 1,959 1,917 2,470 1,160 7,506
Income taxes 448 474 555 155 1,632
CONSOLIDATED NET INCOME 1,511 1,443 1,915 1,005 5,874
Less: Net income attributable to noncontrolling interests 11 21 25 10 67
NET INCOME ATTRIBUTABLE TO SHAREOWNERS OF
THE COCA-COLA COMPANY $1,500 $1,422 $1,890 $995 $5,807
BASIC NET INCOME PER SHARE * $0.65 $0.61 $0.82 $0.43 $2.51
DILUTED NET INCOME PER SHARE * $0.64 $0.61 $0.81 $0.43 $2.49
DIVIDENDS PER SHARE $0.38 $0.38 $0.38 $0.38 $1.52
AVERAGE SHARES OUTSTANDING 2,322 2,316 2,311 2,312 2,315
Effect of dilutive securities 29 27 18 9 21
AVERAGE SHARES OUTSTANDING ASSUMING DILUTION 2,351 2,343 2,329 2,321 2,336
* Basic net income per share and diluted net income per share are calculated based on net income attributable
to shareowners of The Coca-Cola Company.
Note 1:
Certain amounts have been revised to conform to the current year presentation.
Note 2:
The financial information included in this section should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements
contained in our Company's 2008 and 2009 Quarterly Reports on Form 10-Q and 2008 Annual Report on Form 10-K.
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