The Coca-Cola Co (NYSE:KO) has enormous reach with its global footprint spanning more than 200 countries. Coca-Cola’s carbonated beverages are the most prominent source of value for the company. Soft Drink sales made up for more than 60% of the company’s total revenues in 2011, and accounts for just over 60% of our $39 price estimate for Coca-Cola.
Two key trends affecting the carbonated soft drinks (CSDs) business are rising health concerns and international expansion. With so much at stake for Coca-Cola in CSDs, we provide a quick summary of our views on these trends.
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Key Trends in CSDs
1. Increasing Health Concerns Hurting Demand: Increasing awareness of health-related issues due to consumption of CSDs, and intensifying pressure from health advocacy groups, is leading to a decline in overall CSD sales in developed markets of North America and Western Europe. The market has been steadily shrinking for the last few years, and we expect the trend to continue in the future.
As a result of this trend, competition is heating up in developed markets. With fewer dollars available, cola companies are using different strategies to grab the bigger chunk of the market. Coca-Cola is following a two-fold strategy in this respect:
a. Increased Marketing Spend: Coca-Cola is vying with close competitors PepsiCo (NYSE:PEP) and Dr Pepper Snapple for the consumer’s attention, in a fierce and long established marketing battle called the cola wars. Coca-Cola upped its marketing spend by as much as 10% in 2011. In response to this, competitors are also stepping up when it comes to advertising.
b. Focus On Healthier Variants Of CSDs: Since health concerns are the primary reason for declining consumption in western markets, Coca-Cola is making a focused effort at developing and promoting low-calorie variants for its most famous flagship drinks. The company’s efforts certainly seem to be succeeding, particularly with regards to Diet Coke. In 2011, Diet Coke became the second largest selling CSD in the U.S., behind traditional Coca-Cola, and ahead of Pepsi. Coca-Cola is also experimenting with new sweeteners that it believes will add health value to its drinks. The company is rolling out products flavored with stevia, a natural low-calorie sweetener, in both the United States as well as Europe.
We believe the company’s efforts will help to at least maintain its existing share in developed markets.
2. Strong Growth In Demand In Emerging Economies: The company’s real prospects right now lie in emerging economies, where higher disposable income are leading to a strong surge in demand for CSDs. Regions such as China, India, as well as Latin American countries such as Brazil and Chile, are expected to be the key growth drivers for CSDs in the next few years. The per capita consumption of CSDs in these markets is still a fraction of what they are in developed economies, and therefore represent a huge opportunity for Coca-Cola.
Coca-Cola is already well established in key geographic areas of China and Latin America, where it is the largest selling CSD. The company’s strong foothold in these markets, positions it perfectly for leveraging market level growth in these economies.
The company is also focusing on scaling up operations in emerging economies through wider collaborations with bottlers. Coca-cola bottlers are making huge investments in increasing manufacturing capacity, while the Coca-cola company is steadily increasing its marketing and advertising focus.
We expect Coca-Cola to witness steady growth in emerging economies in the future.
We’ll cover Coca-Cola’s non-carbonated beverage division in another article.
We estimate a $39 price for Coca-Cola, which is 7% above the current market price.