From Colas To Coconuts, Coca-Cola Looks To Uphold Strong Performance

Earlier this week, The Coca-Cola Company (NYSE:KO) completed the acquisition of Zico Beverages, which manufactures pure coconut water. After an initial investment in 2009, the company had purchased a majority stake in Zico in April 2012. With this move, Coca-Cola has solidified its commitment to the fast growing coconut water industry. ^[1]

Coca-Cola is the leader of the beverage industry, with a domestic market share of 42% and 34% in the carbonated soft drinks (CSD) and the overall liquid refreshment beverage (LRB) categories respectively. The company’s flagship brands- Coca-Cola and Diet Coke have long been ranked number one and two in the CSD division, with a combined share of over 25%. While fizzy drinks continue to gain volumes in the developing world, their sales in the U.S. have declined consecutively in the last eight years. Consumers are now opting for healthier alternatives, which is evident as the NCB industry continues to grow.

We estimate a $44 price for Coca-Cola, which is around 10% above the current market price.

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Carbonated Drinks On A Decline

The U.S. is Coca-Cola’s biggest market, representing about 19% of the company’s worldwide volumes in 2012. ^[2] Sparkling beverages have historically dominated customer preference, constituting ~70% of the shipments. However, in the last few years, this segment has been slipping slightly. In 2012, the U.S. CSD market declined by 1.2% year-on-year in terms of volume. The figure has further decreased by 2% in the nine months ending September this year.

The reason is simple, consumers, especially in the developed markets, have become calorie sensitive and health conscious. Thorough studies have elaborated on the ill-effects of consumption of carbonated soft drinks, these calorie-fueled soft drinks have also been targeted for causing obesity.

Sales of low or no-calorie CSDs such as Diet Coke and Coke Zero have also decreased due to serious concerns over the usage of sugar alternatives such as “aspartame”. Recent studies have argued that this artificial sweetener can cause serious health problems along with sugar cravings, dehydration and even weight gain. ^[3]

Coconut Water Sales Surge

Every year since 2004, the coconut water market has roughly doubled, reaching domestic sales of over $400 million in 2011. The number of product introductions in this segment has grown five-fold in the last five years. ^[4] At present, Vita Coco is the leader in the coconut water industry. The company had sales of nearly $100 million in 2011, boosted by its distribution agreement with Dr. Pepper Snapple in 2010. Pepsi has invested in the coconut water brand, “O.N.E.”, which ranks behind Vita Coco and Zico in the U.S.

Following the soda debacle, studies have even raised concerns over the unhealthy amount of sugar intake associated with juices and smoothies in the LRB division. Amid the health concerns, coconut water seems to provide a healthier natural solution. After collaborating with Coca-Cola, Zico’s reach is now nation-wide, increasing from six markets in 2009. The company’s year-to-date volume growth continues to outperform its category, with sales increasing five-fold in 2011.

Coca-Cola aims to leverage its strong distribution network and marketing capabilities to establish its foothold in this budding market. The coconut water industry presently represents less than 1% of the U.S. beverage market. However, with cola sales expected to remain flat for the next few years and health concerns driving beverage preferences, coconut water could provide the required growth opportunities to Coca-Cola and its competitors.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. “Zico beverages joins the coca-cola family“, November 22, 2013, coca-colacompany.com [↩]
2. Coca-Cola Company 10-K [↩]
3. “Intake of sugar-sweetened beverages and weight gain“, National Institute of Health, United States [↩]
4. “Beverage wars move to coconuts“, February 11, 2012, wsj.com [↩]