Why China Is Coca-Cola’s Key To Growth (Part 1)

The Coca-Cola Company (NYSE:KO) opened its 43rd bottling plant in China last month, as part of a larger $4 billion investment plan for 2012-14 in the country. The company had previously invested $3 billion for 2009-11 in the country, and has surely upped the ante by announcing a further $4 billion investment plan for 2015-17. ^[1] Coca-Cola has signaled its intention to make China its biggest market soon, and thus we take a look at the growth opportunities for the beverage giant in this country.

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

See our full analysis for Coca-Cola

Beverage Market In China Has Great Growth Potential

China has overtaken the U.S. to become the largest beverage industry in the world, with 67.5 billion liters of annual consumption last year. The Chinese beverage market is also expected to grow by 40% over the next five years. ^[2] The most populous nation has a relatively low per capita consumption of beverages, compared to the global average. The figure for bottled water consumption stands at ~30 liters per person, which is almost one-fifth of the per capita consumption is the U.S. ^[3] Therefore, China presents a solid opportunity for growth of the bottled water segment and thus the overall beverage industry, which is strengthened by the increasing incomes of the consumers.

Coca-Cola’s Strong Performance In China So Far

China is the third largest market for Coca-Cola by shipment, with around 12 billion liters shipped in 2012. In the last few years, Coca-Cola has posted strong numbers in China, mainly due to the best selling Minute Maid in the fruit/vegetable juice category. In 2011, the company’s volumes jumped by 13% year-on-year, and by a further 4% in 2012. Despite the recent economic slowdown in the country, Coca-Cola’s volume has grown by 4%, in the nine months ending September this year. ^[4]

Bottled Water Is A Fast Growing Industry

Packaged drinking water has garnered sizable sales in China over the last few years. This market, worth $9 billion in 2012, is expected to balloon to $16 billion by 2017. In this scenario, bottled water will also overtake the traditionally well-performing carbonated soft drinks (CSD), which generated more than $11 billion in revenues in 2012. In fact, through September this year, the packaged water sales have exceeded those of carbonated drinks. ^[5]

In the U.S., bottled water sales have been declining due to the environmental threat posed by the usage of plastic. In contrast, bottled water continues to rise in China, where tap water is unsuitable for drinking. About 70% of China’s rivers and lakes are contaminated by industrial effluents, and much of the treated water gets polluted again en route to homes. Due to the growing health awareness, a majority of the population is shifting to packaged drinking water to satisfy their daily needs. Hygiene concerns, along with increasing population and rising disposable incomes are reasons why we expect the bottled water industry to surge in China in the coming years.

Coca-Cola Looks To Benefit From This Rise

Coca-Cola’s Ice Dew mustered a market share of 7% in the bottled water industry in 2012. However, the Hanqzhou Wahaha Group leads this market in China, with a 13% volume share last year. This local company has benefited from its strong distribution networks, particularly in the second and third-tier cities. Coca-Cola also faces stiff competition from other renowned local brands such as Kangshifu (Tingyi Holding Corp.) and Nongfushanquan. ((“Bottled water in China“, April 2013, euromonitor.com))

What works for Coca-Cola is its global brand appeal and increasing production in China. With heavy investments lined up in the next few years, Coca-Cola will look to penetrate deeper into the country and thus further expand its consumer base. As the company is well positioned in China, an overall growth in the bottled water market should boost its volumes.

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

1. “Coca-cola to invest more than $4 billion in China from 2015-17“, November 7, 2013, businessweek.com [↩]
2. “Soft drinks in China“, April 2013, euromonitor.com [↩]
3. “Bottled water market quickly turning chinese“, August 2013, forbes.com [↩]
4. Coca-cola company, 10-q [↩]
5. “Beverage output increases 7 times in 12 years“, December 2012, chinadaily.com [↩]