How A Diversified Product Mix And Operational Efficiency Could Be Key For Coca Cola’s Valuation

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The Coca-Cola Company

Taking the “fizz” out of some of its drinks could be the key driver for The Coca-Cola Company‘s (NYSE:KO) growth in the future. As consumers shift focus towards non-carbonated beverages, a healthy product mix of bottled water, milk, coffee, and protein drinks, along with its flagship products should provide the company enough avenues for future growth. Improving its profitability by moving away from a low margin and capital intensive business of bottling and distribution, and optimizing the supply chain could be the other key factor which will determine Coca Cola’s cash flows and valuation in the future.

See our full analysis for Coca-Cola

Improving Focus On Other Beverages

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Coca Cola accounts for approximately 42% of the net volumes in the U.S. carbonated soft drinks (CSD) market, and despite this market being saturated, it managed to register a 1% growth in CSD volume in North America in Q2 2015. However, given the trend of U.S. consumers shifting towards healthy beverages (U.S. carbonated soft drinks volume declined by 14% between 2004 and 2014), we believe segments such as bottled water and other non-carbonated drinks will be key to Coca Cola’s growth in the future. According to our estimates, packaged water constitutes nearly 15% of Coca Cola’s valuation and consumption of packaged water is expected to exceed that of CSD globally in 2015. [1]. While this segment registered a growth of 8% in Q2, 2015, we expect Coca Cola to maintain its market share of nearly 5% in this segment. Signs of improved focus on other beverages by Coca Cola were visible when it recently entered into a distribution agreement in the U.S. with Suja, a high growth organic cold-pressed juice company, and announced plans to expand into plant-based protein drinks through the acquisition of the beverage business of China Green Culiangwang Beverages Holdings in China. The company’s deals with Monster and Keurig Green Mountain and entering new beverage segments, such as milk with its Fairlife product, are other ways in which it is aiming to expand in the “healthy” beverages segment. We believe a diversified portfolio of beverages will be a key driver for Coca Cola’s growth.

Operational Efficiency To Improve Profitability

Coca Cola’s restructuring program aims to save an incremental $1 billion in productivity gains by 2016 through system standardization, supply chain optimization, and industrious resource and cost allocation. These savings are estimated to be $3 billion by 2019. The company is also looking to re-franchise two-thirds of its bottling territories in North America by the end of 2017, and most of the remaining territories by 2020. This will improve operational efficiency as the company moves away from the capital intensive business of distribution, which also has very low margins. In August 2015, the company announced the combination of Coca-Cola Enterprises, Coca-Cola Iberian Partners, and the company’s subsidiary Coca-Cola Erfrischungsgetränke AG, into one bottling company called Coca-Cola European Partners. This is aimed at trimming extra overhead costs and improving supply chain efficiency. While the company’s operating margin is higher than PepsiCo., these measures will improve profitability and will be a key driver of its valuation over time.

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Notes:
  1. Global Packaged Water Consumption To Overtake Carbonates In 2015 []