The Year that Was: Coca-Cola

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KO: The Coca-Cola Company logo
KO
The Coca-Cola Company

The Coca-Cola Company (NYSE:KO) had, like its fellow compatriot conglomerates, suffered at the hands of the stronger U.S. dollar all through 2015, which wiped out the organic growth seen by the company. This, in addition to the company’s woes related to an already slowing core carbonated soft drinks (CSD) segment.  The U.S. alone forms ~45% of the net sales for the company, and with the CSD segment, which forms over 40% of the country’s non-alcoholic beverage market, estimated to have declined for eleven consecutive years now, organic growth remains hard to come by for Coke in U.S. CSDs. On the other hand, the 5% year-over-year organic sales growth through September was wiped out by the negative 7 percentage points impact of currency translations, considering that the majority of Coca-Cola’s top line comes from international markets, whose local currencies struggled to keep up with the dollar all through 2015.

Q1-Q3 coke pepsi dr pepper

2015 was a transitional year for Coca-Cola. The company is looking to restructure, consolidate some of its operations, and spin-off some others — all in a bid to drive operational efficiencies, reduce supply-chain costs, and improve profitability. And then, there is the Monster deal and the premium milk brand Fairlife, which could add incremental sales going forward. The news of JAB Holding buying Keurig Green Mountain, in which Coca-Cola held a 16% stake, also bailed out the beverage giant, which was nursing an unrealized loss of about $1 billion through its equity position in Keurig. A monster premium on the Keurig share price offered by JAB meant that Coke would come out of this without incurring losses on its investment. Keurig’s stock price has declined by over 30% in the last 52 weeks, despite the massive 70% spike caused by JAB’s offer in early December. Although Coke might have been invested for the long haul, and eventually sales of Keurig and its at-home carbonated machine Keurig Kold may have picked up, the buyout by JAB Holding ensures restoration of Coca-Cola’s investment basis.

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We estimate a $42 stock price for Coca-Cola, which is slightly below the current market price.

See our full analysis for Coca-Cola

 

Going into 2016, the strategy for Coca-Cola is clear. The company will continue to push for efficiency through aggressive productivity, increase media spending and investment in brands with solid growth potential, especially in North America. Coca-Cola is looking to refranchise two-thirds of its bottling territories in North America by the end of 2017, and a substantial portion of the remaining territories no later than 2020, in a bid to move away from the capital intensive and low-margin business of distribution. All this in hopes to improve operating performance. So far, the company has transferred or signed agreements for territories covering over 30% of U.S. bottle can volume, and announced the creation of the National Product Supply System, to strengthen and streamline U.S. production.

In 2010, Coca-Cola acquired the former North America business of Coca-Cola Enterprises, and combined it with the management of the existing Minute Maid and Odwalla juice businesses, North America supply chain operations, and company-owned bottling operations in Philadelphia, Pennsylvania, resulting in a unified bottling and customer service organization called Coca-Cola Refreshments (CCR). And now the company has shifted its strategy again.

Another shift in strategy in North America has been a more emphasized focus on sales of smaller bottles and packs, as opposed to more volume. The push for more volume sales in previous years was incentivized by the company’s financial model of selling beverage concentrates to bottlers. However, volume sales of CSDs have consecutively fallen in the domestic market, as customers have cut down on their consumption of beverages containing high amounts of sugar. Hence, the drive to obtain higher volumes would probably meet with customer resistance. Coca-Cola is now pushing for more sales of its smaller cans and bottles, which have higher prices per unit. The transaction packages (smaller packs) represent about 15% of the company’s U.S. CSD volume, growing by double-digit percentages in Q3.

Incremental marketing is also helping Coca-Cola to boost its top line growth. The company’s investment plans are supported by its plans to save an incremental $1 billion in productivity gains by 2016, and raise that to $2 billion by 2017, and $3 billion by 2019, through system standardization, supply-chain optimization, and industrious resource and cost allocation. The company’s various marketing strategies and product campaigns have resonated with consumers, which is crucial considering that soft drinks are mostly an impulse buy, and what gives a company an edge is more reach, availability, and its social connect with the customer.

Coca-Cola is also investing in brands that could help grow its top line going forward, especially brands in categories such as organic juices, bottled water, ready-to-drink teas, etc, that are growing at the expense of CSDs. The company signed a distribution agreement in the U.S. with Suja, a high growth organic cold-pressed juice company, and has announced plans to expand into plant-based protein drinks through the acquisition of the beverage business of China Green Culiangwang Beverages Holdings in China. So basically, Coca-Cola, being the beverage behemoth it is, is still looking to expand and find ways to grow consumption. 2015 was a transitional year for Coca-Cola, and 2016 might be another year where currency and structural changes impact the earnings. However, with astute strategies in place for specific markets, Coca-Cola’s organic growth is expected to continue to remain solid. The question is whether the stronger U.S. dollar continues to hamper earnings, and if investments made by the company will pay off.

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