How Coca Cola Is Continuing Its Portfolio Diversification Strategy

The Coca-Cola Company (NYSE:KO)   announced recently that it had entered into a binding agreement to acquire initial minority equity shareholding in Chi Ltd. a Nigeria based leading dairy and juice company, creating a strategic relationship between the two companies. ^[1] While Coca Cola has made an initial 40 percent equity investment in Chi Ltd., it intends to increase its ownership to 100 percent within the next three years, subject to regulatory approval. With this investment Coca Cola is well poised to expand its regional footprint in Africa as well as its product portfolio. Chi Ltd. has a leading position in the value added dairy and juice products market in Nigeria and Coca Cola will get the advantage of establishing  itself in this market through a prominent player in the region. We believe product diversification and international expansion are two key drivers of growth for Coca Cola and this strategic investment should act a catalyst in future growth.

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Chi Ltd. was the leader in the Nigerian juice industry in 2014, with a  48% off-trade volume share. ^[2] Taking advantage of the ban on imported juices in the country, the company was able to create a strong image for its brand. We believe Coca Cola should be able to leverage this brand popularity to strengthen its position in the region. Surely the company’s own brand image as a global soft drink leader will help.  The juice market in Nigeria is expected to grow at a CAGR of 9% between 2014 and 2019 on the back of the growing population and urbanization in the country. ^[2]
As growth in the carbonated soft drinks market slows and consumer’s preference shifts towards healthier beverages, Coca Cola is diversifying its portfolio to establish a strong presence in other beverages. The company recently launched its flavored milk brand Vio in India to tap into the dairy segment of the country where milk is the most popular drink. ^[3] While the company’s soft drink segment accounts for more than 25% of its valuation in our estimation, we believe in the long term a diversified portfolio which includes healthy beverages will be key for the company’s growth.  Coca cola is investing heavily in Africa to capture growth in the region and in 2014; it announced an investment of $ 17 billion from 2010 to 2020, which is three times the amount invested in the previous decade. The investment will primarily fund new manufacturing lines, distribution capabilities and cold drink equipment. ^[1] The Eurasia and Africa segment accounted for only 5% of Coca Cola’s net revenues in Q3 2015, though we believe it is headed higher.  By investing in the region and making strategic acquisitions, the company is targeting long term growth avenues to offset the saturated and slowing carbonated soft drinks market in the U.S.

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1. The Coca Cola Company and TGI Group Announce Strategic  Investment In Nigeria’s Chi Limited, Company Press Release, January 30, 2016 [↩] [↩]
2. Juice In Nigeria, EuroMonitor International, May 2015 [↩] [↩]
3. Coca Cola Sees Indian Milk Potential, WARC, January 27, 2016 [↩]