Coca Cola’s Next Move To Diversify Its Portfolio

Recently, The Coca-Cola Company (NYSE:KO) announced that its premium iced tea brand “Gold Peak” will launch ready to drink tea lattes and coffees in the first quarter of 2017. As the sales of its carbonated soft drinks decline, Coca Cola is working on the much needed diversification of its beverage portfolio. The ready to drink (RTD) tea and coffee market is witnessing significant growth in the past few years. Experts predict that the RTD tea market will grow at a CAGR of 6% or better until 2018, with tea being the second most highly consumed beverage in the world, after water. We believe as consumer preferences shift to healthier beverage options, it is critical for Coca Cola to reduce revenue dependence on carbonated soft drinks.  Expansion into the RTD tea and coffee market can drive profitability for the company in the long term.

Health Concerns Driving Growth In The RTD Tea And Coffee Market In North America

North America is the fastest growing region for RTD tea and coffee, primarily due to increased health concerns around sweetened carbonated beverages. Other factors driving this growth include rising disposable income, urbanization and the functional nature of these beverages. By expanding into this market, Coca Cola can reduce its dependence on carbonated soft drinks (CSD) and find new engines for growth as the CSD market slows.  Currently, Coca Cola is heavily depended on carbonated soft drinks for its revenues, as these beverages account for more than 65% of its total revenues. We do not expect a significant change in the composition of the company’s revenue over our forecast period. 

However, growth of the carbonated soft drinks market is slowing down and we expect this market to grow from $39.5 billion in 2016 to around $42 billion by the end of our forecast period. Most of this growth is likely to come from emerging markets as soda consumption is declining in the U.S.

According to Beverage Digest, total consumption of soda in the U.S. decreased by 1.2% in 2015, a higher rate of decline compared to the 0.9% figure for 2014.  This trend is likely to continue in future and beverage giants such as Pepsi Co and Coca Cola need to diversify their portfolio for growth. Pepsi is already ahead in this game, with its snack division contributing significantly to its revenues and its focus on healthy beverages.  We believe Coca Cola needs to increase focus on alternative beverages to diversify its portfolio. RTD tea and coffee is a growing market and Coca Cola’s expansion in this space is the right strategy which can drive revenues for the company in the long term.

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