How Has Coca-Cola Turned Around Its Fortunes In Latin America?

Latin America has a vibrant food and beverage industry with a retail value of $90 billion, with The Coca-Cola Company (NYSE:KO) having a 48% value share in the beverage market. However, the company had been facing a challenging time as a result of the macroeconomic weakness in the region. The high levels of inflation, as well as currency depreciation, was forcing the company to continually raise the prices of its products, which consequently, had a negative impact on its growth. Moreover, the softness in the economy prompted the governments to raise taxes, including for the food and beverage industry, which hampered the purchasing power of consumers. Subsequently, Coca-Cola was forced to rethink its business plan in the region, which coupled with stabilizing economies and more business-friendly governments have resulted in an improved performance from the region in 2017. Below we’ll highlight certain factors that will continue to help the company perform strongly in Latin America.

We have a $48 price estimate for Coca-Cola, which is slightly higher than the current market price. The charts have been made using our new, interactive platform.

1. Potential Of The Sparkling Category

There is a $30 billion opportunity for Coca-Cola in the categories it operates in over the 2017 to 2020 period, at a CAGR of 7%. What is more surprising is that the bulk of this growth ($14 billion) is expected from the sparkling beverages market, which is Coca-Cola’s core area. The beverage company holds a value share of more than 50% in the segment, a gain of 3% since 2010.

While soft drink consumption falls in the developed markets, Latin America continues to remain as a bright spot, where the consumption is expected to grow with the modernization of retail channels and stabilizing economies. Moreover, migration to cities and a growing middle class, present opportunities for the improvement of this market, projected to grow at a CAGR of 6% over the next three years. Moreover, given its stronghold of the market, Coca-Cola is in a favorable position to increase prices of its products periodically to compensate for the low volume growth.

2. Large Market For Sports & Energy Drinks

The sports and energy drinks market is currently valued at $4 billion in Latin America, and while there are some countries in the region that have the highest consumption of energy drinks in the world, there are many such places where there is an immense opportunity as the category is highly immature. This market is set to grow with the rising income, growing urbanization, as well as the increasing interest in the functionality of these drinks.

Soft drinks attract a lot of criticism due to their unhealthy nature. Sports drinks, on the other hand, are relatively controversy-free, and therefore, as more consumers show a predilection for healthier products, sports drink consumption is likely to rise. Sports drinks are marketed as thirst quenchers which are substitutes for water, with a further benefit being that these drinks have additional minerals and electrolytes. Apart from being thirst quenchers, sports drinks now target the nutritional need of athletes and consumers who are more physically active. These drinks incorporate ingredients which not only encompass salts and sugars used in traditional sports drinks, but also perfectly balanced carbohydrate-electrolytes which could replace the key components lost by athletes during exercise. In Mexico, Coca-Cola’s sports drink Powerade has gone from strength to strength, and is now the market leader, gaining over 39 value share points in the 2007 to 2016 period.

3. Evolving The Portfolio

In order to adapt to the reduced purchasing power of consumers, as a result of increased taxes, Coca-Cola introduced smaller packs of its products, to increase their affordability. This shift also ensures that products are packaged appropriately to meet the consumer’s needs at a given time and occasion. This also helps consumers in portion control for those who are careful about the amount of sugar they consume, as reducing a pack size enables consumers to better regulate their soft drink and calorie intake. Another benefit of this is that such smaller packages have a higher price per unit, which reduces the pressure on the margins of the company.

4. Reducing Sugar Content

Another step Coca-Cola has taken revolves around the reformulation of their drinks, by reducing the sugar content and introducing beverages such as Coca-Cola Zero/Coca-Cola Zero Sugar. Demand for sugary drinks, especially CSDs and juices, has declined in the last few years due to health concerns. Dietitians and nutritionists are encouraging people to live a healthier lifestyle and consume less calorie-filled drinks. As soft drinks contain high amounts of sugar and calories, consumers are shifting to other beverage categories that have a healthier perception.

Volume sales of Coca-Cola Zero Sugar have grown by double digits globally year-to-date, with the strongest growth in Europe and Latin America, regions where this product is most widely available. While both Coca-Cola Zero and Coca-Cola Zero Sugar are sugar-free and contain the same artificial sweeteners, Coca-Cola Zero Sugar tastes more like the original Coke, and has a similar red packaging, as opposed to the black package designed Coke Zero. The new name is intended to better communicate the zero sugar in the drink to the customers, to remove any ambiguity, as consumers move away from the sugar-loaded drinks and municipalities impose sugar tax on sweetened drinks. The company launched Coke Zero in 2006, but its gains have not made up for the loss in volumes from its other sweetened beverages. Hence, given the fact that this new product tastes like the original, but without the sugar, it may help to attract customers. Much of the growth in Mexico in the last couple of years can be attributed to the popularity of this brand.

See our complete analysis for The Coca-Cola Company

Have more questions on Coca-Cola? See the links below.

• How Is Coca-Cola Turning Around Its Business? (Part 1)
• Soda Tax Repeal: Big Win For Big Soda
• How Coca-Cola Is Focusing On India — Part 1
• Can Topo Chico Be The Next Honest Tea For Coca-Cola?

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