Understanding Coca-Cola’s Business Model And Performance Across Key Operating Markets

by Trefis Team
Coca Cola
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Coca-Cola (NYSE: KO) is one of the largest beverage companies with a diversified geographic presence.

A] Business Model

1) What Does It Offer?

  • Coca-Cola Revenues (How Does Coca-Cola Make Money) are generated by the sale of a variety of beverages such as sparkling soft drinks; water, enhanced water and sports drinks; juice, dairy and plant-based beverages; tea and coffee; and energy drinks.
  • Its brands include Coca-Cola, Diet Coke/Coca-Cola Light, Coca-Cola Zero Sugar, Fanta, Sprite, Minute Maid, Powerade, Dasani, Simply, Gold Peak, and Glacéau Smartwater.
  • Additionally, Coca-Cola also acquired Costa Coffee in January 2019, with plans to leverage its coffee platform.

2) Who Pays?

  • Normally, the company sells the concentrate to its bottlers who then sell it to retail customers by adding water and the fizz.
  • All soft drink customers in all the geographies that the company functions in, are potential end buyers.

3) What Are The Alternatives

  • Within the industry, the main competition comes from PepsiCo, Dr Pepper Snapple, and Nestle, among others.
  • Increasingly, as with most other soft drinks, these products also have to compete with fruit juices, energy drinks, and other healthier drinks. Some of these non-carbonated drinks are serious competitors and command impressive market shares within their market segments, with Red Bull, being a prime example.

4) Historical Revenue Trend

  • Coca-Cola revenues have declined over the last three years, mainly due to loss of revenue from extensive refranchising (sale or conversion of company-owned stores to existing or new franchisees) of its bottling operations.
  • However, with most of the refranchising already done, total revenue is expected to increase in 2019 and 2020, led by higher demand for energy and sports drinks across geographies, along with benefits from major acquisitions.

You can view the Trefis interactive dashboard – Coca-Cola Revenues: How Does Coca-Cola Make Money? – to understand the revenue sources of the company and alter the assumptions to arrive at your own revenue projections for Coca-Cola. In addition, here is more Consumer Staples data.

B] Performance In Key Operating Markets

1) EMEA (Europe, Middle-East and Africa)

  • Segment revenue has continuously increased from 2016 to 2018 and we expect this trend to continue going forward.
  • Higher revenue is primarily to be driven by volume growth, led by sparkling soft drinks and Fuze Tea, coupled with strong pricing in a majority of the key markets.

2) Latin America

  • After increasing in 2017, revenue remained almost flat in 2018 due to volume decline in Argentina and Mexico.
  • Going forward, we expect revenue to increase due to strong performance in the non-carbonated drinks category, along with energy and sports drinks, partially offset by currency headwinds.

3) North America

  • Revenues have maintained an increasing trend till 2018 and are expected to grow further over the next two years led by the impact of new package initiatives executed in the market, and strong pricing mix within the sparkling soft drink portfolio.

4) Asia-Pacific

  • Segment revenue growth is expected to be driven by a healthy increase in volume sold, partially offset by subdued pricing.
  • Demand is likely to be driven primarily by China and other emerging market economies.

5) Bottling Investments

  • This consists primarily of its Company-owned or controlled bottling operations, sales and distribution operations of finished products.
  • Bottling investment revenue has seen a sharp decline over recent years due to refranchising of the company’s bottling operations.
  • However, with most of the refranchising already done, segment revenue is expected to decline at a much lower rate.

6) Global Ventures

  • This is a new addition to the company’s operating segments following the acquisition of Costa in January 2019, with plans to leverage its coffee platform.
  • With 2019 being the first full year of the segment’s operations, revenue is expected to be high in the next two years.

C] Revenue Outlook

  • For the full year, revenue is expected to increase by 9.3% from $31.9 billion in 2018 to $34.8 billion in 2019, and further by 4.7% to $36.5 billion in 2020.
  • Higher revenue is likely to be driven by growth across almost all major segments, offset by slightly lower revenue from the bottling business.
  • Revenue growth would also be driven by inorganic growth strategies of Coca-Cola, with the company announcing several key acquisitions in 2018, including Costa Limited (completed in Q1 2019) and a strategic partnership with BODYARMOR. Additionally, it also announced the acquisition of full ownership in Chi Ltd, which is a fast-growing leader in expanding beverage categories, including juices, value-added dairy, and iced tea in Nigeria.

According to Coca-Cola Valuation by Trefis, we have a price estimate of $52 per share for KO’s stock.


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