Coke is it – “it” being the world’s number one soft-drinks company. Founded in 1886, the Coca-Cola Company owns four of the top five soft-drink brands (Coca-Cola, Diet Coke, Fanta, and Sprite). Its other brands include Barq’s, Minute Maid (the world’s leading marketer of premium fruit juices and juice drinks), POWERade, and Dasani water. In North America, it sells Groupe Danone’s Evian. Outside of Australia, Europe and North America Coca-Cola sells Crush, Dr Pepper and Schweppes. The company makes or licenses more than 400 drink products in more than 200 nations. Coca-Cola does no bottling itself; however, it owns 35% of Coca-Cola Enterprises (the number one Coke bottler in the world); 32% of Mexico’s bottler Coca-Cola FEMSA; and 23% of the large European bottler, Coca-Cola Hellenic Bottling (Murrey, 2006a).
According to the Coca-Cola Annual Report (2004), it had the most soft drink sales totaling $22 billion.
On the surface it seems Coke can do no wrong. This is, however, not the case. Firstly, there is the incredibly strong competitive market. Barbara Murray explains (Hoover, 2006) that for years the soft drink industry has been a major competitive battle between the two soft drink giants Coke and PepsiCo (which had soft-drink product sales of $18 billion including Pepsi, Mountain Dew and Slice (Murray, 2006b) – Please see Table C in Appendix II). More recently the market has been influenced by newer players who are bringing more innovative products to market. Examples of this are bottled water, sports drinks, health drinks, coffee, and tea. Bottled water, sports and health drinks are increasingly popular with the global trend to be a more health conscious consumer.
Secondly, Coca-Cola is the oldest brand. Historically it was the market leader in brand image, but the younger generations have always had a tendency to rebel against the old way of doing things and living. PepsiCo turned the heat on with the “Pepsi generation” campaign. In 1964, the idea found wings with a classic, “Come alive, you are in the Pepsi generation.” Pepsi’s new strategy was to position not itself but the competition, “out of step, out of touch, and out of date.” This advertising and branding technique was the progressive trend throughout the 1980’s and 1990’s. During this time Coca-Cola was fairly quiet on the advertising campaign front.
According to an article by David Teather (Guardian, 2004) shares in the Coca-Cola Company fell to $40.66 in November 2004. Coca-Cola shares were worth nearly $70 five years ago. In the same time frame, PepsiCo shares have risen steadily from the low $30s to $51.53 in November 2004.
Judging from this PepsiCo has recently been more adept at managing consumer trends. It also has the number one bottled water brand in the US; Aquafina and the top energy drink; Gatorade.
However, Coca-Cola has hit back in the previous two years. After hiring a new CEO in May 2004; Mr. Neville Isdell, the company soon cut profit growth targets for 2006 and beyond to 6% from a previous range of 8% and 10%. In a lengthy presentation to investors in New York, Isdell tried to explain the company’s problems and offered possible solutions. He admitted that there are “no quick fixes” and that Coca-Cola had under-performed since 1997 (Teather, 2004).
At the same time Coca-Cola made clear its plans to increase its global marketing and advertising budget and to target new rapidly emerging markets, such as China and India.
The company has also admitted that they had been slow in responding to changing consumer trends. They have been especially slow in pursuing the markets of bottled water, fruit juice, energy drinks and other non-fizzy drinks that health-conscious consumers are demanding. During the late 1990’s Coca-Cola missed the emerging consumer trend in health and wellness (Isdell, 2004).
Based on the most recent financial evidence (Morning Star, 2007) Coca-Cola is indeed fighting back, however, whether it has in place all the strategies required to sustain its long-term growth needs further investigation.
The Internal Analysis section below looks more deeply into Coca-Cola’s strengths and weaknesses, competitive advantages and disadvantages over its competitors and analyzes its financial statements in a little more detail.
Internal Analysis
Coca-Cola Financial Statements
According the latest figures by the Morning Star (2007), Coca-Cola’s performance has been one of the worst over the last 5 years in the beverage manufacturing industry (Please see Exhibit A in Appendix II).
It can be seen from Exhibit A, Table A & Table B (in Appendix II) that Coca-Cola is now slowly regaining its performance after a long weak spell, but the potential for growth is still somewhat uncertain.
Most stocks in the beverage manufacturing industry have seen steadily growing revenue and earnings over the past three years. Coca-Cola has also seen steady revenue growth over the past three years. Like its competitors, this stock’s earnings per share have grown steadily over the past three years as well. A point to note, however, is that this stock’s sustainable growth rate is quite a bit higher than the rate at which its earnings per share have grown. That means that the company is generating enough capital internally to finance future growth (assuming that the pace of growth doesn’t pick up markedly) without raising additional capital from outside sources (Morning Star, 2007).
The trends in earnings estimates for Coca-Cola are very consistent too (Morning Star, 2007). Thus, Analyst expectations for Coca Cola’s earnings have been fairly stable.
Coca-Cola also has a low dividend yield, which is typical of stocks in the soft drink industry. Low dividend yields are typically associated with young companies or companies with considerable growth opportunities. Sometimes even mature companies opt to buy back stock rather than pay dividends, though, because that is more tax-efficient for shareholders. Coca-Cola’s stock’s dividend has risen dramatically over the past five years. This is usually a positive sign for future growth (Morning Star, 2007)
Competitor Financials (PepsiCo)
PepsiCo Beverages North America markets and sells beverages and beverage concentrates, which accounted for 27% of 2006 revenue, under brand names including Pepsi-Cola, Mountain Dew, and Gatorade. Frito Lay North America, 31% of sales, manufactures salty snack brands including Lay’s, Ruffles, and Doritos. PepsiCo International, 37% of sales, manufactures and sells the company’s products outside of North America. Quaker, 5% of sales, produces oatmeal and branded grain products. (Morning Star 2007 P).
PepsiCo is the better company right now, hitting on all cylinders and increasing profits at a nice, consistent pace. Over the years, PepsiCo management has deftly executed a strategy to diversify away from soft drinks. This, along with an exit from the restaurant business, has resulted in higher profits, lower leverage, and great stock performance. (Based on figures from: Morning Star 2007 P).
No doubt, Coca-Cola has a big lead on PepsiCo internationally. Coke’s international revenue was $14.3 billion in 2003; PepsiCo’s was a comparatively low $8.6 billion. (Morning Star 2007 P)
While Pepsi and Mountain Dew are important,it is Lay’s, Doritos, Cheetos, and their equivalent brands abroad that will drive the majority of PepsiCo’s growth. Indeed, Frito-Lay is the key to the company’s future.
Expanding snack distribution at PepsiCo could also eventually provide a means of entry for beverages. In many Coke-dominated regions, the strength of PepsiCo’s carbonated and noncarbonated portfolio – especially Gatorade – could provide stiff competition to Coke once
Frito-Lay gets its foot in the door.
While Frito-Lay is the best salty snack business in the world, Pepsi’s global beverage business is a lot weaker when compared with Coke’s. Frito-Lay may indeed have great long-term prospects internationally, but much of its energy and marketing dollars will be devoted to changing local consumer taste to crave salty snacks – a difficult and costly exercise. Coke, on the other hand, has an easier job ahead of it: In many cases, Coke just needs to meet pent-up demand for its beverages.
Looking at the most recent figures (Morning Star 2007) Coca-Cola is on a somewhat more upward trend than where it was about a decade ago. However, facing such immense competition and new product innovations, along with socio-cultural factors (such as the increase in healthy food and drink consumption and consumer trends and preferences) it is difficult to analyze Coca-Cola on its financial performance alone.
Strengths & Weaknesses
By far one of Coca-Cola’s largest historical strengths has been their strong brand and advertising campaigns. In 1998, Coca-Cola had the most recognized trademark in the world (Ivester – former CEO, Coca Cola). The catchy advertising slogans they roll out every few years consistently become a household commonality. When the average American hears the phrase “it’s the real thing” they automatically think Coca-Cola. Also during the Christmas season their clever ads with the polar bears needn’t even be identified specifically as a Coca-Cola commercial in order for the viewer to recognize the product. Consumers also have strong brand loyalty in the soft drinks industry and consistent Coke drinkers will rarely change to Pepsi or other similar alternatives. This is especially true of older generations.
However, branding and advertising alone doesn’t make a company product. Production also plays a large part in Coca-Cola’s strategy. Their product is produced by ten bottling companies. All ten of these subsidiaries are publicly traded independently of Coca-Cola. The company also licenses local bottlers to produce their product; they utilize this method in order to maintain their public image as local company in contrast with their global reality (www.cocacola.com). The bottling companies are locally owned and operated by independent businesses that are authorized to sell products of the Coca-Cola Company. Since Coca-Cola does not have outright ownership of its bottling network, its main source of revenue is the sale of concentrate to its bottlers (Bettman, et. al, 1998). This gives Coca-Cola a great competitive advantage over its main rivals and the manufacturing and distribution system is the envy of everybody in the industry (Isdell, 2004). It also allows them to conduct business on a global scale while at the same time maintaining a local approach.
Currently the company is also financially sound, with a strong balance sheet (Morning Star, 2007). And, with the cash flows that they have, Coca-Cola is very well positioned to do what they need to do. This brings us to one weakness, however; Coca-Cola lost their growth engine at the beginning of the 21st Century. This was as a result of a certain amount of Company apathy in the last decade, depending solely on brand image and past strong financial performance for sales. They need to turn that back on.
Coca-Cola have also been affected by the layoffs that have taken place in two different batches; mainly, though not only, at the Head Quarters in Atlanta, US. “That really has broken the trust that existed within the organization” (Isdell, 2004). Several op Management shake-ups in the late 1990’s helped to aggravate this. Having said Coca-Cola do have a recent strong Management team (Isdell, 2004), which is core to the businesses smooth running of its operations. The company also has very strong values. They are also dedicated to providing clear direction and clear accountability in the day-to-day running of the business (Isdell, 2004).
The company also now realizes that they missed the consumer trend in health and wellness opportunities. In an interview with David Teather (Teather, 2004) Neville Isdell (CEO) admitted the company had been flat-footed in failing to respond to changing consumer trends. He said the firm had been especially slow in pushing into the bottled water, fruit juice and other non-fizzy drinks that health-conscious consumers were demanding. “The emerging consumer trend in health and wellness were missed,” Isdell said. Coca-Cola does produce POWERade but it is the weaker rival of PepsiCo’s Gatorade. The same is true of Coca-Cola’s Dasani water brand and PepsiCo’s Aquafina.
This leads me to Coca-Cola’s lack of diversification. Does Coke need a new beverage brand or snack to diversify their market? We have already looked at PepsiCo’s success story with Frito Lay. 1. There are several potential advantages of diversification:
Economies of scope (costs decrease, or willingness-to-pay increases, as two businesses come together in a single firm).
The ability of the firm to act as an internal capital market (managers being able to allocate capital among multiple businesses more effectively than the external capital markets could do so).
The ability of the firm to act as an internal labor market (managers being able to attract management talent and then allocate that talent effectively among the businesses more effectively than external labor markets could do so).
Superior management skills/systems (the ability of the corporate office to operate the businesses more effectively than could be operated as independent companies, through systems that enable them to effectively discipline business unit management, transfer of knowledge among the businesses, etc.).
However, Coca-Cola must also consider the costs associated with diversification. You cannot only assess the benefits. There are transaction and agency costs associated with intrafirm organization (as opposed to contracts and markets). Those costs must be weighed against the benefits of diversification.
Other current weaknesses are that some regional markets are performing to below expectation (Far East and South East Asia in particular). However, Coca-Cola has revealed its plans to increase its global marketing and advertising budget and to target new rapidly emerging markets, such as China and India.
A serious problem is the one of health issues, such as Coke’s effects on teeth and that its high sugar content can cause health problems. Being addicted to Coca-Cola due to its caffeine content also is a major issue, which is likely to have a negative effect on the body after several years.
Coca-Cola has also had a few Public Relations disasters in last decade:
1) The Dasani water brand launch in Britain. First consumers were shocked when the press realized it was just distilled tap water. A health scare then forced the company to pull the product from shelves.
2) In Belgium, after an incident where a bottler used the wrong type of carbon dioxide to bottle the product all Coca-Cola was removed from the shelves pursuant of a government ban enacted by the Belgian Minister of Health. The carbon dioxide that was used was mixed with a fungicide and was meant to treat wooden pallets against mildew. A hundred or so people were rendered sick by this mistake, mostly small children. Subsequently the product was also removed from the shelves in the Netherlands, and France.
In addition to the above strengths and weaknesses Coca-Cola needs to closely monitor its internal business environment. The internal business environment and its influences are to some extent within the Company’s control. The main attributes in the internal environment include efficiency in the production process, through management skills and effective communication channels. To effectively control and monitor the internal business environment, Coca-Cola must conduct continual appraisals of the business’s operations and readily act upon any factors, which cause inefficiencies in any phase of the production and consumer process.
For further analysis of Coca-Cola’s strengths and weaknesses please refer to the SWOT Analysis in Appendix II (Exhibit B).
APPENDIX I – Cited references
· Bettman, J. R. / Luce, M. F. / Payne, J. W. (1998): Constructive Consumer Choice Processes, Journal of Consumer Research, 25.
· Isdell, N (October 2004), Interview retrieved April 11 2007 from http://www.beverage-digest.com/editorial/041008.php
· Morning Star (2007). KO: Coca Cola Stock Report / Data Interpreter. Retrieved April 11 2007 from http://quicktake.morningstar.com/stocknet/Diagnostics.aspx?Country=USA&Symbol=KO&stocktab=interpret
· Morning Star (2007 P) PEP: PepsiCo Stock Report / Snapshot. Retrieved April 19 2007 from: http://quicktake.morningstar.com/stocknet/Snapshot.aspx?Country=USA&Symbol=PEP&stocktab=snapshot
· Murray, Barbara. (2006a). The Coca-Cola Company. Hoovers. Retrieved April 11, 2007 from http://premium.hoovers.com/subscribe/co/factsheet.xhtml?ID=10359
· Murray, Barbara. (2006b). Pepsi Co. Hoovers. Retrieved April 11, 2007, from http://premium.hoovers.com/subscribe/co/profile.xhtml?ID=11166
· Teather, David (2004). Coca Cola reduces its profit targets. The Guardian, November 12 2004. Retrieved April 11 from: http://www.indiaresource.org/news/2004/1053.html
· The Coca-Cola Company. (2004). Annual Report. Retrieved April 11, 2007 from http://www.cocacola.com
APPENDIX II – Tables & Charts
Exhibit A & Table A: Coca Cola Performance growth ($10,000)
(Morning Star, 13 April, 2007)
Total Return%
2004
2005
2006
YTD
Coca-Cola Stock (Red)
-16.1
-0.7
23.1
4.1
+/- Industry (Orange)
-14.3
-9
4
1
+/- S&P 500 (Green)
-25.1
-3.7
9.5
1.7
Table B: Coca Cola Percentage Trailing Returns ($10,000)
(Morning Star, 13 April, 2007)
Trailing Returns %
(Morning Star, 13 April, 2007)
3 year
5 year
10 year *
Stock
1.3
0.4
0.2
% Rank in Industry
75
83
93
Industry Average
5.5
3.8
4
S&P 500
8.8
5.5
6.5
*10yr data is most recent month end.
Table C – Sales Statistics of Coca-Cola.
Coca Cola 2004 Sales
$ Mil.
% of total
Europe/Eurasia/Middle East
7,195
33
North America
6,643
30
Asia
4,691
21
Latin America
2,123
10
Africa
1,067
5
Corporate
243
1
Total
21,962
100
Source: Murray, Barbara. (2006a) the Coca-Cola Company. Hoovers. Retrieved April 11, 2007, from
http://premium.hoovers.com/subscribe/co/factsheet.xhtml?ID=10359)
Table D – Sales Statistics of PepsiCo.
Pepsi Co. 2004 Sales
$ Mil.
% of total
US
18,329
63
Mexico
2,724
9
UK
1,692
6
Canada
1,309
4
Other countries
5,207
18
Total
29,261
100
Source: Murray, Barbara. (2006b). Pepsi Co. Hoovers. Retrieved April 11, 2007, from http://premium.hoovers.com/subscribe/co/profile.xhtml?ID=11166
Exhibit B – Coca-Cola SWOT Analysis
STRENGTHS
Founded in 1886, the Coca-Cola brand is well known and its image has been part of American culture for more than a century.
The brand is also very well recognized world-wide.
Strong brand loyalty – consistent Coca-Cola drinkers will rarely change to Pepsi or alternatives.
Coca-Cola’s bottling system (through economic alliances) is one of their greatest strengths. It allows them to conduct business on a global scale while at the same time maintaining a local approach.
Recent strong Management team (Isdell, 2004), which is core to the businesses smooth running of its operations.
The company has very strong values. They are also dedicated to providing clear direction and clear accountability in the day-to-day running of the business (Isdell, 2004).
Currently the company is financially sound (cash rich with little debt).
WEAKNESSES
Currently some regional markets are performing to below expectation (Far East and South East Asia in particular).
Certain amount of Company apathy in the last decade, depending on solely on brand image and past strong financial performance for sales.
The company now realizes that they missed the consumer trend in health and wellness opportunities. (Isdell, 2004).
Lack of diversification.
This in turn led to Coca-Cola losing the strength of its growth engine at the beginning of the 21st century.
Internally, lay-offs at the beginning of this century were the cause of some loss of trust in the Company by employees (Isdell, 2004).
Several Top Management shake-ups in the late 1990’s help to aggravate this.
Health issues – effects on teeth and the high sugar content can cause health problems. Being addicted to Coca-Cola due to its caffeine content also is a major issue, which is likely to have a negative effect on the body after several years.
A few Public Relations disasters in last decade.
OPPORTUNITIES
The Coca-Cola brand recognition remains one of its core strengths in the soft drinks industry and many people are very loyal to it.
Coca-Cola’s bottling system also allows the Company to take advantage of infinite growth opportunities around the world. This strategy gives Coca-Cola the opportunity to service a large geographic, diverse, area.
Some large regions are not fully optimized, for example; India and China so there is a lot of potential for growth here.
THREATS
The competition!! PepsiCo are constantly trying to out do Coca-Cola, whether it is through advertising or introducing new products. Please refer to Table D & E in Appendix II for a competitor comparison with regard to sales by region in 2004 (Murray, 2006).
The threat of substitutes, such as tea, coffee, juices, milk, and hot chocolate is growing as consumers are becoming more demanding in product diversity.
Consumers can easily switch to other beverages with little cost or consequence. This buying power of consumers is a constant danger to the company and industry.
Health issues (see weaknesses) – this may cause consumers to switch to alternatives or to stop buying Coca-Cola.
