Financial Analysis on Coca-Cola

Financial Analysis on Coca-Cola

By Vincent

Session 1.        Main Street View

1. Company Briefing: The Coca-Cola Company is an American multinational beverage corporation and manufacturer, retailer, and marketer of nonalcoholic beverage concentrates and syrups, which is headquartered in Atlanta, Georgia. The company is best known for its flagship product Coca-Cola, invented in 1886 by pharmacist John Stith Pemberton in Columbus, Georgia. The Coca-Cola formula and brand was bought in 1889 by Asa Griggs Candler (December 30, 1851 – March 12, 1929), who incorporated The Coca-Cola Company in 1892. The company operates a franchised distribution system dating from 1889 where The Coca-Cola Company only produces syrup concentrate which is then sold to various bottlers throughout the world who hold an exclusive territory. Its stock is listed on the NYSE and is part of DJIA;  index; the Russell 1000 Index; and the Russell 1000 Growth Stock Index. As of 2015, its chairman and CEO is Muhtar Kent.

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        HQ: Atlanta, GA, USA

        Website: http://www.coca-colacompany.com/

        Founded: 1886

        Industry: Beverage

        Number of employees: 130,600 (Dec 2013)

1. Mission & Vision: As indicated in the web site of the company:

“OUR MISSION

Our Roadmap starts with our mission, which is enduring. It declares our purpose as a company and serves as the standard against which we weigh our actions and decisions.

• To refresh the world...
• To inspire moments of optimism and happiness...
• To create value and make a difference.

OUR VISION

Our vision serves as the framework for our Roadmap and guides every aspect of our business by describing what we need to accomplish in order to continue achieving sustainable, quality growth.

• People: Be a great place to work where people are inspired to be the best they can be.
• Portfolio: Bring to the world a portfolio of quality beverage brands that anticipate and satisfy people's desires and needs.
• Partners: Nurture a winning network of customers and suppliers, together we create mutual, enduring value.
• Planet: Be a responsible citizen that makes a difference by helping build and support sustainable communities.
• Profit: Maximize long-term return to shareowners while being mindful of our overall responsibilities.
• Productivity: Be a highly effective, lean and fast-moving organization.”

1. Where the firm is. The Coca-Cola Company is the leading beverage company globally. The company is selling beverage products in more than 200 countries. Every day, more than 1.6 billion units of their product is consumed. The flagship “Coke” is roughly 78% of the total sales in volume.

The annual report of 2014 indicating North America generates 46.7% of the total net operating revenue, followed by bottling investment 15.2% and Asia-Pacific 11.4%.

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1. Company Strategic Position. Coca-Cola has been a very successful company based on its core value of “brand marketing”. Over the decades, it has been created a solid stronghold of its iconic brand image, strong distribution network, and economies of scale as the world's leading beverage manufacturer. Even though carbonated soft drink makers will probably continue to face secular volume headwinds in developed markets, given rising health concerns and a growing preference for still beverages such as juice, coffee, and tea, but we expect Coke and its primary competitor, PepsiCo, to remain relatively disciplined on price actions. The barriers to entry this business and directly competing with two well established giants is almost a “mission impossible”. The strength of Coca-Cola is also reflected in the company's sizable bottling and distribution network, premier relationships with major retailers, and strong brand awareness. In addition, Coca-Cola’s noncarbonated portfolio--which includes Powerade, Minute Maid, and Vitaminwater--should enable the company to drive volume gains in a growing end market. The company was also trying to consolidate its portfolio in the market that they are not covering or having strong footprint, such as the attractive juice market in China, though eventually local regulation stopped the transaction but it clearly shows the direction the company is striving for, which is very good strategy and direction. Generally market analysts believes that there are still potential annual growth in beverages at an average 6% clip, and 2% for sparkling drinks.
   
   Coke also enjoys a dominant position in many emerging markets, and its direct-to-store distribution model places it at a competitive advantage to other vendors who rely on third-party distributors. Given its market position, the company is typically able to price higher, on average, than Pepsi in these regions, and this is probably sustainable. The firm's at-home partnership with Keurig Green Mountain could also build upon Coke's brand image and drive similarly premium pricing, though it probably won't be a material cash flow driver in the near term. In all, returns on invested capital have averaged a solid 20% over the past five years, and we expect continued economic profit generation.

Though there are potential risks that carbonated soft drink manufacturers have seen declining volume over the past decade in developed markets like China, as consumers have shifted their preferences toward juice, water, and other noncarbonated beverages due to well spread health issue, both diabetics and safety concern of sweeties. Although the company has enjoyed solid pricing power that has mostly offset these declines, and 2014 saw industry volume again fall less than average price increases (after falling sharply in 2013), a renewed volume decline acceleration is a critical risk. Local regulation could be an uncertainty, such as Mexico recently instituted a tax on sugary drinks that has harmed volume, and similar government actions in other markets could move consumers further away from Coca-Cola's core carbonated beverages. Local government might be stricter on potential M&A, such as Chinese government disapprove Coca-Cola acquiring the largest juice supplier in China, Huiyuan.  Volatility in commodity prices, particularly for raw materials such as corn, juices, aluminum, and plastic resins, could also pinch Coke's sales and profitability. The firm's plans to divest its North American distribution arm, restructure its manufacturing footprint, and streamline its operations also present an execution risk. Finally, there is potential for at-home single-serve to take share from traditional bottles and cans of carbonated beverages; Coke has partnered with Keurig Green Mountain on a potential solution, but continued development in this arena could create volatility in the end market.