Under the Spotlight: Coca-Cola (KO)
As the biggest non-alcoholic beverage company in the world, Coca-Cola has reached a US$250b valuation. Read into how an unconventional business model can turn a low margin sugary drink supplier into one of the 50 biggest companies in the world.
1.9 billion servings of CocaCola are consumed daily. In a relatively low margin market where volume trumps all else, Coke has found success in just over a century of operation.
Most business models are predictable and make sense on the surface. How Amazon, Tesla and Apple make most of their money is clear and straightforward. You’d think that’s the case with Coca-Cola, but the company has one of the more unique business models.
Yes, Coca-Cola makes money selling soft drinks. No, they do not produce bottles or cans of drink themselves. Coca-Cola largely provides its concentrates and syrups to hundreds of bottling agencies around the world who add water and carbonate the drink before bottling and then onselling. $KO works with 225 bottling partners across 900 plants globally. While the bottling partners may play some role in local marketing campaigns and distribution, once a finished product, Coca-Cola is responsible for getting the cans in consumers’ hands.
These bottlers are usually privately run but Coca-Cola Bottling Co ($KO) and Coca-Cola Europacific Partners ($CCEP) are both listed US companies that solely operate as bottling partners. They carry a US$5b and US$25b valuation respectively.
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Again, deviating from the norm, Coke breaks its revenue down into both geographic regions and investment lines. Most companies break revenue down by their product lines.
Unsurprisingly, a third of their revenue stems from North America. Their next biggest regions in order are EMEA, APAC and Latam. They also report their “bottling investments” and “global ventures” in their quarterly revenue figures. Together, these segments totalled ~$38b in the last year. This figure is growing since 2019, but about 20% below revenue highs seen in 2012. Their best growing business segment was “nutrition, juice, dairy and plant-based” products. This is driven by more health-conscious consumers as well as Coke catering more closely to this market with new product lines.
Coca-Cola also pays a ~2.9% dividend.
All about the red can
Despite having hundreds of products in hundreds of countries, the classic red canned Coca-Cola remains the company’s dominant product. One of the most recognisable brands on earth, Coke’s impact on modern culture stems from the sweet brown drink. In fact, Coke played a huge role in adding an illustration to the modern-day Santa Claus. Previously faceless, 1930s ad campaigns painted Santa as a jovial character with a beard dressed in red. It was the first time an image of Santa had been broadcast to the masses. Coke’s influence lives on.
The consumer is very protective of their headline product too.
In 1985, in the face of declining market share to Pepsi, Coke underwent a taste change.
They decided to change their recipe to include high fructose corn syrup, a product known as New Coke. 79 days into the experiment, New Coke was taken off shelves and Coca-Cola Classic was reinstated. Interestingly, the reverse led to booming Coke sales. By the end of the year, Coke’s sales growth had doubled Pepsi’s after showing their loyalty to the American customer.
As the biggest non-alcoholic beverage company globally, and an iconic brand, success in the beer, wine and spirit market seems somewhat inevitable.
In reality, the biggest markets like beer are probably too well established to enter now. Names like AmBev and Asahi dominate so much of the market that the only successful newcomers are very local, craft beer varieties.
The opportunities lie in emerging alcohols. Seltzer is one such category. For the first time since 1983, Coca-Cola has re-entered the alcohol market in the US with their TopChico seltzer. The beverage has now spread to other markets including Australia.
And for those who are still unsure, it’s true, Coke did indeed include illicit substances many years ago.