BitsBusiness

Understanding the Business : 

• Prominence : Coke is the world’s largest  beverage company
• Location : The top five brands of Coke are sold in more than 200 countries with largest beverage distribution network in the world
• Form : Coke has Company-owned or -controlled bottling and distribution operations as well as independent bottling partners, distributors, wholesalers and retailers. However company charges independent bottlers for the syrup and engages in product marketing
• Product : Sparkling & Still beverages
• Industry : FMCG ( Fast Moving Consumer Goods )
• Customers : Anyone age 5 and up
• Product Distribution : (1) Super Markets / Retailers (many types)  (2) Fast Food Chains / Restaurants – Fountains (3) Vending machines in various locations (ex: Offices, Schools, Public properties like parks etc)
• Growth : In the past few years Coke’s growth in U.S is stagnating ( specially in sparkling beverages ). It’s growth in emerging markets is moderate ( sparkling and still beverages ) – Coke’s growth is tied to the population growth ( assuming current intake per capita )

* It’s usual for Coke to obtain exclusive rights to distribute its products to Retailers or place vending machines in city parks for example.

Is the Business Good ? : Yes

The Key metrics considered are ROIC and FCFROIC . We compare the ROIC against the competitors and industry benchmark.

ROIC in 2013 : 

• Coke : 12.67%  ( FCFROIC : 9.90 )
• Pepsi : 11.53%
• Market Median : 9% ( 1994 – 2003 )
• Market Average : 14.9% ( 1992 – 2006 )

Trend in ROIC ( past 10 years ) : 

The Moat : Wide

• Economics of Scale :
  • World’s largest Manufacturing & Distribution Network lowers per unit production cost
  • Central Advertising results in huge scale advantages
• Growth in population and global expansion
  • Avg intake of liquid per capita – 64 Oz / with expected population of 9 Billion by 2040
• Valuable Brands in Sparkling & Still beverages
• Continuity & Focus on the value chain ( i.e. beverages only )
• String psychological forces acting in it’s favor
  • Association
  • Social Proof
  • Availability
  • Conditioned Reflexes ( Operant & Classical or Pavlovian )

The Future : Predictable

• The Threat of Substitutes : Medium  
  • Growing health concerns and possible regulation/tax policies provides opportunity for substitutes
  • Coke has appeal in global markets, but the loyalty towards the brand is weaker than U.S ( reason : Coke is part of U.S culture and history, which is not as strongly engrained in the local culture and history of other countries )
  • Substitutes like tap water, coconut water, homemade beverages like lemonade etc have grater acceptance and usage in cultures and countries outside U.S ( specially developing and under-developed countries )
• The Bargaining power of Customers : Low
  • The price of coke’s products are insignificant compared to customer’s income
• The Bargaining power of Suppliers : Low
  • Due to the Strategy of Coke to own controlling stake in some of the important bottlers & distributors
• The Threat of New Entrants : Low
  • The Economics of scale presents a huge barrier to entry into the soft drinks industry. The major players are quick to react to new entrants with competing products or acquisitions.
• Rivalry among existing competitors : Low  
  • Coke and Pepsi are engaged in a duopoly ( with market share of 37.1% & 30.2% respectively)  and the industry structure is relatively stable.

Is it Expensive ? : Yes

Guidelines : (1) Enterprise Multiple (EV/EBIT) <= 10

• Earnings Multiple = 16.63 ( > 10 )
• Times Free Cash Flow = 21.28
• Price to Book = 5.09
• Price to Tangible Book = 2.22
• Enterprise Multiple = 15.59

The Management :

* Concerns : Recent issue regarding dilution of shareholder’s equity for executive compensation