Coke’s Global Brands and Distribution Network Are Unmatched

Coke’s Global Brands and Distribution Network Are Unmatched

By Thomas Mullarkey, CFA | 12-04-13 | 06:00 AM | Email Article

Coca-Cola (KO) described its 2020 vision in 2009 and since then has been making steady progress in achieving its goals. The company hopes to double the amount of Coca-Cola beverages consumed around the world and double system revenue in that time frame. While we believe volume growth during the next decade will be led by emerging markets, we think Coca-Cola’s sales in mature geographies will also expand as the firm broadens its portfolio of still beverages. Coca-Cola’s vast distribution network and powerhouse brands are second to none and have helped the company create one of the widest economic moats in our consumer defensive coverage universe. We believe the firm’s wide moat justifies an above-average multiple, and the shares look undervalued compared with our $45 fair value estimate.While declining consumption of carbonated beverages in North America is a near-term headwind for Coke, we believe international markets will provide plenty of growth opportunities in the long term. Barring any strategic missteps, we view Coca-Cola as a haven in an uncertain economic environment, given that it has one of the widest moats in our consumer coverage universe.

Even though its distribution network spans the globe, Coke continues to invest for international growth. The company and its bottling partners intend to invest billions during the next few years in countries such as China, Russia, and Brazil, where per capita consumption is increasing in light of a burgeoning middle class. For example, annual per capita consumption of Coca-Cola products in China is currently just 38 servings, versus 8 servings in 1998 and more than 400 servings in the United States. We think these investments will build out the firm’s manufacturing and distribution footprint to such an extent that it would be too costly for a new entrant to duplicate, solidifying the sustainability of Coke’s competitive advantages.

Coke Focuses on Consumer Demands
Coca-Cola’s massive scale and global distribution network are the key sources of the company’s wide economic moat. Although consumer tastes in several developed markets are shifting away from Coke’s core carbonated products, the firm has aggressively pursued growth in emerging categories. As long as Coke remains focused on the demands of the consumer, we expect its distribution network to preserve Coke’s position as the leading global beverage supplier and to maintain its solid returns on invested capital.

Furthermore, in many markets, Coke operates a direct distribution system, whereby its distributors physically place products onto retailers’ shelves. This access to retailers gives Coke a significant competitive advantage over second-tier manufacturers that distribute through third parties. In our view, the financial resources required to replicate Coke’s direct distribution footprint act as a barrier to entry.

Additionally, the Coca-Cola brand is arguably one of the strongest and most enduring brands in the world. This can drive meaningful retail traffic, giving Coke substantially more power over retailers than many other consumer staple companies.

Commodity Prices Pose Risk 
Coke’s sales and profitability could be negatively affected beyond our forecasts by greater-than-expected increases in commodity prices, particularly for raw materials such as sugar, cocoa, and oranges. Ownership of the company’s North American distribution platform will increase Coke’s exposure to other commodities such as aluminum and plastic resins, and the deal is not without integration risk. With about 60% of revenue being generated outside the U.S., the firm is subject to currency and geopolitical risks in overseas markets. Sales of Coke’s carbonated drinks could be hurt by negative publicity regarding health issues concerning drinks with high sugar content, and Coke’s sugary drink volume could be constrained should governments look to increase taxes on soda.

Consistent Execution Comes From Strong Leadership 
Coca-Cola generally has a high standard of management stewardship. We attribute the firm’s consistent execution in the difficult operating environment of the past several years to strong leadership and a very deep bench. We are also impressed by management’s focus on the company’s 2020 vision, which emphasizes making the best decisions to expand the business over the long term, not just the next quarter.

Thomas Mullarkey is a senior stock analyst for the Consumer Team.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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