Coca-Cola Should Buy Chobani

| About: The Coca-Cola (KO)

Last month, after Coca-Cola (NYSE:KO) posted less than stellar Q2 results, some commentators argued the company should diversify its product line by acquiring Mondelez (NASDAQ:MDLZ) and its portfolio of snack foods. "In a world where both sugary and sugar-free soft drinks are under fire for health considerations," Jim Cramer argued, "...some diversification away from those drinks would be good for Coca-Cola."

Indeed, Coke's North American sales slipped for the first time in 13 quarters in an environment of increasing health consciousness among consumers. At the same time, Coke's closest competitor, PepsiCo (NYSE:PEP), with its Frito-Lay snack division in tow, reported a strong quarter, beating both EPS and revenue estimates. In the month following Coke's earnings call, the stock has remained stagnant around the $40 level, with many investors concerned about future growth prospects in North America and Europe.

As a Coke investor, I agree that it would be nice to see some diversification in the product line; however, with consumers demanding healthier options, I believe these commentators and investors are misguided in calling for an acquisition of Mondelez. Why would consumers who are shying away from Coke, Sprite and the like due to health concerns fill their carts with Oreos, Ritz Crackers and Chips Ahoy? It just don't make sense.

Rather, Coke should make a splash in one of the fastest growing segments of the health food market and buy privately held Chobani Inc. In 2007, Greek yogurt accounted for just a single-digit portion of the $7 billion yogurt market in the United States. Just six years later, that portion has increased to around 40 percent. And Chobani is the biggest fish in the pond by far, with a dominant 47 percent of the U.S. Greek yogurt market, more than twice the market share of its closest competitor.

Coke's recent history is full of acquisitions that have diversified the company's product line beyond traditional carbonated soft drinks. In 2001, Coke bought juice and smoothie maker Odwalla for $181 million. In 2007, the company bought tea fruit drink brand Fuze for an estimated $250 million. And again in 2007, Coke purchased Glaceau, maker of Smartwater and VitaminWater, for $4.1 billion in cash.

The Glaceau acquisition is interesting for a couple of reasons. First, it shows that Coca-Cola is willing to make a multi-billion dollar investment for the right product. This is important, since Chobani became a $1 billion company in 2012. Second, the Glaceau acquisition showed that Coke is willing to let a well-run business run itself, as Coke took a hands-off approach to its new subsidiary, allowing the founder and officers to remain in charge. This is important because Chobani's founder and CEO, Hamdi Ulukaya, has stated as recently as June of this year that he is committed to maintaining control of the company.

Rarely does a company have the opportunity to make a truly market-defining acquisition. But with Chobani's product line, loyal customer base and dominant market share, along with Coca-Cola's marketing abilities, a Chobani/Coke marriage would produce a behemoth that would be nearly impossible to compete with. The Greek yogurt market in the U.S. continues to grow at a brisk pace, as Americans seek healthier dining options. And none of Coca-Cola's direct competitors is in a position to take a significant portion of that market from Chobani.

Coca-Cola's growth has slowed because consumers are trending away from the company's flagship products due to potential health concerns. Rather than investing in a company that produces mostly unhealthy snack foods, as some have suggested, Coke should acquire the dominant player in a rapidly expanding health food market. That is a recipe for future growth.

Disclosure: I am long KO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.