In 2009, Coca-Cola (KO) set the Guinness World Record for organizing the most people to simultaneously open a Coca-Cola contour bottle in Dubai. However, that is far from the only record Coca-Cola will be setting to 2020 and beyond. For a company that has increased its net income from $2.18 billion in 2000 to $6.82 billion in 2009 [that is an average of over 20% a year], the success story has just begun. It is hard to imagine that a company that has been around for over one hundred years is still earning 30% returns on equity and growing at a considerable rate. Consequently, Coca-Cola’s durable competitive advantage will continue to flourish as it continues to find and create growth by harnessing the developed markets and expanding the developing ones.
Coca-Cola is, in effect, a cash generating machine. According to its 2009 Form 10-K, management states,
We believe our ability to generate cash from operating activities is one of our fundamental financial strengths.
Accordingly, maintaining and expanding infrastructure in Coca-Cola’s developed markets will harness more cash and allow for expansion elsewhere. By recently acquiring Coca-Cola Enterprises (CCE), Coke’s primary bottler in the United States, the company will streamline its cost operations and maintain its wide economic moat. The bottling business offers lower margins; however, more cash will be generated on fair returns to capital, which will allow for greater deployment of assets globally.
Moreover, the infrastructure and distribution capability of Coca-Cola allows not only for a near distribution monopoly, but also provides for learning abilities. For example, Coca-Cola is the primary distributor for Hansen Natural (HANS), the maker of Monster energy drinks. If you want your beverage distributed, Coca-Cola is one of the few players in the market capable of successfully doing so. In addition, Coke is able to view Hansen’s unit volume sales through distribution, which allows for successful tracking of a wide portfolio of products.
Coca-Cola also continues to expand its product portfolio for the developed markets as well. By acquiring Energy Brands, the maker of Vitamin Water, Coca-Cola continues to evolve its offerings to rising incomes and healthy living.
Lastly, Coca-Cola is a global company that is well-positioned to capture the rising tide in the global standard of living. Over 70% of Coke’s profits originate outside of North America. In effect, the company epitomizes global brand and product leadership. (Just look who is sponsoring the World Cup.)
However, Coca-Cola’s continued success will not come without its challenges. On September 3, 2008, the company failed to acquire China Huiyuan Juice Group (GM:CYUNF) as Chinese regulators rejected the deal. Therefore, emerging markets do present their challenges. However, Coca-Cola’s able management will spot new trends and develop winning products to exploit market share as the leader in nonalcoholic beverages.
Disclosure: No positions