Coca-Cola's Investment In Africa Impacts Its Stock

Aug.17.14 | About: The Coca-Cola (KO)

Summary

Coca-Cola had to shift its attention towards emerging markets present in third world nations.

The Coca-Cola Company along with their bottling partners have announced a $5 billion investment in the African continent.

Despite low domestic sales, Coca-Cola’s performance in the emerging market sector has been quite impressive.

Coca-Cola (NYSE:KO) and Pepsi (NYSE:PEP) have been battling for global soft drink supremacy since the latter part of the 19th century. Despite being similar on the surface the two companies have taken fundamentally different routes to expand their business. While Pepsi diversified their interests by branching out into the food sector, Coca-Cola remained loyal to their roots and stayed a beverage only corporation. In line with their aim to dominate the beverage industry, the company acquired several brewers like Vitaminwater, Minute Maid and Powerade thus significantly increasing the number of brands offered by the company.

Staying focused on a single type of product, however, has spelt bad news for the iconic "Coke" maker in recent years. After sales of carbonated soft drinks took a nosedive in key markets like the US and Europe due to consumers opting for low-calorie healthy alternatives, Coca-Cola had to shift its attention towards emerging markets present in third world nations - places where sugar-based drinks were still in high demand.

Why The Need To Invest Billions in Africa?

So why doesn't Coca-Cola revamp its current strategy and introduce sugar-free products instead of investing in developing nations? Mainly because sales in the North American region have been at a standstill for quite some time now due to market saturation and lifestyle choices being made by current consumers. Furthermore, it's a safe bet to assume that Coca-Cola products are pretty much present on every shelf in every store present in the North American continent. That leaves emerging markets like Africa as promising alternatives, mainly because their population is still growing and their economies are gradually maturing. And, healthy or not, the corporation is not going to quit on its bestseller anytime soon, especially if it continues to mint them cash and gives them the necessary cash to compete with PepsiCo.

With that in mind the higher-ups at the Coca-Cola Company along with their bottling partners have announced a $5 billion investment in the African continent over a period of six years - which brings the total investment tally to roughly $17 billion - to be invested between 2010 and 2020. The funding aims to improve distribution channels, develop new manufacturing lines and cooling systems.

How The Investment Impacts Coke

The analysts at KO are expecting the same great results in Africa as they enjoyed in China. At a time when North American sales were stagnant; continuously leading to a flat share price, a move to the emerging Chinese market proved to be an extremely effective one causing volumes to grow by 10%. Replicating the same process in Africa can contribute significantly to Coca-Cola's overall revenue and performance. The company is actively looking for new locations worldwide to achieve organic and inorganic growth and the African continent looks promising.

Another major reason why KO is looking to quickly dominate Africa is because of their arch rival PepsiCo. While PepsiCo has done great in the Foods sector - a segment Coca-Cola is yet to tap into - they haven't fully realized the potential of making sizeable investments on par with KO's in an emerging market like Africa - a flaw Coca-Cola wants to take advantage of before Pepsi realizes its mistake. Being the sole heavyweight champion with no challengers can increase KO's revenue tenfold. It all boils down to "getting there first".

Coca-Cola CEO Muhtar Kent discussed how the company's investment in the region will be a catalyst for growth.

"tapping the potential in the African market can accelerate growth for the company by making supply chains more effective and will enable sub-Saharan Africa to supply more raw material to growing markets."

As compared to developed markets where the focus is generally towards innovation, an emerging market's dynamics rely on customer loyalty. Despite low domestic sales, Coca-Cola's performance in the emerging market sector has been quite impressive; already accounting for two-thirds of its business. Though the total sales volume grew by a mere 3% in the second quarter of the current fiscal, the emerging market sector present in Asia-Pacific recorded sales of 8%. Another emerging market - China- accounts for 5% of overall sales giving the company a 65% share of the carbonated drinks market in that region. Despite low domestic sales, Coca-Cola's performance in the emerging market sector has been quite impressive.

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