Coca Cola: Olympic Sponsorship is a Profitable Tradition

The Coca-Cola Company (NYSE: KO) loves the Summer Olympics. Very few brands have the lasting power of appeal and recognition that Coca-Cola enjoys throughout the world and the Olympics is the ideal place to showcase that power. Sugar-based sodas might be unpopular here at home, but the rest of the world is still drinking Coke.

Coca Cola is truly a global company, with consumers in more than 200 countries. I've been drinking Fanta and Sprite since I was a kid in Latin America. I still remember the guy who used to deliver the cases of Fanta and Coke right to our doorstep every month. Talk about personal service. But this is the sort of service you still see today in places like Peru, Argentina, Hungary and Croatia.

Today, Coca-Cola is an even more diverse company, offering over 400 brands and more than 2,600 beverage products, including water, orange juice, sports drinks, tea and energy drinks. The company is also deeply committed to sustainable business practices (recycling water, plastic and glass bottles) and has been working closely with the UN and many NGOs around the world. As a result, Coca-Cola has been included in the Dow Jones Sustainability Indexes and the FTSE4Good Index. This is important to young people and Coke has done a great job addressing their concerns.

But what about the numbers? In 2006, Coca-Cola outperformed both the Dow Jones and the S&P 500 and 2007 was a stellar year--case volume increased by 5% and revenues were up 23.6%. Most importantly, this is a company that performs well during good and bad times and 70% of sales come from outside the United States. The fastest growing markets are the BRIC nations: Brazil, Russia, India and China. But Mexico and Brazil are the top two markets outside the United States. This is really about the youth factor, and a huge percentage of the population in the developing world is under 25.

The company has also paid 343 consecutive quarterly dividends since 1920. At $56.66, with a P/E of 21, the stock is at or near fair value. I'm watching the stock closely on a daily basis because I really want to own this company prior to the Beijing Olympic games. This is not a company that will give you explosive growth, but I'll take 4%-5% annual volume growth and 6%-8% operating income growth any day if we're talking about stability and long-term performance.

Something else to keep in mind is the weak dollar. For Coca Cola, this means a favorable currency exchange, which helps the company deal with the negative effects of high commodity prices, and recent data suggests that Coca Cola is doing well. First-quarter 2008 numbers were strong, with net revenues up 12% over 2007 despite the slow down here at home and Europe. Sales were also up 5% year-over-year. I expect the Olympics to provide an additional boost in Q3 and Q4, so this is definitely a solid stock for 2008 and beyond.

Disclosure: Author holds a long position in KO

Comments

[China Marke...:]

I disagree with the author's position on Coke benefitting from the Olympics. Here is a commentary I wrote in Forbes recently entitled Beijing Olympic Sponsorship's a Waste.

www.forbes.com/2008/04...

Companies like Adidas and Internet portal Sohu have coughed up serious money to sponsor the Beijing 2008 Olympics. Estimates have computer maker Lenovo paying $80 million to $100 million to be the official sponsor of the games. Eleven global sponsors--including Coca-Cola and McDonald's--spent a combined $850 million to sponsor the Turin and Beijing Olympics.

With marketers salivating at the thought of selling to China's emerging 250 million-strong middle class, especially in light of the subprime debacle in the U.S. combined with slowing retail sales, many companies feel that sponsoring the Olympics is a great way to build brand awareness with Chinese consumers and increase sales. For even the largest companies, like Johnson & Johnson (nyse: JNJ - news - people ), winning China has become critical to hitting the annual numbers Wall Street demands.

Excitement over the Beijing Olympics is at a fever pitch in China and growing as August 8 approaches. My firm, the China Market Research Group, decided to see just how effective Olympic sponsorship has been toward creating brand awareness, loyalty and more important, triggering sales in China. Over the past three months, we conducted several hundred in-depth interviews and surveys with Chinese men and women between the ages of 18 and 45 in 10 cities throughout the country.

The results of the research were disheartening for those companies that have ponied up the kind of money involved in becoming an Olympic sponsor. Nearly 80% of those Chinese consumers we polled said they "did not care" who the official sponsors were and the vast majority "did not consider official Olympic sponsorship" when buying a product. Boycotts in the Western world of official Olympic sponsors are already being called for during the Olympic Torch run in light of the Darfur and Tibet controversies. With this kind of potential backlash in their home countries, Olympic sponsors need a sales bump in China...

2008 May 09 05:31 AM

[China Marke...:]

I disagree with the author's position on Coke benefitting from the Olympics. Here is a commentary I wrote in Forbes recently entitled Beijing Olympic Sponsorship's a Waste.

forbes.com/2008/04/23/......

Companies like Adidas and Internet portal Sohu have coughed up serious money to sponsor the Beijing 2008 Olympics. Estimates have computer maker Lenovo paying $80 million to $100 million to be the official sponsor of the games. Eleven global sponsors--including Coca-Cola and McDonald's--spent a combined $850 million to sponsor the Turin and Beijing Olympics.

With marketers salivating at the thought of selling to China's emerging 250 million-strong middle class, especially in light of the subprime debacle in the U.S. combined with slowing retail sales, many companies feel that sponsoring the Olympics is a great way to build brand awareness with Chinese consumers and increase sales. For even the largest companies, like Johnson & Johnson (nyse: JNJ - news - people ), winning China has become critical to hitting the annual numbers Wall Street demands.

Excitement over the Beijing Olympics is at a fever pitch in China and growing as August 8 approaches. My firm, the China Market Research Group, decided to see just how effective Olympic sponsorship has been toward creating brand awareness, loyalty and more important, triggering sales in China. Over the past three months, we conducted several hundred in-depth interviews and surveys with Chinese men and women between the ages of 18 and 45 in 10 cities throughout the country.

The results of the research were disheartening for those companies that have ponied up the kind of money involved in becoming an Olympic sponsor. Nearly 80% of those Chinese consumers we polled said they "did not care" who the official sponsors were and the vast majority "did not consider official Olympic sponsorship" when buying a product. Boycotts in the Western world of official Olympic sponsors are already being called for during the Olympic Torch run in light of the Darfur and Tibet controversies. With this kind of potential backlash in their home countries, Olympic sponsors need a sales bump in China...

2008 May 09 05:32 AM

[Max Zeledon:]

Shaun:

You're research is very specific to China and it will be interesting to visit the numbers when Coca Cola releases earnings at the end of the year. I'm willing to bet sales will go up as they did last. But I'm also addressing the global market.

Billions of people watch the Olympics and that's a historically proven platform for Coca Cola in terms of brand exposure. The exposure is huge around the word. I'm not just talking about China (a tea drinking nation by the way where Coca Cola sells other products besides Coke to please local taste). The Olympics and World Cup soccer are the two most important international sporting events and brand linkage to these events increase brand awareness.

While there was a great deal of controversy over Coca Cola's sponsorship of the Beijing Olympics there is no evidence to suggest this has hurt sales. In fact, Coca Cola sales are up across the board despite the backing of the controversial Olympic torch tour. And the public has known about its sponsorship for years. The balance is in good shape.

As I a researcher I've learned that what people say does not always reflect what they do. As for Lenovo and others brands you mention in your Forbes article I suspect their problems are beyond the sponsorship of the Olympic games. They have an image problem that has nothing to do with the Olympics.

Consider this as well: Coca-Cola, Visa and McDonald's are long-term sponsors of the Olympic Games; if Beijing fall short of commercial expectations they will move on to London 2012. People are not going to link these brands to Beijing beyond this summer.

There is also no consistent research showing consumers make buying decisions based on their political views--in developing markets it's about price, feeling good, and value. I don't think Coke drinkers in Hungary or Costa Rica will boycott Coca Cola because they are sponsoring the Beijing Olympics. But I'm willing to bet they will be drinking a Coca Cola beverage while they watch the 100m dash.
That's why this political boycott talk is nonsense.

2008 May 09 10:34 AM

[weng ho teng:]

Very informative article.

I like a few stocks going into the August Games.

One of the big movers for the remainder of 2008 will be China internet and B2B play MYST.OB.

Earnings due and Subaye English B2B site this week.

2008 May 12 11:28 PM