Coca-Cola's Acquisition Of Innocent Good For Non-Carbonated Beverage And Food Shift

| About: The Coca-Cola (KO)
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A little covered acquisition by Coca-Cola (NYSE:KO) has stayed out of the news for the most part. The company boosted its ownership stake in Innocent, a maker of juices and smoothies based in the United Kingdom. I think the acquisition will pay off huge for the company as it brings the huge fan favorite brand to the United States and also increases the food offerings for Coca-Cola.

Innocent is the leader in the ready-to-drink smoothie industry in both the United Kingdom and all of Europe. The company's previous relationship with Coca-Cola helped the drink become the official smoothie of the 2012 Summer Olympics in London. All of the products from the company are 100% pure fruit and made with natural ingredients.

Products sold by Innocent include:

· Smoothies

· Juice

· Kids Juice

· Kids Smoothies

· Fruit Tubes

· Veg Pots

Smoothie flavors include:

· Strawberry & Bananas

· Mangoes & Passion Fruit

· Oranges, Carrots & Mangoes

· Kiwis, Apples & Limes

· Blackberries, Strawberries & Black Currants

· Pineapples, Bananas & Coconuts

· Pomegranate, Blueberries, & Acai

Innocent products are only available in 15 countries. The company expanded from its small base in England to become the biggest brand in Europe. With Coca-Cola's ownership, the brand will likely see rapid expansion. I believe that Coke will bring the brand to the United States.

In the US, the ready-to-drink juice and smoothie market is growing. For the most part, three companies dominate the market with a near 70% market share between them.

· Naked Juice, which was bought out by Pepsi (NYSE:PEP), offers no artificial flavors and natural ingredients. The company has become the fastest growing juice and smoothie brand in the United States. Naked Juice offers 20 different flavors and has a separate Coconut Water segment that was recently introduced to a growing market.

· Odwalla, owned by Coca-Cola, was bought out for $181 million in 2001. The company's juice and smoothie products can be found in leading retailers in the United States. Odwalla also produces juice bars, which is one of the few food items owned by Coca-Cola, the number one beverage company in the World.

· Bolthouse Farms was purchased by Campbell's (NYSE:CPB) in 2012. Bolthouse offers juices, smoothies, protein drinks, and coffee drinks. Prior to the acquisition, the company had annual sales of $1.2 billion. The large $1.55 billion price was puzzling to some investors, but showed the value of the ready-to-drink market.

Coke's ownership of Odwalla will help the company introduce Innocent to the United States market. With two leading juice and smoothie brands, Coke should be able to dominate the market in five years and have leading market share in the ready-to-drink segment for juices and smoothies.

I think the purchase could turn into the company's next Vitamin Water. Innocent is a brand that is known for its sustainable efforts and large charitable work. The brand will have a strong following in the United States and should sell well in stores like Whole Foods, Trader Joe's, and Costco. The natural and upscale feel to the company's brands should help it become a staple in the high-end retail shopping market.

Another early example of a way to boost Innocent sales in the United States market could be a deal with Subway. Coca-Cola entered into a deal with the largest restaurant in the US (by units) to carry Vitamin Water in its stores. It is early, but a deal to bring the brand into a deal like this could be huge for both Innocent and Coca-Cola.

Aside from the ready to drink market, Innocent offers Veg Pot pre-prepared meals. In 2013, the company was given an award for the introduction of this food item. Veg Pots contain three portions of vegetables in each container. The flavors offered are:

· Thai Vegetable Sweet Chili

· Caribbean

· Bombay Curry

· Thai Coconut Curry

· Indian Vegetable Masala

· Roasted Aubergine Moussaka

· Indian Daal Curry

· Mexican Sweet Potato Chili

Coke increased its stake to a near 100% level, leaving a small partial stake for the company's three founders. Back in 2009, Coke acquired its first stake in the company with a small purchase of 18%. In 2010, the company increased its stake to over 60%. Innocent has said that the founders will step back from day to day operations, but will remain on the executive committee. Innocent will remain a separate company from Coca-Cola.

One of the things that have helped Innocent grow sales is its sustainability efforts. The company buys most of its products from certain companies with the highest standards. All bananas, for example, come from companies that are recognized by the Rainforest Alliance Farm. Innocent donates 10% of yearly profits to charities, which is likely to continue under the much larger Coca-Cola umbrella. The key areas Innocent focus on for sustainability are: nutrition, ingredients, packaging, production, and legacy.

Innocent is a unique brand and some have questioned if Coke's ownership will hurt the small time feel of the brand. Marketing Week argues that there will be threats and opportunities with the purchase. The article points out an example of how Unilever (NYSE:UL) has kept the small individual feel to Ben & Jerry's since its acquisition of the famous ice cream brand.

With a huge customer base in Europe (320,000 likes on Facebook, 115,000 followers on Twitter), Coca-Cola will be able to cross-promote its items. Coke's strong distribution system will help Innocent reach new regions where it has never been sold. Innocent's strength in the region should help Coke push its own Odwalla brand into Europe.

Coke is one of the best companies on the planet and has long been an investment favorite. Shares trade at a slight premium, with analysts expecting earnings per share of $2.14 in fiscal 2013. This would give shares a current price to earnings multiple of 18. Revenue is expected to increase 2.1% to $49.02 billion. The company's expansion in the ready-to-drink juice and smoothie market will be more beneficial to earnings per share in fiscal 2014 and on. Buy Coke shares on any dips and hold the stock for the next five years of growth in the non-carbonated beverage market.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in KO over the next 72 hours. 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.