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| | Why Coca Cola?
Description of the Business
The Coco-Cola Company is a manufactorer, distributor and marketer of non-alcoholic beverages. It most well-known sparkling brands are Coca-Cola, Sprite and Fanta. Its business also includes still beverages. The company owns about 450 brands. The products are sold in more than 200 countries.
Analysis of Competitors
The main competitors of KO are:
- Pepsico
- Dr Pepper Snapple Group
- Hansen Natural Corporation
- Cadbury PLC
- National Beverage Corp
Other competitors include many often local manufactorers of low cost beverages with a Cola taste, which are competing with Coca-Cola on price.
However users of Coca-Cola and also Sprite and Fanta tend to be very loyal to the brands.
The industry of KO can be categorized as an oligopoly. The number of large companies are limited and it is difficult to enter the business, because of high costs to develop brand and distribution channels. Because of the strong brand loyalty and stable demand economic profits because of collusion are possible and the price inelasticity of demand provides the opportunity to increase prices without losing market share.
Competitive Advantages
The Coca-Cola company has several competitive advantages, which include their strong brands and their market leader position. They have a very strong bargaining power with both suppliers and (wholesale) customers.
If a shop or restaurant is not selling Coca-Cola customers will go somewhere else. KO outsources most of its bottling operations to decrease capital costs and increase return on assets.
Super investor Warren Buffet owns shares of the company. He only buys shares of companies with durable competitive advantages.
The main risk to KO are low price substitutes. Although low price substitutes have a significant market share, they tend to be fragmented and are not able to threaten the market leadership of KO even though prices of sometimes only 50%. This is also due to the strong brand loyealty.
Financial Analysis
Their balance sheet is very strong. They have no debt and 4 billion in cash. The return on equity is about 30% and the return on assets is about 15%.
They have a profit margin of about 20%.
These are all indications that they have a competitive advantage and they can increase revenue and create value by increasing prces, developing new brands and increasing market share of their current brands..
Risks
The following risk could adversely impact future cash flows:
- Negative Health effects of their beverages
- Decreasing popularity of its brands
- Low cost competition of beverages with similar tastes
- Suger taxes to reduce usage of products with high amounts of sugar and the related effects on weight and health.
However the demand for their products is very stable due to strong brand loyalty and long-term contract with bottlers. Besides their products are stable and does not need to be changed. People want the classic Coke taste and no changes.
We conclude that the risk of KO is low.
Management Team
The CEO of KO is Muhtar Kent, since 2008. He is very experienced. He has an economics degree. He has worked for the Coca Cola Company for almost 30 years.
Valuation Calculation
The cash flow value of KO is about $25 a share. The value of their brands including potential value creation by future growth is $25. Their low risk profile and strong balance sheet has a value of $15.
The total value of KO is $65 a share.
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