Coca-Cola Valuation | What Drives Coca-Cola’s Revenue—It’s Not Soda!
Coca-Cola’s bold moves to stay ahead of the curve
The name Coca-Cola is synonymous with fizzy drinks, nostalgia, and global dominance in the beverage industry. But what actually drives the financial success of this iconic brand? Well, it does not actually involve the sugary soda most of us associate with Coca-Cola.
Today, I take a deep dive to uncover Coca-Cola’s strategic evolution, from its origins to its innovative response, changing consumer preferences, and how its core business model continues to drive profitability.
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From a pharmacy concoction to a global giant
In 1886, Dr. John Pemberton, an Atlanta pharmacist, brewed the first Coca-Cola. Since then, the company has grown to offer over 3,600 beverages under 500 brands in 200 countries.
Looking at Coca-Cola’s timeline, you’ll notice a couple of key milestones that have revolutionized the beverage world:
- 1916: The introduction of the iconic Contour Bottle.
- 1941-1945: The term “Coke” became a registered trademark.
- 1955: A historic partnership with McDonald’s brought branded beverages into fast food.
- 1961: Sprite debuted, diversifying Coca-Cola’s soft drink line.
- 1978: Entry into China, where it was the only cold-packaged beverage company.
- 2019: Acquisition of Costa Coffee, marking a strategic shift into the coffee market.
The decline of sugary beverages
The golden age of sugary drinks is notably slowing down. In 2003, 62% of adults and 80% of American children consumed sugary drinks daily. Fast-forward to 2024, and those numbers have dropped to about 50% for adults and 60% for kids.
Due to health-conscious consumers—who are now aware of the dangers of obesity—social media advocacy and taxes on sugary drinks, people are shifting toward healthier options. Coca-Cola recognized this trend early, adapting its strategy to remain relevant and profitable.
Coca-Cola’s response: diversify or decline
In response to this new trend, Coca-Cola was quite strategic and visionary. It ventured into healthier alternatives by acquiring brands like Topo Chico (sparkling water), BodyArmor (sports drinks), and Mojo (kombucha).
Second, the company tapped into countries like China, India, and Brazil, where per capita soft drink consumption remains low, offering Coca-Cola significant growth opportunities.
Third, Coca-Cola diversified its product range to include coffee (Costa Coffee), dairy (Fairlife), and smoothies (Made Group). This diversification aligns the company with global health trends while positioning it for future growth.
The secret sauce: concentrates
As I mentioned at the beginning, soda, as we know it, is not the primary revenue source for this beverage giant. While Coca-Cola has made considerable strides in the beverage industry and sells 2.2 billion products daily, only 42% of its revenue comes from finished beverages like cans or bottles. The bulk—58%—comes from concentrates. Surprise! Surprise!
This strategy was born in 1899 when Coca-Cola shifted to selling syrup concentrates to bottlers. The company sells pre-flavored mixtures mixed with water and carbonation to produce hundreds of servings. Bottlers handle production, packaging, and distribution, while Coca-Cola controls branding and marketing.
What makes this model so effective? Shipping concentrates, which exclude water (80% of most beverages), drastically reduces costs. Also, concentrates yield 60-80% gross margins, compared to 30-40% for finished products.
This franchise model saves costs and ensures that Coca-Cola remains the dominant force in beverage branding. The company has the largest advertising budget in the beverage industry, focusing on creating memorable connections with consumers.
A financial powerhouse
Despite these challenges, Coca-Cola remains financially world class. Using my World Class Benchmarking scorecard, the company ranks in the top 20% of its sector in terms of profitability and growth.
Its high net profit margin shows the efficiency of cost structure and focus on high-margin segments like concentrates. Besides, even with slow revenue growth, emerging markets and non-soda segments offer Coca-Cola new opportunities.
Challenges and opportunities
Coca-Cola may be a beverage giant, but has its fair share of hurdles. For instance, with a net profit margin of 23% (compared to Pepsi’s 10%), there’s little room for growth.
Between 2015 and 2023, Coca-Cola’s revenue compound annual growth rate (CAGR) was almost flat, highlighting the challenge of growing in a saturated market.
Further, with a price-to-earnings (P/E) ratio of 26, Coca-Cola isn’t cheap, indicating potential underperformance compared to its peers.
Final sip
Coca-Cola’s secret to success isn’t just its fizzy drinks but its adaptability and strategic focus on concentrates. By repositioning its business model, embracing diversification, and targeting emerging markets, Coca-Cola stays ahead in these changing times.
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