The Coca-Cola Company, established in 1892, is the world’s largest beverage company with the market capitalization of $168.7 billion being one of the top 5 valuable brands as of November 2014 (Forbes, n.d.). The company manufactures primarily carbonated soft drinks (CSD) as well as still beverages, tea, coffee and energy sports drinks. Operating in more than 200 countries, Coca-Cola owns or licenses and markets “more than 500 non-alcoholic beverage brands”, among them 20 “billion-dollar brands” (Coca-Cola, n.d.). In 2013, the company served 24 million customers per week, while 50% of people drank Coca-Cola only in the previous month (Kent, 2014). The majority of revenues are still driven by the core CSD brands, and the company relies heavily on its performance in this traditional segment.
During the previous decade, the U.S. and international beverage markets exhibited steep decline of demand and major shifts in consumer preferences, caused by the growing concerns related to obesity and health. The anti-crisis efforts failed to create sustainable growth. In 2013 and 2014, the Coca-Cola’s revenues exhibited flat or negative growth in most regions.
External Environment (Industry Analysis)
This section offers a detailed industry analysis as well as implications of the external factors for the company.
The Current State of the Industry, Financial Performance, and Key Trends
The demand for carbonated soft drinks decreased during the previous decade, while the year 2013 showed the largest rate of decline in the market, particularly in the developed markets of North America and Western Europe. This represents the major threat to the cash flows of the companies, especially for the leaders where CSD brands constituted the major part of the product portfolio in terms of sales volume and revenue, enabling to maintain the high profitability margins. The downward trend affected all market players, and it mostly hit the companies who earned more from the carbonated drinks portfolio, with the revenues up to 80%, like Coca-Cola and PepsiCo. The two companies reported serious decrease of revenues in the last quarter of 2014: Coca-Cola sales dropped by 55%, whereas Pepsi sales decreased by 25%. The negative impact is lower for the companies that invest in the new market segments, like Dr. Pepper Snapple Group. According to the Euromonitor analyst, the year 2013 was a turning point marking the “explosion of raw juices and functional beverages” such as coconut water as well as “growing interest in sweetener blends that can satisfy both low-calorie needs and demand for “natural” marketing claims” (Hennessy, 2013). Since the emerging markets continue to grow at high rates, the geographical diversification is the method to offset the downturn in the developed markets and mitigate the risks related to the volatility of the specific local markets.
External Opportunities and Success Factors
The global market provided a range of opportunities to diversify the business to more attractive segments; primarily the still beverages market and the CSD emerging markets, like China and India. Additionally, the market featured significant demand for the “premium, not concentrate” juices, ready-to-drink coffee, and functional beverages (Hennessy, 2013). Manufacturers turned to researching natural sweeteners. Many large beverage companies expanded their business into the snack ventures. The ability to diversify the business, introduce healthier product formulas, and improve the perception of the consumers represents a key factor of success for the large beverage companies. As the Coca-Cola Company had an imposing portfolio of successful brand acquisitions, this strategy represented a good opportunity to diversify the business: “A growing number of industry analysts suggest Coca-Cola should spend less to advertise cola and more to diversify aggressively through acquisitions of companies, like energy-drink maker Monster Beverage Corp” (Esterl, 2014).
External Threats and Risks
The major obstacle that hindered the growth of the company in the previous years was the significant shift in customer preferences, which resulted in the decreased demand for carbonated soft drinks. In particular, since 2003, consumers in the North America have rarely purchased all Coke brands, including the Diet Coca-Cola, so that the sales rates decreased by 1-4% per annum (The Economist, 2015). Still, although the issue was recognized by the company, in the beginning of 2014 the CEO of the Coca Cola Company communicated that core brands are still the “lifeblood” and the core of the company’s strategy is as follows: “We need to work even harder to enhance the romance of the brand in every corner of the world” (Esterl, 2014).
A related risk was the regulatory requirement to provide transparent nutrition information to the customers. Additionally, bad publicity related to the consumption of the scarce water resources damaged the business reputation in the emerging markets, which represented the key growth area for CSD brands. Among other risks were exchange rates of international currencies compared to the dollar, leading to the rise of dollar expenses, as well as seasonal fluctuations.
The Financial Performance and the Industry Outlook
According to the industry report by IBISWorld (2015), the market size for the soft drinks and bottled water is estimated to be $256 billion in revenues. Overall, the market grew by 1% on average during the period from 2010 to 2015. In the established markets, the growth rates “slowed over the past five years due to the global recession constraining demand across most of the industry’s markets” (IBISWorld, 2015). However, emerging markets and specific product categories are expected to feature much higher growth rates, mostly in the single-digit range.
The key drivers of the business performance are margins, which are affected by two components: revenues and costs. Whereas the typical operating margin in the industry does not exceed 10%, the leaders maintain much higher margins, which are up to 1.5-2 times higher than the benchmark industry level. The industry is highly brand-oriented, which explains its ability to achieve high customer affinity and derive revenues from the high brand value and premium prices. Due to high entry barriers, the ability to further enhance the production efficiency as well as optimize costs is the second important driving factor of the profitability. The financial indicators and related benchmarks will be discussed in the last section of the situational analysis below.
Situational and Environmental Analysis
This section offers an analysis of the Coca-Cola’s strategic position in terms of the corporate strategy plans, strengths and weaknesses of the strategic execution and the financial performance.
The Mission and the Vision of the Company
The Coca-Cola Company declared its long-term purpose in the threefold statement: “to refresh the world; to inspire moments of optimism and happiness; to create value and make a difference” (The Coca-Cola Company, n.d.). In 2009, the company formulated its comprehensive ambitious 2020 Vision. It is based on the six key elements including people, portfolio, partners, planet, profit, and productivity that reflect not only the company, but also the business environment and the society.
Strategic Goals, Performance Targets, and Related Needs and Constraints
Since the moment of its foundation 129 years ago, the company has been establishing its strategic goals in a customer-centric manner: “Our success depends on our ability to connect with consumers by providing them with a wide variety of options to meet their desires, needs and lifestyles” (Coca-Cola 2014 Annual Report, 2015). The second part of the strategic statement declares the goal of the excellent execution, which relies on several components of Coca-Cola’s effective management of internal and external resources and serves to create sustainable value for shareholders and for the society: “Our success further depends on the ability of our people to execute effectively, every day” (Coca-Cola 2014 Annual Report, 2015).
The strategic objectives supporting the corporate mission are related to the same strong areas of the company’s performance that made it the winning company in previous years. The objectives are focused on the market, “work smart”, “act like owners”, and inspire new generations with the Coca-Cola brand values (The Coca-Cola Company, n.d.).
In the late half of 2014, the company revised its goals and elaborated an anti-crisis strategy “to position the company for long-term earnings-per-share growth in the high single digits” (Sharma, 2015). The strategy is comprised of reorganization and revision of the business model, aggressive cost saving and performance tracking program as well as the plan to relocate the expenditures to most effective marketing programs. In October 2014, the company’s CEO confirmed radical goals to “trim $1 billion in costs by 2016” and achieve overall cost reduction of $3 billion by the end of 2019 (Advertising Age, 2014).
As expressed by the CEO, the new strategic priorities “emerged from a disciplined factual base regarding the issues that drive results and long term sustainable growth” (Nasdaq, 2015). Among the critical areas identified in the revised strategy were the global growth of the Coca-Cola brand, implemented strategies based on the “great marketing and great in-market execution” (Nasdaq, 2015) and the expansion of the still beverage portfolio. These areas are supported with a particular focus on the efficiency and effectiveness of the marketing, distribution and logistics as well as the investment in the human capital of the new generation of the employees.
The Competitive Environment: The Porter’s Five Forces Model
The competitive forces of the Porter’s model are described in the Table 1 below and examined in detail in the five subsequent sections.
The Five Forces of the Porter’s Competition Model: The Coca-Cola Company
|Competitive Forces||Explanation||Impact or Power (Score 1-10)|
|Competitors||Competitors in the primary categories and markets
Local market players
Competitors in the non-core categories
|7 (powerful, but limited impact as the global players face the same issues as Coca-Cola)
4 (limited impact, stronger in the economic downturn)
9 (the strongest impact)
|Potential Entrants||Mostly represented by the new brands of the existing manufacturers||2 (not important due to high entry barriers)|
|Substitutes||Healthier product categories, e.g. juices and functional beverages||8 (very strong impact, offset by the high customer affinity and brand perception of the Coca-Cola customers)|
|Suppliers||Including industry suppliers, a network of bottling partners, and governmental partners||5 (limited power of suppliers, yet strong impact on the quality perception and the execution)|
|Consumers||10 (the strongest impact)|
A highly saturated market of non-alcoholic beverages is represented by both local or regional emerging companies and global multi-brand companies. The Coca-Cola Company faces various forms of competition in virtually all types of products. A traditional rival in the domestic market and the primary established competitor worldwide is PepsiCo, Inc. A rapidly developing competitor for both companies in the North America is Dr. Pepper Snapple Group, which has taken a strong position in the substituting segment of healthier beverages. Other competitors are Nestle, Groupe Danone, Mondele-z International, Inc., Kraft Foods Group, Inc., Suntory Beverage & Food Limited and the Unilever Group. Besides the global beverage producers, Coca-Cola competes with regional and local companies as well as retailers with their private label brands. In some markets and in specific categories, the company enters alliances with its competitors “through licenses, joint ventures and strategic partnerships” (Coca-Cola 2014 Annual Report, 2015).
There are relatively perceptible barriers of entry to the market, as the Coca-Cola Company and other global players created unmatched distribution networks and partnerships. Therefore, the power of this force is very limited. Potential entrants emerge as the new categories and brands offered by existing companies.
As with the potential entrants, the substitutes also normally emerge from the product portfolios of the existing beverage manufacturers. This force has a tremendous negative impact on the performance of the Coca-Cola, given the dramatic changes in the consumer preferences that were witnessed during the previous decade.
During the years of its operation, Coca-Cola built a strong network of suppliers and partners, which represent its core competitive advantage. As of 2013, the network comprised of around 250 partners, more than 900 plants and more than 24 million retail outlets worldwide; for three years since 2010 the company has invested more than $50 billion in “new facilities, distribution infrastructure, equipment and retail customer activations” (The Coca-Cola Company, n.d.). Coca-Cola maintains significant bargaining power over its suppliers due to the business model implemented in its concentrate operations. The franchise model was subjected to revision in the North America in 2010, when Coca-Cola acquired its largest bottling partner, The Coca-Cola Refreshments, to cover 90% of the distribution network and gain greater control over the distribution. The decision was rolled back in 2014, when the company refranchised most of the former acquisitions.
As Coca-Cola’s entire mission relies on its ability to meet the needs and desires of the customers, consumers are the most powerful force having profound impact on the competitive situation and financial performance. Despite the fact this Coca-Cola managed to build the strongest beverage brand recognized by millions of admirers worldwide and is generally able to maintain higher prices, the rapidly evolving consumer preferences currently pose a major risk to the company’s growth. The factors that contribute to changes in customer preferences are “health and nutrition considerations, especially the perceived undesirability of artificial ingredients and obesity concerns; shifting consumer demographics, including aging populations; changes in consumer tastes and needs; changes in consumer lifestyles” (Coca-Cola 2014 Annual Report, 2015).
Internal Environment: Strengths and Weaknesses
The section provides a detailed analysis of Coca-Cola’s internal factors that influence its strategic competitive advantages.
Internal strengths. The Coca-Cola Company features unmatched geographical presence, efficient distribution network, and high bargaining power over suppliers. These capabilities enabled the company to keep higher profit margins and maintain high marketing budgets. The company’s unique expertise in traditional marketing and advertising as well as the effective integration of digital and social media channels contribute to the stable growth of the Coca-Cola brand value, creating a strategic advantage in the competitive market. The core strengths, which are the distribution network, the brand, the unique marketing and advertising expertise, are examined in detail below.
Despite serious competition battles across regions, Coca-Cola enjoys the highest share in the global market of non-alcoholic beverages. It has the most efficient distribution network and extraordinary geographical presence. Due to its size and effectiveness of the franchise model, the company “exerts significant power over its suppliers to receive the lowest price available from them”, increasing its own operating margins (Jurevicius, 2013).
The Coca-Cola’s core brand is its main competitive advantage that contributes to the extensive geographical availability of the company’s product assortment. In 2014, the brand was estimated by Forbes at $56.1 (close to the value of Google, $56.6). Interbrand consultancy estimated the brand at $79.28 billion. Coca-Cola has been a leading company according to the Interbrand rating for four consecutive years from 2009 to 2012, outstripping the leading technological companies, and has also been leading according to other rankings.
Unique brand recognition and customer affinity were made possible thanks to the special focus on the marketing and advertising. The total marketing budget, which made $6.9 billion and 14.7% of revenues in 2013, being not large if compared to competitors, may be considered “the one that was used most effectively” (Jurevidicus, 2013). In addition to the traditional marketing assets such as the ‘contour bottle’ outline, the logo and the recognizable personages and tunes, the company proved to effectively manage digital marketing methods and approve its “lifestyle brand” positioning among the current target audience.
Internal weaknesses. The overwhelming amount of products marketed worldwide (3500+) also represents a problem of Coca-Cola’s business model. However, the company developed several successful brands as well as made a number of smart local acquisitions to be scaled up to top-performing products of its portfolio. The company created brands “for every possible segment of the soft drinks market” (Brennan et al., 2007, p 367), yet maybe only 10% of the 500+ brands are indeed performing well. The product portfolio still relies very much on the success of the core brands. In view of the changing markets and customer tastes, this has facilitated tangible problems with financials and cash flows.
The Financial Performance Analysis
Resulting from the unfavorable demand trends in the primary CSD market, the company faced decrease of sales and profits, most visible since 2012. In the mentioned year, the Coca-Cola featured the largest decline; the percentage changes in sales and net profits for the years 2013-2014 compared to the previous year for Coca-Cola and PepsiCo are shown in Appendix A. Yet despite the steady decline of the market, Coca-Cola still maintains its leading position in the U.S. market (see Appendix B). The demand is partially diverted towards healthier drink options.
The Appendices C and D offer the key financial ratios and charts of the Coca-Cola performance in 2012-2014, compared with the industry benchmarks and the PepsiCo. The key measure of the company’s performance is return on equity (ROE). In 2012-2014, Coca-Cola increased borrowings that were also reflected in the coverage ratios and performed much worse in terms of net profit margin and asset turnover. This resulted in the decreased ROE. Still, the company performed much better than the existing companies in the industry in general (23.2% compared to 14.4%). The return on assets (ROA) also declined from 10.5% in 2012 to 7.7% in 2014, reflecting the degraded sales performance with the increased assets. Yet, Coca-Cola managed to maintain very high margins, which were much higher that the industry benchmark and about 1.5 times higher than those of PepsiCo. This is explained primarily by the very effective distribution strategies and the premium pricing. The planned cost reduction efforts might help to further improve the profit margins. The main area for improvement is nevertheless the revenue generation from both core large brands and new acquisitions.
In 2014, compared to previous periods, the company significantly increased its liabilities. Current liabilities grew by 16% in 2014, whereas long-term debt was increased in 2013 and remained the same in 2014. The resulting financial leverage, which remained on the acceptable level, allowed the company to maintain its operations and mitigate decrease in sales.
Regarding the activity ratios, they generally decreased in 2014, showing that the company was achieving its revenues less efficiently. On the contrary, PepsiCo improved all the efficiency metrics. The values of asset turnover are significantly lower than across the industry in general, which is normal, since both companies are very large. Both Coca-Cola and its main competitor featured the liquidity ratios close to 1, indicating that the company can cover its short-term obligations with liquid assets. It is a normal value; however, it is much lower than the industry benchmarks. This is the result of the company’s business, since the turnover is high and available liquid funds are tied up in the working capital.
Financial Management of International Operations
As a globally diversified company and the largest company in its industry, the Coca-Cola relies heavily on the derivative financial instruments and hedge strategies. It effectively combines all exposure management tools in order to reduce the “exposure to adverse fluctuations in foreign currency exchange rates, interest rates, commodity prices and other market risks” (Coca-Cola 2014 Annual Report, 2015). The main instruments used are “straightforward over-the-counter instruments with liquid markets” (Coca-Cola 2014 Annual Report, 2015). The future risks are hedged up to 36 months in advance. Foreign exchange contracts and currency options are used to “hedge certain portions of forecasted cash flows denominated in foreign currencies”, also hedging the earnings impact and the net international investments (Coca-Cola 2014 Annual Report, 2015). The exposure to interest rate fluctuations is managed with interest rate swap agreements. As the company is also exposed to commodity pricing risks related to purchasing ingredients, they are managed primarily via supplier pricing agreements and sometimes with the use of financial derivatives.
Major Strategic Issues and Recommendations for the Management
Given the negative results of the financial performance in 2014, there are increasingly more skeptical viewpoints, “even inside the company, about whether Coke can still meet its target for 3% to 4% annual volume growth in a world in which soda volume rose only by 0.9% last year” (Esterl, 2014). In October 2014, the top management of the company performed the necessary revision of the earlier ambitious long-term goals “to position the company for long-term earnings-per-share growth in the high single digits” (Sharma, 2015). These strategic objectives outlined a number of short-term milestones to ensure that the company moved in the right direction. The organization has a need to revise the strategy execution in several dimensions.
First of all, significant changes in the organizational structure were made. At the end of 2013, the President of Coca-Cola Americas quit after the company bought the largest bottler and reorganized business structure in order to reconsider the franchise model and change focus. In October 2014, the Chief Marketing Officer was replaced with a new candidate, who formerly led the Iberian business unit in order to help restore growth (Esterl & Vranica, 2014). A general strategy to cut costs resulted in a decision (announced in January 2015) to cut 1,600 – 1,800 positions globally, including up to 500 positions in the head office. A typical crisis management tool, changes in the executive team and the staff reduction plans implemented by the CEO may or may not result in the streamlined growth. The newly assigned team members will be working towards increasing the efficiency and effectiveness of the company’s performance.
Second, the company has gone through radical changes in the operations model. Since 2010, the franchise model has been revised and then refranchised back, with the following comment in the company’s annual report: “From time to time we acquire or take control of bottling or canning operations, often in underperforming markets where we believe we can use our resources and expertise to improve performance” (Coca-Cola 2014 Annual Report, 2015). A come-back to franchise agreements is controversial; however, it is expected that the company will succeed in quality control and remain close enough to the distribution. Most importantly, it is not recommended to switch between the models as it was done in 2010-2014. Rather, more effective mechanisms of effectiveness control are needed.
The “four-year productivity and reinvestment program” aimed at strengthening the brands and “reinvesting the resources to drive long-term profitable growth” was announced in February 2012 (Coca-Cola 2014 Annual Report, 2015). The program is to optimize the supply chain, standardize IT and data management systems as well as reconsider performance metrics of the global marketing campaign, operational processes, and innovation projects. This will become the most important part of the anti-crisis strategy. Since the reallocation of saved costs will serve to support the most effective marketing campaigns, the strategy is reasonable. However, the decision to stay with the core Coca-Cola brand “to help Coke return to high-single-digit earnings growth in 2016” (Geier, 2015) may seem paradoxical. Instead, it is recommended to invest more in the development of new categories. In fact, a number of initiatives have already been rolled out to respond to the market changes. Namely, in the USA and the UK, the Coca-Cola Life, which is the first version of the Coca-Cola classic brand producing natural sweeteners, was launched in 2014 (Interbrand, 2014). Coca-Cola continued to pursue the market diversification opportunities with a number of acquisitions: a coconut water brand ZICO, a tea brand Fuze, and the 17% acquisition and strategic partnership with Monster Beverage Corp. A large opportunity to grow, other than carbonated soft drinks, is provided by at-home carbonation market. The market size in the USA is estimated to cost $14 billion. In February 2014, Coca-Cola concluded a 10-year global strategic agreement with the Green Mountain Coffee Roasters Corporation (“Keurig Green Mountain”) and subsequently purchased 16% of the corporation’s shares (Coca-Cola 2014 Annual Report, 2015).
Brand positioning is also changed and adjusted to local specifics. The company aims to differentiate business models by focusing on either price (developed markets) or volume (emerging markets): “Each of our markets has a specific role in order to sustainable revenue growth. Some markets focus on price realization, while others focus on volume and the remaining ones are focused on the balance of the two” (Sharma, 2015). Such segmentation is highly recommended in order to gain the most perceptible benefits from the still very high brand perception of the Coca-Cola, since the markets perform differently, and the customer preferences differ significantly around the world.
Although the Coca-Cola Company faced major demand problems and exhibited low financial performance in most of the geographical areas in 2013 and 2014, the company still possesses strong capabilities to reverse the situation and gain momentum. These are such factors as unique availability, unmatched distribution and franchise networks, as well as a very high affinity to the brand. Among the most important opportunities of boosting the performance and achieving sustainable growth are expansion of the brand portfolio to the available healthier products, expansion to new segments such as at-home carbonation market, and development of core brands in the emerging markets. It is recommended to differentiate the marketing and sales strategy according to the types of markets. These strategic growth areas will be supported by the traditionally strong marketing and advertising plans, provided that the effective performance measurement of the marketing initiatives is in place. The financial performance is to be improved by means of implementing an aggressive cost saving plan.