Coca-Cola Case Analyses
This paper is about the company Coca-Cola Company which is one of the major bottled beverage sellers in the US.
· The parent company of Coca-Cola is KO and its strategy is to fully utilize its numerous brands, financial strengths and the distribution system.
· The Coca-Cola Company is the largest producer of juice related products, soft drink concentrates and syrups.
· The vision of Coca-Cola is to refresh the world, inspire moments of optimism and create value for the brands of Coca-Cola continue growth.
· The objective of Coca-Cola Company is to bring to the world an assortment of quality beverage brands that satisfy the people’s needs and create delight in customers.
· The secondary objective is also to maximize long-term return to shareholders while being responsible for the overall activities.
· An objective of Coca-Cola Company is also to increase the sales and expand business of non-carbonated beverages of the company in the future and be the industry leader int eh business.
· Another goal of the company is to increase the net operating revenues, operating income and Earnings per Share (EPS) over the next few years by 3 to 4 per cent.
· Current strategy also includes exchange contracts and purchases of other foreign currency options. This is done to reduce the risk of the impact on revenue for the sales outside US when there are changes in the exchange rates.
External Audit
Industry Analysis
· The beverage industry is a part of Consumer Staples sector which accounts for 12.6 per cent of the S&P 1500 and is increasing. The price/earnings ratio of the Consumer Staple industry is almost 14 times and the PEG ratio of the industry has been 2.2.
· The beverage industry has been highly competitive now because of the many brands that have been introduced. The primary competitor of Coca-Cola Company is PepsiCo, which is the global leader in the beverages industry.
· Segments for the sales of the industry are North America, Bottling investments, European Union, Pacific, Latin America, Eurasia and Africa and Corporate.
· There has been economic weakness in the US and sluggishness in the Europe which will negatively impact the performance of the industry.
· Certain markets like India, Japan and South Africa are facing economic problems because of which the marketplace has been challenging for some time.
· There has been an increase in the demand of non-alcoholic beverages from the growing consumer base and per capita consumption levels of non-alcoholic beverages is expected to rise continually.
· There has been a rise of customer traffic in the non-traditional distribution channels which will allow the company to reach them easily.
· There has been a slowdown in the consumer spending in the recent economic downturn as a result of inflation in the commodity products.
Competitive Profile Matrix (CPM)
Coca-Cole Company
PepsiCo
Key Success Factor
Weight
Rating
Score
Rating
Score
Growth of Cash Flow
0.08
4
0.32
3
0.24
Declines in the Material Cost
0.025
3
0.075
3
0.075
Marketing of Core Brands
0.04
4
0.16
5
0.20
Introduction of New Products
0.09
5
0.45
4
0.36
Advertising and Promotional Spending
0.04
5
0.20
5
0.20
Penetration into Non-traditional Distribution Channels
0.04
4
0.16
4
0.16
Financial Strength
0.08
5
0.40
4
0.32
Market Share
0.13
3
0.39
4
0.52
International Prospects
0.09
4
0.56
4
0.56
Risk Assessment
0.03
3
0.09
2
0.06
Credit Rating
0.03
5
0.15
3
0.09
Product Portfolio
0.03
4
0.12
4
0.12
Acquisitions in the Future
0.12
3
0.36
2
0.24
Volatility to Exchange Rates
0.12
4
0.48
3
0.36
Acquiring New Technology of Bottling
0.08
2
0.16
1
0.08
Total
1.00
4.075
3.585
It can be concluded from the above given Competitive Profile Matrix (CPM) that Coca-Cola Company is stronger in comparison with PepsiCo. PepsiCo is the major competitor of Coca-Cola given the particular success factors, the strategic position of Coke is better than that of PepsiCo as it is evident from the score of both the companies. It represents the overall comparison of the two companies is relation to the factors given and the importance of the weights to the industry.
External Factor Evaluation Matrix (EFE)
Key External Factor
Weight
Ratings
Weighted Score
Opportunities
Increasing weight of the S&P 1500 index for industry
0.05
4
0.20
Growing consumer demand of non-alcoholic beverages
0.10
3
0.30
Rise in the traffic in the non-traditional distribution channels
0.05
3
0.15
Higher retail pricing in the US
0.06
2
0.12
Consumption growth in developing and emerging markets
0.09
3
0.27
Threats
Economic weakness in US and Europe
0.10
3
0.30
Competitors are increasing in industry
0.05
2
0.10
Challenging international marketplace
0.10
3
0.30
Slowdown of consumer spending
0.20
3
0.60
Inflation of commodity cost
0.10
3
0.30
High fluctuation of exchange rates
0.10
2
0.20
Total
1.00
2.94
The total weighted score has come up to 2.94 which indicate that Coca-Cola Company has an average ability to respond to the changes in external factors. This is the representation of the current business conditions and Coca-Cola is pretty comfortable in facing these external factors. It can be seen in the External Factor Evaluation matrix that the industry is facing more threats than the opportunities and the priority of the threats are also more than the opportunities. This means that the industry is more vulnerable to the effects of threats than opportunities.
Porter’s 5-Forces Model
· Porter’s five forces framework is used by the strategic consultants when making a qualitative evaluation of the firm’s strategic position in the industry.
· The three horizontal forces from the competition are threat of substitute products, threat of established rivals and the threat of new entrants into the industry.
· The other two forces from the vertical competition include the bargaining power of suppliers and the bargaining power of customers.
· It is not easy for the new entrant to enter the industry and raise the level of competition for Coca-Cola right away. This is because high barriers of entry exist in the industry such as economies of scale, customer loyalty with the existing brands, requirement of high initial investment and the access of industry distribution channels.
· A new entrant is also not likely to be successful because of possible retaliation from the existing industry players. There are many substitutes available to non-alcoholic beverages therefore this lowers the attractiveness and profitability of the industry. But the relative pricing of the substitutes are higher therefore the industry does not suffer.
· Most of the suppliers in the industry are the strategic partners of different players in the industry and there are many suppliers available. Therefore the suppliers are not in a position to threaten the companies.
· The buyers are also not in a position to bargain the prices from the companies as there are a few dominant sellers in the industry who have the major market share of non-alcoholic drinks.
· The intensity of the rivalry in the industry is not very strong as the products are differentiated.
Therefore it can be concluded that the industry is attractive enough for the investors who want to invest in Consumer Staple industry. The industry will be profitable in comparison to other industries even in the times of economic downturn as these products are observed to be price inelastic.
Strategic Group Map
A Strategic Group Map is used to compare companies within an industry that have similar business model. These companies are compared on the basis of two variables. In the comparison of the companies in the non-alcoholic industry the two variables chosen are the percentage volume change since the last year and the current market share.
The diagram identifies the two direct competitors in the industry which are PepsiCo and Coca-Cola Company. The diagram also shows that they compete on the basis of the market share of the industry and volume of sales. The two groups that can be easily interpreted from the map are of Pepsi and Coke and the other group being Dr Pepper the other one. Pepsi and Coke should be on high alert as the volume a change of the other group is gaining. It is not likely for any of the competitors Pepsi or Coke to move to the other strategic group neither the other group member has a chance of moving to the group of Pepsi and Coke.
It can also be concluded from the map that Pepsi gained more volume of sales in comparison with Pepsi. The other group was able to make a rapid increase in the sales volume than Pepsi and Coke. The map also shows that the Coca-Cola Company is the market leader with the most market share in the industry, Pepsi being in the second number in the market leadership.
Internal Audit
Internal Factor Evaluation (IFM) matrix
Key External Factor
Weight
Ratings
Weighted Score
Internal Strengths
Increasing weight of the S&P 1500 index Coca-Cola Company
0.08
2
0.16
Largest producer of soft drink concentrates and syrups
0.025
4
0.10
Sold in more than 200 countries
0.04
4
0.16
Owns license to almost 500 brands
0.09
4
0.36
Owner of the trademark Coca-Cola, the best selling soft-drink in the world
0.04
4
0.16
Foreign currency exposures are managed on a consolidated basis
0.04
2
0.08
Highest stock market capital in the industry
0.08
3
0.24
Annual growth of operating revenues at 10%
0.13
2
0.26
Volumes up by 3% in the international market
0.09
4
0.36
Internal Weaknesses
Sales have fallen down 3% in Q1, 2009
0.03
3
0.09
The SBUs are not diverse
0.12
2
0.24
Launch of new vending machines is being delayed
0.08
4
0.32
Higher retail pricing in the US, which can drive down the volumes
0.08
1
0.08
Weak sales data
0.025
4
0.10
Total
1.00
2.71
The Coca-Cola Company’s internal weighted score is well above 2.5 which means that is in a strong internal position. It can also be observed that there are much more internal strengths than the weakness which is why also the company has a strong internal position. In regard to the provided internal factors, the company can perform better as these are less number of weaknesses than strengths.
External/Internal Evaluation and Recommended Strategies
· SO Strategy: the Company has over 500 brands of soft-drinks and there is an opportunity in the market which is high demand for non-alcoholic drinks. Therefore the company should concentrate on reaching out to the customers demanding the soft-drinks and should not try to make its portfolio diverse. The popular brands of soft-drinks should be introduced in the countries where they are not present.
· WO Strategy: the launch of new vending machines has been delayed many times and the industry is witnessing growing demand of non-alcoholic drinks which is an opportunity for Coca-Cola to install vending machines in the appropriate countries and increase its sales volume and revenue.
· ST Strategy: there is economic downturn in the global economy which is making difficult for Coca-Cola to increase its sales in the international marketplace. The strategy it should follow is to reduce the prices on some of its brands such as Coca-Cola Classic and Fanta brands. This can be achieved by identifying the best suppliers and retailers and make them strategic partners to share profits and losses with them.
· WT Strategy: there is a slowdown of consumer spending and as a result the sales of Coca-Cola have been pushed down by three percent. This should be improved and the slowdown in the sales should be made minimum by promoting the products and ensuring that the existing customers do not shift to the competitors’ products. This can be done through improving the distribution system of the company.
Financial Analysis
· The overall financial condition of the company KO the parent company of Coca-Cola, is pretty good and the company can be said to be in good financial health.
· The company was able to increase its cash flow and reduce its debt. The debt/capital ratio has been down 4.7 per cent since the year ended 2007 till the year ended 2008.
· The interest coverage ratio has been 19 times up from 16 times in 2007. This means that the company is generating enough net income to cover its interest payments and the company is in a good position to pay its debts in the future.
· The cash at hand has also risen to 4.7 billion US$ by 0.6 billion US$.
· The return on assets and the return on equity have decreased considerably if the data of last 4 to 5 years is compared. The reason behind this could be decrease in the total assets and total equity of the company.
· The P/E ratio of the company is higher than the industry which is not a good indicator and means that the prices per earning unit are low than the industry.
· Although there is a recession in the global economy but the revenue and operating income both have increased for the company.
· The company pays an annual dividend of 1.52 US$ per share which is quite better than the industry. Therefore the company seems to be in an overall good financial position.
Long Term Strategy
The three key issues that Coca-Cola Company faces are:
· The economic slump in the world which has a negative impact on the sales and performance of the company. Some particular markets such as India, South Africa and Japan have poor infrastructure and struggling local economy.
· Sales are dominated with different currencies across the globe because of which Coca-Cola faces issues related to exchange rates. It has not hedged exchange rates for the markets with very volatile exchange rate of currencies.10-12% of operating income is deducted off from the total as a result of currency translation.
· The key growth rate indicators of the company are falling down since the last 3 years including the net income which has decreased as compared to the last 3 years.
The long term strategy of the company is to sustain the lead in the market share and divest the brands which are increasing costs and not contributing much to the operating income. The company should try to improve its financial ratios which are showing declining performance of the company in recent years. This would attract more investment from the stockholders and they will place more trust in the organization. The consumer base of non-alcoholic drinks in growing, therefore we can expect it to grow more in the next years. To provide these increasing customers what they want, the company should understand the market and should try to provide more and more variety to the market to instill consumer loyalty.
Implementation and Results
The recommendations given in the previous sections can be implemented if the external environment is favorable to the company. The economy of the world is expected to recover in a couple of years and therefore the inflation on the commodities will reduce, allowing the consumers to raise the spending. Infiltration in other markets can be possible through introduction of other brands in the markets such as South East Asia and Japan. This can be done with the help of integrating their cultural drinks with the ones already existing.
Availability of drinks is another factor that needs to be improved. Vending machines with new technologies should be used which are more secure and have storage space better than the ones existing. With vending machines in each and every shopping mall and streets where there are many pedestrians, the sales are destined to rise. This will also surpass the retailers and the revenue from the vending machines will be directly received by the company. Better tools and technology should be used to ensure that the shelves in the retail shops are always filled and the customers never have to switch to the competitor’s drinks.
The plants of the bottling, syrup and concentrate production facilities should be place in the countries where the labor is cheap but skilled. This will cut on a lot of cost for the production. Another way of cutting costs is to build strategic partnerships with the suppliers and making them their key suppliers. In this way the revenues, net income and the financial ratios will become better.
References
Standard & Poor’s. (2009, May 30). Coca-Cola Co (The). Retrieved June 12, 2009, from www.standardandpoors.com
Standard & Poor’s. (2009, May 30). PepsiCo Inc. Retrieved June 12, 2009, from www.standardandpoors.com
Argus. (2009, June 1). The Coca-Cola Co. Retrieved June 12, 2009, from www.argusresearch.com
Argus. (2009, June 1). PepsiCo Inc. Retrieved June 12, 2009, from www.argusresearch.com
