Financial Analysis of the Coca Cola company
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The Coca-Cola Company (founded in 1919 Georgia, USA) today is the largest global manufacturer, distributor and marketer of non-alcoholic beverage concentrates and syrups in the world. Its strategy is to become more competitive by using its vast assets-brands, financial strength, unrivalled distribution system and the strong commitment by management and employees worldwide.
This report analyses Coca Cola's financial performance during the period from
2005 to 2009 through the following steps:
1. Industry analysis
2. Firm Analysis
3. Financial Analysis in comparison with PepsiCo and the industry.
4. Evaluation and Conclusion
The entire industry is under pressure because of currency fluctuations and
high fuel prices. It cannot be concluded, however, that the beverage industry is
being threatened more than other industries. The main threat is increasing
consumer and regulatory awareness on health and nutrition considerations.
There are 3 big players in the beverage industry. Buyers' power and rivalry is
quite significant throughout the industry. Coca Cola's strengths are based on
its global resources such as brand value, marketing innovation, strong capital
base and distribution channels.
Coca-Cola has achieved impressive profits records and ROCE exceeding by far the industry norms and PepsiCo. Although Coca Cola maintains low liquidity ratios, its ability to turnover the stock within a short period of 39 days and enjoy longer credit period with its suppliers, give sufficient comfort to meet its financial obligations. This implies that Coca-Cola has strong bargaining power. Historically, Coca-Cola's dividend payouts have been over 50% of the net income of any given period. It is observed that Coca-Cola's debt-financing strategy justifies the reasons for maintaining high debt-to-assets and debt-to equity ratios.
Coca-Cola has the largest market share in the beverage industry and has a market capitalization of US$102bn which is far above an industry average of US$75bn. Coca Cola's profits have steadily grown above industry norms and operational efficiency is quite impressive as indicated by revenue/employee which are twice as high as its main competitor and the industry. However, ROA declined year-by-year from 2005 thru 2009 couple with a decline in the share price. Nonetheless, the new leadership and management team has managed to improve the performance as evidenced by the excellent Q-3 2009 financial results and the resultant increase in EPS.
Coca Cola has sound risk management policies that have enabled it to remain stable given the high foreign currency fluctuation, interest rate risks and political instability associated with the wide operation in over 200 countries. In particular, introduction, revision and implementation of effective marketing strategies, quick-decision-making, effective asset utilization, overall asset management policies and the dividend payout policies need immediate management attention, in view of the competitive nature of the beverage industry. Otherwise Coca-Cola may lose more grounds to its competitors.
Table of Contents
2 Macro Industry Analysis ......................................................................6
3 Micro Industry Analysis .......................................................................7
4 Financial Analysis.................................................................................9
4.2 Liquidity and Funds Management...........................................10
4.3 Asset Management..................................................................12
8.1 Appendix I - Definitions of ratios used in the financial analysis.......16
8.2 Appendix II - Coca Cola's Financial Ratios......................................20
8.3 Appendix III - PepsiCo Financial Ratios..........................................22
8.4 Appendix VI - Financial Statements
8.4.1 Coca Cola Financial Statements
8.4.2 PepsiCo Financial Statements
Coca-Cola (the beverage) was invented in May, 1886, in Atlanta, Georgia and
the first drink was sold at a soda fountain in Jacob's Pharmacy in Atlanta by
Willis Venable. The idea was if he could just get people to try Coca-Cola they
Would buy it. History proved him right.
In the beginning sales of Coca-Cola accumulated 50 US$ for the first year. Today the Coca-Cola Company is the largest manufacturer, distributor and marketer of non-alcoholic beverage concentrates and syrups in the world.
The company provides a wide variety of non-alcoholic beverages, including
carbonated soft drinks, juices and juice drinks, sports drinks, water products,
teas, coffees and other beverages. Along with Coca Cola, this is recognized as the
World's most valuable brand, the company markets four of the world's top five
Soft-drink brands, including Diet Coke, Fanta and Sprite. The company's main
rival is the PepsiCo, although Coca Cola considers Tap water a long-term-indirect
Coca Cola's global operating structure includes the following operating segments:
North America, Africa, Asia, Europe Eurasia and Middle East, Latin America and
This report analyses Coca Cola's financial performance. The structure of the
report is as follows:
ô€‚‰ The first part of the report includes a Macro and Micro industry analysis
in which the beverage industry is analyzed
The second part is the Firm Analysis, which highlights Coca Cola's
Capabilities, Competences and Recourses
The core of the report is the Financial Analysis, in which Coca Cola's
financial ratios are compared with its main competitor (PepsiCo) and with (the
non-alcoholic beverage) industry's standards where possible
Finally the report ends up with an evaluation and a conclusion
2 Macro Industry Analysis
As a global company operating within the soft-drink industry, Coca Cola has to
content with the traditional Macro Environmental factors. The applicable laws
within the United States and in many countries around the world impose
restrictions for Coca Cola and the beverage industry. New deposit laws in the
United States and in Europe require beverage bottlers and distributors charge
a refundable deposit on beverage containers. Implementing this system requires
significant capital investment to develop the capability to handle and process
empty beverage containers. (Reuters).
Many continue to associate health risks with consuming carbonized drinks. A
recent study in the United States links the consumption of soft drinks with
Type 2 diabetes and weight gain. This idea is supported somewhat by the medical community with statements such as: "Anyone who cares about his/her health or the health of their family would not consume these beverages." Although this study was localized within the United States, from a Political and Legal perspective it has potential global implications throughout the industry.
Beverage industry is affected, by a number of Economical factors that range from the cost to manufacture and distribute products, to foreign currency exchange fluctuations, fuel prices and weather patterns. Coca Cola has a global manufacturing network and it is also affected by these and other economical factors. For example Nestle's (50% owned by Coca-Cola) sales increased with 12.6% in 2005 but due to the impact of foreign exchange rate the sales decreased by 6.3%. (www.dailyreporter.com) Danone's profits' margins have also been significantly affected by the increase in oil costs and hence, decided to increase their prices by up-to 12%. However it cannot be concluded that the beverage industry is more vulnerable than other industries.
The beverage industry also faces environmental challenges. In India, for instance, where there is a serious shortage of water supply, the industry giants were strongly criticized on their use of water that constitutes 90% of the raw materials. This could invite governments to introduce new legislations that may have global implications on the global industry. Additionally, the company experienced culturally imposed operating restrictions when marketing its product in some countries, due to risks related to the socio-cultural factors such as obesity, that have potential adverse effects on the beverage industry. (NewsTarget.com)
3 Micro Industry Analysis
The non-alcoholic sector is dominated by three major players, which together control 90% of the global market. However, the rivalry is fierce among the competitors: Nestle, Cadbury Sweppes PLC, Groupe Danone and Kraft Foods, with PepsiCo being the number one Rival for Coke. Coca Cola focuses primarily on carbonated soft drinks and fruit juices, while all of it competitors supply the market with other food products in addition to soft drinks. Coca Cola is continuing its diversification efforts, however and now owns 50% of Nestle, which currently dominates bottled water sales in some regions. Nonetheless, as a result of its past focus of relying primarily on the soft drink market, Coca Cola more vulnerable to fluctuating market conditions than its competitors. The non-alcoholic beverages market remains somewhat vulnerable to the threat of substitutes. The market has become saturated with the introduction of an array of soft drinks, sports drinks and bottled waters. By its own admission, Coca Cola considers tap water one of the main Substitute Products, and possibly a long-term indirect threat. Although many consider the consumption of soft drinks such as Coke (and Pepsi) a social event, the need to quench thrust remains a primary factor. Coca cola views the ready availability of tap water as a long-term threat, especially considering the decreasing reputation of carbonized soft drinks.
One of the most significant threats to the beverage industry and Coca Cola is that of buyers' power. Consumers can change their decision to buy at once. In 1985 for example, Coca-Cola decided to change the taste of its Cola. The consumers stopped buying Coca Cola even though taste tests demonstrated an improvement. (Hoovers)
Coca Cola has long enjoyed limited vulnerability to Suppliers' Power. Coca Cola maintains a solid position. Several resources providing global access to the main ingredients, such as Sugar, Artificial Sweeteners and Fruit Juice. However, this can change somewhat because Coca Cola recently experienced some limitation with the availability of raw materials due to increased activity in India. (Reuters)
The key to success for all beverage companies is differentiation. The right product along with an effective marketing and branding campaign could create a formula for success. However, when it comes to New Entrants, it is unlikely that new entrants are going to form any creditable threat. Competition from PepsiCo remains the main threat for Coca-Cola.
5 Financial Analysis
The financial analysis is based on the consolidated audited accounts of Coca-Cola Company and Subsidiaries made-out by Ernst & Young for the past 4 years from 2005 to 2009 and comparisons are made against one of its main rivals PepsiCo. The accounts have been prepared in accordance with USA generally accepted accounting principles and standards of Public Company Accounting Oversight Board. The audited accounts / reports bear an unqualified auditors' opinion.
Coca- Cola has been able to maintain impressive gross profit margins (GPMs) during 2005 to 2009 ranged between 66% and 63% which is better than its main competitor PepsiCo, whose GPMs from2005 thru 2009 stood consistently at 54% and industry standard of 42.28% (http://yahoo.finance.com).
Apparently, the cost structure of Coca-Cola and its overall cost-position is relatively better than PepsiCo although PepsiCo was able to achieve higher revenues than Coca-Cola by up-to 33%. This is further evidenced by the cost-to revenue ratio which was in the range of 75% and 69% for Coca-Cola and 82% and 83% for PepsiCo.
Further, better overall cost-position by over 50%, and prudent cost-control enabled Coca-Cola to comparatively achieve better net incomes than PepsiCo as indicated by Net-Profit-Margin (NPM). On an average basis (from 2005 thru 2009) Coca-Coca's NPM stands at 29.815% higher than PepsiCo's 18.765% by 59%.
5.2 Liquidity and Funds Management
While current ratios for both companies are maintained at a reasonable standard of above 1:1 and are constant over the four years, quick ratios are also maintained at almost 1:1 and hence found to be relatively reasonable in meeting the short-term financial obligations. The cash ratio stands at 0.62:1 (slightly higher than PepsiCo's 0.51:1) in 2009 which has improved, compared to 0.44:1, 0.32:1 and 0.23:1 in 2008, 2007 and 2006 respectively, mainly due to the increase in cash and cash equivalents balances to US$6.71bn in 2009 from US$3.36bn in 2008, US$2.13bn in 2007 and US$1.88bn in 2006. Generally, Coca-Cola has been maintaining better cash ratios than PepsiCo.
CASH GENERATED FROM OPERATING ACTIVITIES TO MATURING OBLIGATIONS
Furthermore, although cash provided by operating activities have been steadily increasing at an overall growth rate of over 10%, Coca-Cola's Cash-Generated-from-Operations-to-Maturing-Obligation (CGOMO) ratio declined to 0.59:1 in 2009 from 0.58 and 0.54 in 2008 and 2007 respectively due to the increase in current liabilities by over 39%. The key components to the overall increase in current liabilities are:
â€¢ Increase of maturities of the long-term debt to US$1.5bn in 2009 from US$0.3bn, US$.18bn, US$0.1.6bn and US$1.4 in 2008, 2007, 2006 and 2005 respectively.
â€¢ Increase of loans and notes payable to US$4.5bn in 2009 from US$2.6bn in 2008, US$2.5bn in 2007, US$3.7bn in 2006 and US$3.0 in 2005.
Nonetheless, there shouldn't be major concerns as Coca-Cola's ability to collect its debts within 35 - 39 days and pay its creditors in almost 200 days while turning over its stock in 63 days, giving sufficient comfort to meet its financial obligations. Coca Cola has strategized in 2005 that by 2009 it intends to generate cash from its operating activities to the extent of 39 billion us$
5.3 Asset Management
Comparatively, Coca-Cola's average stock holding period of 64 days is higher than PepsiCo's 40 days, as indicated (STR in 2009). The trend shows that both companies have been consistently maintaining their STRs at almost the same levels. The better PepsiCo's ratio could be attributed to the diversified nature of its product lines to include foods as compared to Coca Cola which is purely in drinks. There're negligible differences in the debt collection periods where the number of days range between 35 and 39 for both Coca-Cola and PepsiCo, which is considered reasonable in an industry which is highly competitive and where the norm is 60 days. This implies that both companies have the competitive edge that may enable them to avoid tiding-up the capital in the receivables and generate sufficient cash to meet their short term financial obligations. Credit payment period shows Coca-Cola enjoys a longer credit period of almost 200 days than PepsiCo's 147 days. This implies that Coca-Cola has stronger bargaining-power than PepsiCo, thus basically gives Coca-Cola a free interest loan. Notably, the fundamental difference in asset management policies between Coca-Cola and PepsiCo is Equity-method-investments by Coca-Cola which historically is among the key components of its asset-base.
Coca Cola key Asset Components in 2009
The global beverage industry is highly regulated and instabilities, changes and uncertainties in world's political and economic environments pose risks and challenges to the beverage companies, especially those which operate in a global fashion. The sluggish global economy, budget deficits of major economic powers, steep rise in oil prices and sharp currency fluctuations are matters of concern in general that may potentially have adverse implications and put the profit margins under pressure for many companies. This is due to the increase in energy cost needed to run the plants and transport the products to the marketplace. Competition in the beverage industry is fierce; companies that are not widely diversified remain more vulnerable to threats such as, rivalry, buyers and supplier's powers. Product substitution and new entrants form a minor threat in the beverage industry.
Coca-Cola, the largest global company with the largest market share in the beverage industry, has a market capitalization of US$102bn which is far above an industry average of US$75bn and slightly higher than PepsiCo's US$98bn. It's global presence, wide and reliable distribution channels, strong capital and asset base and global brand recognition provide it with a competitive edge over its rivals and in achieving better economies of scale.
However, ROA declined year-by-year from 2009 thru 2005 couple with a decline in the share price. Nonetheless, the new leadership and management team has managed to improve the performance as evidenced by the excellent Q-3 2009 financial results and the resultant increase in EPS.
Coca Cola's leadership and management structure and the overall organizational culture have recently been initiated by hiring the new CEO (E Neville), who now focuses on revamping the organizational structure and the strategies. His primary objectives are to promote Coca Cola's historical strengths such as innovation, motivation, training and development, knowledge management and blow-up the bureaucracy that has long been existing in the company in order to achieve sustainable growth and competitiveness. Coca Cola has got sound risk management policies that have enabled it to remain stable given the high foreign currency fluctuation, interest rate risks and political instability in view of the wide operation in over 200 countries.
In particular, introduction, revision and implementation of effective marketing strategies, quick-decision-making, effective asset utilization, overall asset management policies and the dividend payout policies need immediate management action in view of the competitive nature of the beverage industry,
Otherwise Coca-Cola may lose more grounds to its competitors. The overall financial position of Coca Cola is fantastically sound. The notable decline in ROA is not a matter of great concern particularly when the company's leadership and management team has got a breath of fresh air whose effectiveness is evidenced following the announcement of impressive Q3 2005 financial performance. The new CEO (E Neville) may have set a new course for the world's number 1 soft drink giant.
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