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Colas and other carbonated drinks are some of the products who have been part of everyday day market since time immemorial. We have seen its transformation to barreled drinks into its innovative and advanced bottling technologies. Cola brands have also been competing in terms of product sweetness, packaging, and advertisements. Now, one of the leading brands in a global scale is Coca-Cola.
The Coca Cola Company (TCCC) is the leading owner and marketer of non-alcoholic beverage brands and of concentrates and syrups used to produce non-alcoholic beverages. The company owns license and market of more than 500 non-alcoholic beverage brands of sparkling and still beverages such as water, enhanced water, juice and juice drinks, ready-to-drink teas and coffees, and energy and sports drinks. Table 1 shows the list of products of The Coca Cola Company. As one of the most important brand names, Coca-cola owns and markets four of the top five top non-alcoholic sparkling beverage brands including Diet Coke, Fanta and Sprite. Coca-cola products have been served in the US and 200 countries since 1886.
The goal of the company is to use the TCCC's assets such as their brands, financial strengths, unrivaled distribution system, wide global distribution and the talents and strong commitment of the management and associates to become more competitive and to accelerate growth in a manner that creates for our shareowners. Coca-cola is one of numerous competitors in the commercial beverages market. Of the approximately 54 billion beverage servings of all types consumed everyday, 1.6 billion bear Coca-cola trademark and license.
Coca-cola attributes their success to their ability to connect with consumers and by providing them with a variety of choices to meet their desires, needs, and lifestyle choices. The company also acknowledges further success of the people will depend on the ability of their executives to satisfy their everyday responsibilities.
As of December 31,2009, Coca Cola employs 92,800, 17,900 of which are employed by consolidated variable interest entities. This increased from 92,400 in 2008 primarily because of increased Latin America operating groups and other Bottling Investment groups. These were the results of the company's ongoing productivity initiatives in all of its operations.
The Coca-cola company's organizational structure is composed the following operating groups: Eurasia and Africa, Europe, Latin America, Pacific, Bottling Investments and Corporate. In Australia, there is Coca-cola Amatil Limited with which TCCC has 30% of ownership as of December 2009. Coca-Cola Amatil has bottling and distribution rights through direct ownership or joint ventures in Australia, New Zealand, Fiji, Papua New Guinea, and Indonesia. Coca-cola claims that 100% of the territories of these countries's market contain Coca-cola products.
The non-alcoholic beverages segment of commercial beverages is known to be a highly competitive industry consisting of numerous firms. These firms compete in multiple geographic areas in international, regional and local operations. Some of the competitive products include non-alcoholic sparkling beverages, various water products, fruit drinks and dilatable juices, coffees and teas, energy and performance-enhancing drinks, dairy-based drinks, functional beverages, other non-alcoholic beverages. PepsiCo, Inc., Nestle, Dr Pepper Snapple Group, Groupe Danone, Kraft Foods and Unilever are some of the primary competitors of The Coca-Cola Company.
The competitive factors with which the company focuses on include pricing advertising and sales promotion programs, innovation in core products, increased efficiency of production techniques, production of new packaging, innovation in vending and dispensing equipment and brand and trademark development and protection.
The Coca-Cola Company: Assets, Liabilities, and Operations
This section serves as a more detailed presentation of the company's status in terms of its assets, liabilities and operations.
One of the main properties of the company includes the worldwide headquarters located on a 35-acre office complex in Atlanta, Georgia. Lies on this complex are approximately 621,000 square foot headquarters building, 870,000 square foot Coca-Cola North America building, and the 264,000 square foot Coca-Cola Plaza building. The company also leases 250,000 square feet of office space at Atlanta and real estate properties in New York. In addition, the company also owns and lease additional facilities and real estate throughout the world for administrative operations, processing, packaging, and storage, warehousing and retail operations.
In North America, Coca-Cola owns nine still beverage production facilities, ten principal beverage concentrate and/or syrup manufacturing plants and four bottled water facilities. It also leases one bottled water facility and owns a facility that manufactures juice concentrates for food service use.
Moreover, the North America operating segment also has a portion of the Atlanta office complex. As of December 31, 2009, TCCC owns and operates 20 principal beverage concentrate manufacturing plants outside of North America, of which seven are included in the Pacific operating segment, five are included in the Eurasia and Africa operating segment, five are included in the Latin America operating segment and three are included in the Europe operating segment.
The company's management believes that the company's facilities for the production of products are suitable and adequate. Moreover, the extent of utilization of these facilities varies based in seasonal demand for Coca-Cola products. Nevertheless, the management believes that additional production can be obtained through existing facilities by adding personnel and capital equipment and through shifting or additional personnel. The company presently reviews anticipated requirements for additional facilities to acquire and/dispose some facilities.
As of December 2009, the total asset of Coca-Cola was $ 48,671 million which increased from $40,519 in 2008. The Coca-Cola Company's current assets amount to $17,551 million which increased from $12,176 million in 2008. Majority of these assets come from cash and cash equivalents and short-term investments. Marketable securities, trade accounts receivable, inventories and others accounts to the remaining amount of company assets. Table 2 shows the summary of the financial assets of the company.
One of the most important assets of the company is its brand. The Coca-Cola brand accounts for 90% of all the company's assets. The company owns numerous patents, copyrights, and trade secrets such as substantial know-how and technology. The most important patents, copyrights and trade secrets are its sparkling beverage and other beverage formulae. The company's technology includes products and services for their production, packages for their product, design and operation of processes and equipments in business, and other quality assurance software.
Table 2 The Coca-Cola Company Assets
Some of these technologies are further licensed to supplies and other parties. These trademarks are valid as long as these are in use or their registrations are properly maintained. Moreover, pursuant to the company's Bottler's Agreements, the company authorizes the bottlers to use applicable Company trademarks in their manufacture, sale, and distribution of Company products. Likewise, the company also grants licenses to third parties from time to time to use certain trademarks and in conjunction with certain merchandise and food products.
As of 2008, the total current liabilities of The Coca-Cola Company amounted to $ 12,988 million which increased to $ 13, 721 million in 2009. Moreover, the total current equity of the company were $ 25, 346 million and $ 20, 472 million in 2008 and 2009 respectively. The total liabilities and equity amounted to $ 48, 671 in 2009.
Table 3 shows the summary of liabilities and equity.
Table 3 The Coca-Cola Company Liabilities and Equity
The operations of the company are divided into six operating regions. The company operated on: Eurasia and Africa, Europe, Latin America, North America, Pacific, and Bottling Investments. Table 4 shows the summary or overview of the company's operations in 2009.
Operating activities of Coca-Cola also amount to large amounts money. As of December 2009, the net cash provided by operating activities amounted to $8,186 million. This was a big increase from $7,150 million in 2007.
Table 4 The Coca-Cola Company Operation's Overview
Financial Performance: The Coca-Cola Amatil
Figure 1 Financial Performance of Coca-Cola Amatil
Figure 1 shows the financial performance of Coca-Cola Amatil, the bottling partner of the Coca-Cola Company from 2003 to 2007. The company showed stable financial performance in these years especially in terms of share price appreciation.
Risk Analysis and Management of the Coca-Cola Company
In the annual report of the Coca-Cola Company, the risks factors identified by the company are the following: brand image and corporate reputation; obesity and health concerns; water scarcity and water quality; changes in the business environment, increased competitions, developing and emerging markets, fluctuations of currencies, recent global credit crisis, increased interest rates, relationship with bottling partners, and others. Specifically, these risks can be classified into three broad groups: natural risks, external risks, and internal risks.
Adverse weather conditions
Water scarcity and quality
Global or regional catastrophe
Recent global credit crisis
Fluctuations in Foreign currencies
Obesity and other health concerns
Changes in the business environment
Increased interest rates
Increased income taxes/charges
Laws and regulations
Brand image and corporate reputation
Emerging and developing markets
Relationship with bottling partners
These are the risks which include natural phenomenon such as weather, typhoons, earthquake, and etc. These risks post threats only to the properties of the company but also to their sales volume and profitability.
Water scarcity and water quality. Water is a very limited resource. Moreover, overexploitation, increased pollution, poor management, and climate change further contribute to water scarcity and deteriorated water quality. However, water is the main ingredient of the Coca-Cola products and this scenario may incur to the system increasing production costs and capacity constraints that may affect profitability.
Adverse weather conditions. Sales of Coca-Cola products are influenced by weather conditions. Cold or rainy weather during the summer months has negative impacts on the demand of such products.
Climate change. Climate change or the increase in global average temperatures due to increased concentration of carbon dioxide and other greenhouse gases in the atmosphere cause significant decrease in agricultural productivity. This adverse agricultural productivity affects the production of sugarcane, beets, corn, citrus, tea, and coffee, which are the main raw materials for the products of Coca-Cola. Increased frequency and duration of extreme weather conditions impairs production capabilities, disrupts supply chain and adversely affects the impact demand of products. Likewise, climate change will exacerbate water scarcity and cause further deterioration of water quality in affected reasons and shall limit system's bottling operations. Moreover, reduction of greenhouse emissions results to increased energy, transportation and raw material costs. Hence, climate change could have long-term adverse impact on the actual products and the operations of each.
Obesity and other health concerns. Public health and government officials and the customers become more and more concerned on the adverse effects of obesity to health especially on younger people. Hence, they advocate reduced consumption of sugar-sweetened beverages including sweetened with HFCS and other nutritive sweeteners. This growing concern may lead to increased possible new taxes and government regulations concerning marketing, labeling, and availability of sweetened beverages. The company also claims that negative publicity resulting from actual or threatened actions against the industry may reduce demands of sweetened beverages and this could affect the profitability of Coca-Cola.
Changes in the business environment. Changing consumer preferences, health and nutrition considerations and lifestyle has made the non-alcoholic beverages business environment change rapidly. Moreover, the industry becomes wider; hence there is a growing competitive product and pricing pressures the company has to face. If the company fails to adapt to this changing environment at a fast phase, share of sales, volume growth, and profitability results decrease.
Increased competition. This industry is highly competitive. There are other major international beverage companies that operate in major geographic areas and other locally-operating firms that give the Coca-Cola Company strict competition. The company claims that its ability to maintain market shares may be limited to the resulting actions by competitors.
Increased interest rates. The interest rates of the company may also affect credit ratings. Credit rating agencies consider capital structure and financial policies and aggregate balance sheet and financial information. If the credit ratings were to be downgraded as a result of capital structure, the major bottler's financial performance is expected to go down.
Recent global credit crisis. The recent global credit crisis brought about unprecedented disruptions in the past two years. The cost and availability of credit varies by market and subject to changes in global economic environment. The decrease in availability of consumer credit because of financial crisis may also cause consumers to reduce discretionary spending and reduce demands for non-alcoholic beverages and hence shall affect negatively, net revenues and profitability.
Increase in income tax rates. Increase in income taxes will reduce after-tax income and other effected jurisdictions. This is also critical because Coca-Cola operates on various countries; income tax increases on majority of these countries, it shall have detrimental effects on the company.
Energy supply. Step by step production, from gathering of raw materials to delivery of products needs energy supply. Bottling patterns operate on large fleet of trucks and other local vehicles to distribute and deliver beverage products to customers. Moreover, bottlers also use huge amounts of electricity, natural gas, and other energy sources in their various operations. Increase in the price, disruption of supply or shortage fuel and other energy sources caused by natural disasters, power outages and others would increase Coca-Cola system's operating costs at large amounts could negatively impact its profitability.
Legal and government regulations. All business operations of the Coca-cola Company is subject to different laws and regulations concerning competition, product safety, advertising, and labeling, container deposits, recycling and stewardship, protection of the environment, and employment and labor practices.
Brand Image and corporate reputation. The company acknowledges that their further success depends on their ability to maintain its brand image and corporate reputation. Hence, the company exerts more financial funding for advertising and marketing especially now that customers have changed their media preferences from traditional media to computer-assisted ones and the Internet. Some of the threats against their reputation identified by the company are: obesity and health concerns, environmental issues, water shortage, labor relations, employment and labor concerns, and human rights violations.
Developing and emerging markets. The company acknowledges that their success depends on their ability to grow business in developing and emerging markets. This ability requires formation of strategic business alliances to make necessary infrastructures such as facilities, distribution networks, sales equipment, and technology. However, the company also foresees that due to product price, limited purchasing power of consumers in developing markets and cultural differences, there can be no assurance that their products shall be accepted as that of established markets.
Relationship with Bottling Partners. Coca- Cola generates significant portion of its net operating revenues by selling concentrates and syrups to independent bottling partners. For example in 2009, approximately 79% of worldwide unit case volume was produced by bottling partners. The bottling partners also have the right to produce and distribute their own products and beverage of other companies. If Coca-Cola fails to provide appropriate mix of incentives to the bottling partners may devote more energy and resources to produce and distribute products of other companies. In the long run, it shall have adverse effects on the profitability of the company.
Financial Strategies and Risk Management: The Coca-Cola Company
The company uses derivatives of financial instruments primarily to reduce exposure to adverse fluctuations in interests and foreign exchange rates and to lesser extent of adverse fluctuations in commodity prices and other market risks. Primarily, Coca-Cola do not enter into derivative financial instruments for trading purposes. All of the company's derivative positions are used to reduce risks through hedging underlying economic exposure. The high correlation between the hedging instrument and the underlying exposure, fluctuations in the value of the instrument are generally offset by predicted changes in the values of underlying risk exposures. The company also claims that all of its derivatives are straightforward, over-the-counter instruments and with liquid markets.
In terms of foreign currency, the company manages its foreign currency exposure through consolidated basis and allows net certain exposures and takes advantage of any natural offsets. About 80% of the operating income of the company comes from five geographic operating segments outside the United States. Hence, weakness of one particular currency is offset by strengths of other currencies. Likewise, it also use financial instruments to reduce net exposure to currency.
Likewise, the company also enters to forward exchange contracts and purchases various currency options and collars to hedge options of forecasted cash flows of denominated foreign currencies. Moreover, the company also enters into forward exchange to offset the earnings impact in terms of exchange rate fluctuations of some monetary assets and liabilities. It also enters into forward exchange contracts to lessen net investments in international operations.
Financial Strategies and Risk Management: The Coca-Cola Amatil
This branch of the Coca-Cola Company in Australia also implements recognition and management of risks. The risk management of the company is implemented through a top-down and bottom up approach in terms of identifying, assessing, monitoring, and managing of key risks factors. The procedures of risk management are reviewed and reported regularly to Audit and Risk Committee Board. The company recognizes that its Audit and Risk Committee operates efficiently and effectively in terms of material respects, risk management, and internal compliance.
This board is responsible for ensuring that adequate systems procedures in identifying, assessing, monitoring, and managing risks. The scope of their monitoring and management procedures include: overall business risks, treasury risk, procurement, insurance, taxation, litigation, code of conduct violation and fraud.
Aside from monitoring these areas, the committee also reviews and makes recommendations to the administration in terms of policies regulating such areas. Likewise, the internal and external audit also implements its own procedures of risk recognition, assessment, and management.
To compare, the risk management strategies of the Coca-Cola Company differs from that of risk management procedures of Coca-Cola Amatil, a bottling partner based in Australia. The Coca-Cola Company focus on financial risks while Coca-Cola Amatil considers insurance and other business or operation-related risk concerns.
Comments on Risk Analysis and Management of the Coca-Cola Company
Risk involves the possibility of suffering damage or loss brought about by uncertainty of the outcomes of actions or circumstances. Because the uncertainty attributes of risk, various companies have different attitudes and responses towards risk. Nonetheless, a company's attitude towards risk directly influences its main strategic choice. A company that favors risk has its range of strategic choices welcoming expansion and high risk strategies can be acceptable and even desirable. On the other hand, when a company is risk averse, the strategic choices of the company are limited and risky alternatives are eliminated even before strategic choices are made (Kelly and Booth, 2004).
Various companies today has two approaches towards addressing risks: risk hedging and risk management.
In risk hedging, the view of risk is nothing but a danger for the well-being of the company. The main objective of this procedure is to protect the company against downside of the current risks and its main functional emphasis is centered on financial matters only. The process is primarily product oriented with the use of derivatives and insurances. The measure of success based on risk hedging is reduced volatility of earnings, cash flows and values (Damodaran, 2008).
On the other hand, in risk management, risk is viewed as a danger and an opportunity as well and the objective is to exploit this opportunity. Risk management is process oriented and its functional emphasis is strategy across other functions of the company. Identification of risks, assessing and taking advantage of the risks are some scopes of risk management (Damodaran, 2008) .
Risk management is the process for incorporating sufficient flexibility in different aspects of plans, strategies, and tactics. These procedures include adapting strategies to incorporate unforeseen circumstances which may be favorable or unfavorable. These serve as precautionary measures of the company to minimize threats to its efficiency and profitability. Examples of these procedures are taking out insurance against financial loss, and implementing security and safety measures (Kelly and Booth, 2004).
The scope of risk management includes planning risk, identifying risks, analyzing risks, and developing risk response strategies. Appropriate risk management is proactive, positive, and continuously seek strategies to deal with risks by minimizing uncertainties and preparing for the worst scenario (Kerzner, 2009).
Some of the alternative techniques for hedging risks include: investment choices, financing choices, and insurance.
Better investment choices can hedge risks by maximizing financial investments to prime locations, core businesses and other investment specifics that will lead to the least possible risk. There are times that it is better to limit the choices to certain, fixed, and predictable return on investment rather than on investments with greater risks and little possibilities of great returns especially if the financial capabilities of the company are limited (Demodaran, 2008).
This leads to better financing choices as a good alternative to eliminate risks. Not to mention, financing choices has overall effects on company's risk exposure. The optimum financial strategy is to match the characteristics of debt to the asset financed by the debt. This is critical for Coca-Cola because it operates on various countries with different currencies (Demodoran, 2008).
Lastly, there is insurance. In essence, insurance does not eliminate but only shifts the risk. While insurance gives the company security of its financial asset, there are other benefits aside from these. First, the company shall have portfolio of risks which can be used for diversification of benefits. Second, the company may also acquire expertise to evaluate risks and process claims because of repeated exposure to risk. Third, insurance companies may also provide other services such as inspection and safety services which can be beneficial for the company too (Demodoran, 2008).
Based on identification of risks and management procedures of the Coca-Cola Company and Coca-Cola Amatil, this paper came up with the following recommendations for the companies:
Perhaps the highest risk for the Coca-Cola Company is its brand image and corporate reputation. An immediate attack to its reputation can adversely affect the company as a whole and each of its bottling partners. Hence, the company should exert efforts more than just responses to attacks to their credibility like what they are doing now. The company lacks assertiveness in promoting and maintaining the integrity of their brand.
Reputation is a very valuable asset for any company with established brand name. In the case of Coca-Cola, its brand accounts for 90% of all the company's assets. However, little perceived or real failure associated with an established brand, the cost of restoring confidence can be considerable (Larkin, 2003).
In June 1999, Coca-Cola was the world's most valuable brand which accounted to $83 billion or 60% of the company's market value. However, its reputation was seriously put at risk when about 100 people got sick after drinking Coke due to contamination. The 133 years of experience of the Coca-Cola Company was jeopardized by this contamination incident. This resulted to recall and ban of all Coca-Cola products by the European environment (Lam, 2003).
However, the risk management strategy of Coca-Cola towards brand image and corporate reputation is not enough to deal with the critics of the company. For example, in spite of the implementation of Global Water Challenge Project of Coca-Cola in cooperation with UNICEF, Procter and Gamble, and CARE with the aim to improve sanitation, hygiene education and access to clean water especially in developing countries. However, the company still wave banners regarding the "destroying" of farmer's lives and the media serves as the most active critics of the company (Griffin, 2008).
Employment-related issues as an integral part of the company's risk management strategy to promote greater cooperation and morale/reputation destroying effect of legal actions filed by its employees can have detrimental effects on the company. In May 2002, Coca-cola was hit by employment-related law suits filed by its employees. Coca-Cola was sentenced to pay $ 8.1 million to former and current female employees for salary discrimination plus $192 million class-action race discrimination lawsuits (Neef, 2003).
Hence, the company should ensure, after this incident that they implement better compensation procedures eliminating biases of race and gender. This is particularly critical for them because the company operates on wide geographical distribution.
New product development also serves as an effective mechanism to reduce risks. The company should make sure that their existing and developing products should be continuously improved. Rather, static or mature markets are more vulnerable like that of Coca-Cola (Sadgrove, 2005).
The company should continuously track consumer's choice, preferences, and expectations of their product. Stability and lack of new product development may cause consumers to try other company's products. However, developing new products and business diversification may also pose detrimental effects on core business products. The company should maintain balance between these two groups of products.
Coca-Cola is exposed to more country risk because of investing to emerging markets with substantial risk. A substantial performance in one country can be offset or traded off by superior performance in one country. The Coca-Cola Company is oftentimes criticized for investing in emerging rather than in established markets (Demodoran, 2008).
Hence, to reduce risks brought about by uncertain acceptance from developing countries and having to deal with more currencies which are still unstable, the company may study the option to focus on developed markets. Moreover, this will lessen start-up costs such as establishing partnerships, developing all the facilities necessary, and finding the best road network for the most efficient supply chain.
As a conclusion, the company should improve its risk dealing strategy from being risk hedging only into more comprehensive risk management procedures. The company should improve in terms of brand image and corporate reputation, new product and market concerns, and employment-related issues.