Coca-Cola Lays Down the Gauntlet

Despite 2013 earnings coming in below management's expectations, Coca-Cola (NYSE: KO) remains aggressive in its strategy for 2014. Fourth quarter adjusted earnings only showed a 7% rise to $0.46 per share year on year and overall revenue dropped by 4% for the same period.

After this disappointing news, it was good to hear that management has announced plans to attack the falling revenue head on by significantly increasing market investments and introducing as yet unrevealed innovations to both packaging and products. This, coupled with a planned expansion of its beverage portfolio and a new partnership about to take off, shows the company is intent on pursuing an aggressive strategy to regain and improve its overall global sales and profitability.

Breaking new ground
In a press release earlier this year, Coca-Cola announced a new partnership with Keurig Green Mountain (NASDAQ: GMCR), the maker of the popular Keurig pod coffee machine. This partnership looks like a great fit for both companies. In addition to Coca-Cola's lackluster performance, Keurig Green Mountain has been under ever-increasing competition in the pod coffee market after most of its K-Cup patents expired in 2012.

Encouraging also is its plan to use the proceeds from the $1.2 billion sale of a 10% stake to Coca Cola to boost its share-buyback program, reducing dilution. It will use the remainder to fund the anticipated increase in capital expenditures as it moves into the production of its new Keurig single-serve cold-beverage system.

Under the terms of the partnership, Keurig Green Mountain will make Coca-Cola brand drink pods, which will enable consumers to 'brew' their own Coca-Cola at home. This opens up a whole new potential segment of the soft-drink market. It will also obviously pose a challenge for PepsiCo (NYSE: PEP).

Although facing similar pressures to Coca-Cola with regard to global soda sale revenue, PepsiCo has been able to maintain positive revenue and earnings growth of 1.4% and 10.2%, respectively. This will force PepsiCo to look into forming a partnership of its own, most likely with SodaStream (NASDAQ: SODA), in order not to be left behind in the move to soda drink pods. 

Keurig Cold beverage system
The new Coca-Cola branded drink pods are slated to enter the market after the launch of Keurig Cold beverage machine in 2015 according to a Coca-Cola spokesperson. This will be in direct competition to the market dominant SodaStream maker which is not great news for SodaStream, as it has largely had the at-home carbonated drink-making market to itself until now.

The major difference between the two machines is going to be in the method by which the soda is produced. The Keurig system does not require consumers to calculate the amount of syrup or level of carbonation, as those recipes will be contained within the memory of the machine itself.

The other major innovation in the upcoming Keurig system lies in removing the need for consumers to purchase CO2 cartridges, as the carbonation system will be built in and only require the purchase of the relevant cold beverage pod. No price has yet been set for the cost of the new equipment, but I anticipate the prices will start at the upper end of the current price scale.

Challenges facing the soda industry
This new partnership could not come at a better time for Coca-Cola with changing consumer preferences starting to eat into soda sales globally. The rise in health awareness has highlighted the impact of consuming large amounts of sugar- sweetened drinks; and with obesity a major topic, many people have been reducing their soft-drink intake.

More worrying for Coca-Cola is the decline in sales of its flagship Diet Coke, fueled by increasing concerns about the chemicals used in the production of artificial sweeteners. The upside to this is the increasing success of Coke Zero, which may show the way forward for Coca-Cola to increase its revenue in combination with the obvious benefits of the new home-delivery system offered by the partnership with Keurig Green Mountain.

Things looking up
Coca-Cola has definitely weathered a fairly difficult couple of years with the share price only rising 10% since 2012; this compares with a 25% rise in PepsiCo and 47% for the benchmark S&P 500 index. Despite the relatively slow growth, the shares are still trading at a significant premium with a value of 14.2 times their earnings before interest, taxes, depreciation, and amortization.

Hearing Muhtar Kent, the chairman and CEO of Coca-Cola, calling 2014 'the year of execution' and outlining the ambitious plans ahead indicates to me there will be significant growth in the share price. This will unfold as the growth and acquisition strategies are implemented. I also feel there are potential medium and long-term gains in both Coca-Cola and Green Mountain as they move to production and marketing of the Keurig Cold beverage system and the Coca-Cola branded drink pods.

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