Why Coca-Cola's Pullback Looks Like an Opportunity

Coca-Cola has dropped 6% in 2014, but this might be a blessing in disguise.

Jun 6, 2014 at 9:00AM

Coca-Cola's (NYSE:KO) performance in 2014 has been unimpressive. The stock has remained flat while PepsiCo (NYSE:PEP) is up more than 6%. However, Coca-Cola is adopting various strategies to boost its performance going forward. The company is focusing on new products to drive volume, while it is also exploring the emerging markets. Let's take a look at the moves that Coca-Cola is making to get back on the growth trail.

A turnaround in the cards
Coca-Cola is focusing on five strategies to improve performance. First, it is looking to accelerate sparkling beverage growth. Second, it wants to strategically expand its portfolio. Third, it plans to increase brand investments by maximizing productivity. Fourth, it will increase its presence at points-of-sale. And last but not least, it will invest in next-generation products. 

Coca-Cola has built strong relationships with bottling partners to increase both the penetration of sparkling beverages and cold-drink availability to customers. In addition, the company is focusing on brand, price, and packaging strategies to enhance revenue growth. Also, Coca-Cola is extensively involved in the marketing campaign and programs for the upcoming FIFA World Cup, where more than 175 countries are participating. This marketing push will have the broadest reach of any campaign in Coca-Cola's history. 

Coca-Cola will be focusing on sparkling beverages, robust marketing, and local execution in order to make the most of the World Cup opportunity. It is trying to tap this opportunity through various initiatives such as the Share a Coke program, which provides individualized Coca-Cola bottles along with a wide range of new packages across its entire sparkling-beverage portfolio.

Product diversification
Coca-Cola has increased its stake in Keurig Green Mountain (NASDAQ:GMCR). Earlier this year, the company purchased a 10% stake in Keurig Green Mountain for $1.2 billion and has since raised that stake to 16%. With this move, Coca-Cola entered into a commercial and strategic deal for 10 years to provide Green Mountain access to its beverage brands in the U.S. and across the globe. Moreover, Green Mountain is optimistic about the performance of the Keurig Cold system, which is why it is building a new Keurig Cold production center in Vermont. 

The two companies will partner for the next 10 years to produce Coca-Cola's products in single-serve pods, or K-Cups. The K-Cups will be produced through Green Mountain's Keurig Cold system, which is set for a late-2014 launch. Through this partnership, Coca-Cola will be able to diversify its product lineup and should be able to reinvigorate volume growth in North America.

Although Coca-Cola delivered 2% global volume growth in the first quarter, consumption was flat in North America. The company has depended on robust volume growth in emerging markets such as China and Brazil, thus benefiting from its geographic diversity. However, North America is an important market. So, the company has been taking steps to improve its position here; PepsiCo seems to be taking away market share from Coca-Cola. 

In the words of Fool contributor Ted Cooper:

Even though PepsiCo's global beverage volume was flat and Coca-Cola's increased 2%, the No. 2 American soft-drink company topped its competitor in the North American beverage market. PepsiCo's North American beverage unit experienced flat volume growth and 1% organic revenue growth, while Coca-Cola's North American unit experienced flat volume and a 2% revenue decline.

As a result of the Green Mountain partnership, Coca-Cola should be able to reach more households. Moreover, the company announced that it will be investing an additional $400 million this year toward media initiatives in a bid to accelerate top-line growth. These moves should help Coca-Cola improve.

The bottom line
Coca-Cola's moves look impressive. Although the company is struggling so far this year, it should be able to come out of its slump on the back of its robust strategies. It would be wise for investors to buy Coca-Cola on the pullback, especially considering that it has a strong dividend yield of 3%.

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Prabhat Sandheliya has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Keurig Green Mountain, and PepsiCo. The Motley Fool owns shares of PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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