Why Coca-Cola's Investments in Emerging Markets Are Right on the Money

Coca-Cola's plan for future growth won't be accomplished without investing in underdeveloped nations. Fortunately, management is up to the task.

Jun 21, 2014 at 2:00PM

The ongoing soda war between Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP) has reached a standstill, at least in North America. Simply put: the domestic market is just about as saturated as it can get. Growth in the United States is especially hard to come by, as it's a good bet you can find Coca-Cola or PepsiCo products in virtually every household across the country.

But that doesn't mean the war is over; far from it. In fact, a new battle is being waged far across the globe. As both Coca-Cola and PepsiCo see flat-lining volumes in the United States, they're looking elsewhere for growth. Fortunately, there's tantalizing potential to be found in the emerging markets.

Underdeveloped nations in the Middle East, Africa, and Asia are growing much faster than their Western counterparts. Populations are rising fast there, and as these economies mature, it means tens of millions of new entrants into the middle class.

Seeing these demographic shifts, Coca-Cola has upped the ante abroad. The company recently announced a new round of significant investments targeting emerging markets. Along with its 2020 Vision plan, Coca-Cola has made it abundantly clear it intends to win on the battlefield of emerging markets.

Coca-Cola plants its flag
Coca-Cola recently announced it will invest $500 million over the next three years to build five new factories in Egypt and Pakistan. In an interview with Reuters, Coca-Cola's Middle East and North Africa president said the company sees double-digit growth potential for these markets over the long term.

This is a wise move, since the potential in rapidly growing markets is too great to ignore. Coca-Cola definitely has room to expand in these countries. Last year, just 15% of its case volume came from what it terms Eurasia and Africa. North America remains the company's largest geography, as it made up 21% of its case volume in the period.

Maintaining North America as its biggest business is problematic because there isn't much growth left here. Last year, unit case volume was flat in North America. The best results came from Eurasia and Africa, where case volume grew 7%.

Emerging markets set to outperform
Coca-Cola's investments build on its long-term strategic growth plan, which management laid out in its 2020 Vision. According to company estimates, growth in the beverage industry will be fueled by global expansion.

As emerging economies develop, there will be a broad shift toward urbanization and middle class expansion. To that end, Coca-Cola expects 20% growth in the global urban population and 50% growth in the number of people entering the middle class across the world.

Not surprisingly, PepsiCo has followed suit in recent years and is also busily building its business in underserved nations. PepsiCo operates in more than 200 countries. It holds 22 global brands, which are its biggest sellers. These 22 brands each collect $1 billion in worldwide sales every year. Just a few of them include Pepsi, Quaker, Gatorade, and Lipton.

And, like Coca-Cola, PepsiCo's international segments are growing much stronger than its North American divisions. For example, PepsiCo's beverage volume shrank by 2% last year in both the Americas and Europe. By contrast, beverage volume jumped 7% in its Asia, Middle East, and Africa segment.

Coca-Cola has the right strategy in mind
Coca-Cola's decision to accelerate its already-significant investments in the Middle East and Africa is a sound strategic move on the part of management. The company estimates most of the growth in the industry will come from developing nations across the world because those economies are expanding much faster than saturated markets such as the United States.

Coca-Cola still has room to grow abroad since the United States still represents its biggest-single geographic region. That's why investors should be excited about Coca-Cola making such sizable investments in building new factories and growing its business in emerging markets.

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Bob Ciura owns shares of PepsiCo. The Motley Fool recommends Coca-Cola 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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