Originally invented in 1886, Coca-Cola (KO 1.50%) has grown from its pharmacy roots to become one of the most valuable brands in the world. With sales across every continent in the world, and cases of soda sold alongside PepsiCo (PEP 3.62%) in every grocery store, Coke is about as familiar as it gets.
Today, changing consumer trends have cast some uncertainty around the soda giant. Traditionally considered a safe investment, from the likes of Warren Buffett no less, the stock is anything but fail safe these days. Here are three things you need to know before you buy Coca-Cola's stock.
Coca-Cola is more than just Coke
While its namesake soda brand is what gives it familiarity, today Coca-Cola is much more than Coke. In 2013, traditional Coke brands made up only 46% of sales, while other Coca-Cola brands made up the rest. Those other brands consist of Minute Maid, Dasani, Powerade, among others, and they've been driving growth recently. For the first quarter of 2014, Coca-Cola's North American carbonated beverage segment was flat but other healthier beverage groups were up. Sales of Powerade were up 9%, and the juice segment was up 10%. This is not that different than PepsiCo, which relies on Quaker, Frito-Lay, and other food brands for the majority of its revenue today.
Coca-Cola's strong brand is a catch-22
Coca-Cola was recently ranked the third most valuable brand in the world. Coke's soda products are much more popular than Pepsi's, which is an advantage when it comes to negotiating terms with its retail partners and vendors.
As the chart below shows, Coca-Cola has a nearly 7% edge over PepsiCo in gross profit margin.
PEP Gross Profit Margin (Quarterly) data by YCharts
In the chart above, we're simply measuring the profit between Coca-Cola's total revenues (sales) minus the costs of those products (beverages). This lead isn't due to the efficiency of Coca-Cola's "beverage only" structure, as its lead stays about the same (21% vs. 14%) when operating margins are calculated (which include salaries, rent, etc.). PepsiCo's food business is actually what drives its operating profit. Its North American food business made up 52% of operating profit in 2013, compared to 26% for the beverage business. It's very possible that PepsiCo would be performing worse, vs. Coca-Cola, without its food business.
That said, Coke's powerful soda brand carries a huge risk for investors. Coca-Cola relies on that soda brand much more, and soda is under intense scrutiny. While consumption of Coke is falling slower than Pepsi, it is still falling. Coca-Cola is supplementing this decline with growth in its juice segment, but don't count on Minute Maid being nearly as profitable as Coke.
Coca-Cola is about to go back to its "healthy" roots
Like Pepsi, Coca-Cola was originally marketed as a medicine and sold in pharmacies. In the late 1800's, most American's believed that carbonated beverages were healthy. Founder John Pemberton claimed that Coke cured diseases, addiction, and even impotence. It was a different time, for sure.
Today Coca-Cola finds itself in a difficult position, with increased scrutiny of both sugar, and artificial sweeteners, squeezing North American soda sales. Ten years ago, Diet Coke was the answer for health conscious customers. Today, customers are as skeptical of Splenda as they are calories. To combat this Coca-Cola is unleashing Coca-Cola Life, a naturally sweetened beverage that promises Coke's taste at 1/3 the calories. The drink has the chance to recharge Coca-Cola's soda sales.
Of Course, it's never as simple as it sounds. Life is sweetened with both natural sugar and stevia, but stevia tends to have a bitter aftertaste that has been described as similar to licorice. Coca-Cola claims that Coca-Cola Life will taste great; if it gets close it could have a big impact.
Questions for Coke
If any management team can navigate through uncertainty, it's Coca-Cola's. They've done a nice job of navigating through changing consumer trends by adding healthier drinks to their portfolio in recent years. Investors shouldn't bank on Coca-Cola Life to save the day. Even if it tastes great, remember there is a reason that Coca-Cola puts corn syrup into Coke (instead of sugar). It remains to be seen what the profit margins of the new product will be.
Still it's a nice idea that could help stabilize soda sales; more than anything it's a good sign that Coca-Cola management understands the threat. Don't expect Coca-Cola to deliver big growth anytime soon, but management should stabilize the situation enough to make an investment in Coca-Cola safe.
