When it comes to food and drink, Americans' tastes are quickly changing. Led by Millennials, the focus is one step away from fast food empires and pre-packaged goods and a move toward healthier meals with fresher ingredients. For perspective, Americans have flocked to Chipotle, while McDonald's continues to struggle in the current environment.
As far as beverages go, there has been a noticeable shift, as well. In light of continued health warnings of excess sugar consumption -- and more recently, artificial sweeteners, as well -- soft-drink patrons have traded in colas and other "sparkling beverages" for water, tea, and other healthier choices. Last year, a Gallup poll found 63% of Americans were actively avoiding soda.
Ironically, soda makers are facing a crisis much like the cigarette industry faced in the late 1970s throughout the 1980s. After decades of high smoking rates, the industry suddenly had to face health questions amid government warnings and a skeptical public. The smoking rate dropped from nearly 40% in 1970 to mid-20% by 1990.
In the face of this threat, what does Coca-Cola (KO 1.46%) CEO Muhtar Kent prescribe as the way to add value for shareholders? Double down on its soda-first strategy.
Is Coke rearranging deck chairs on the Titanic?
A Wall Street Journal article (subscription required) outlines Mr. Kent's strategy. The story starts with the meticulous CEO comparing the paint on a new delivery truck to a paint chip in his wallet in order to ensure the truck was true to Coke's legendary red color -- it wasn't. According to the story, Mr. Kent compares the color to bottles, cans, and Coke's soda machines in order to "polish that diamond."
However, the reason for Coca-Cola's woes has nothing to do with the wrong hue, but rather, the aforementioned health concerns. Coca-Cola is a company that derives nearly 70% of sales from soda; investors should ask if doubling down on this strategy is the best path forward in the current environment.
Kent's current path of increased marketing spending is interesting in light of the $3 billion in cost cuts last year -- leading to 1,500 layoffs. Is it best to spend any of that capital on a product many have already judged as harmful? Wiill it move the needle?
Speaking of tobacco companies...
Coca-Cola could take notes from tobacco company Altria (MO 1.08%). In the face of increasing U.S. scrutiny, the company has continued to outperform. For a visual perspective, here's a chart comparing Altria, Coca-Cola, and the greater S&P 500:
There are a few things that Coca-Cola could do to better enrich shareholders in the face of flagging U.S. sales. First, Altria engaged in a huge international push in order to offset falling U.S. volumes. Later, the company spun off that international business -- Philip Morris International. Shareholders received proportional shares in the new corporation.
Next, the company was able to create value for shareholders by shrewdly buying complementary businesses: The company owns 27% of beer maker SABMiller, and also owns Ste. Michelle Winery outright. Finally, the company has a strict policy of distributing 80% of adjusted earnings, giving investors back unused capital.
It isn't as if Coca-Cola hasn't tried to accomplish any of these goals, and it's had different levels of success. After years of international growth, the company is facing slowing growth rates, with worldwide unit case volume slowing to 2% during each of the past two years. The two regions with higher than 2% growth each of those years were its Eurasia & Africa region and Asia Pacific; it would be wise for the company to focus on those regions for organic growth.
In addition, the company has recently taken to acquisitions for growth. Unlike its rival PepsiCo, Coca-Cola did not diversify away from cola in past decades. As a comparison, soda provides roughly 70% of Coke's revenue -- compared to Pepsi's food division that provides 52% of revenue. More recently, the company has started to acquire other companies, taking a near-17% state in Monster Beverages and Keurig Green Mountain in an attempt to kick-start growth.
Finally, as Coca-Cola is having problems growing organically, perhaps it's time for the company to look into returning more cash to shareholders via a dividend policy like Altria. It may not be Coca-Cola red, but I think shareholders would prefer another color: green.
