Exploring profit chances within Coca-Cola's global market
Coca-Cola, one of the world's most renowned brands, defies the typical corporate structure. Instead of managing the distribution of its products centrally, the company employs a network of international bottling partners in various markets, ensuring that the drink reaches consumers efficiently.
In essence, Coca-Cola functions like a franchise system. While the parent company, known as KO (NYSE), manufactures key components and maintains global brand management, local firms primarily handle the bottling and distribution tasks in their respective territories.
From southern Europe to South America, key regional companies influence the distribution process. Many of these firms have leveraged their association with the colossal drinks conglomerate and secured deals with Coke's counterparts.
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birth of a global icon
The carbonated beverage we now call Coke originated in the late 1800s. John Stith Pemberton, a Atlanta-based pharmacist, begot the syrup for Coca-Cola. According to the brand's historical account, Pemberton trafficked the new product to Jacobs' Pharmacy, where it was sold as a soda fountain drink for five cents.
The rise of soda fountains in drugstores in the late 1850s was due to their reputation as purveyors of medicinal tonics, which often included cocaine and caffeine. The advent of milkshakes in the latter part of the century led to the popularity of soda fountains amongst the younger demographic.
Pemberton started selling his elixir in 1886. In its initial year, sales averaged just nine drinks daily. Frank Robinson, Pemberton's partner and bookkeeper, aided in designing the iconic Coca-Cola logo, setting its illustrative script ablaze throughout the town and local press.
After several years of steady growth and diligent work from the founders, Asa Griggs Candler purchased the Coca-Cola formula and brand in 1892, ultimately forming the Coca-Cola Company in Atlanta. By mid-decade, the syrup was marketed across the US; in 1889, the company instituted a seismic shift in its operating model.
In pursuit of expansion without substantial monetary investment in new factories, the company adopted the franchise business model, where independent bottlers across the nation received exclusive bottling rights for a nominal fee.
Over time, Coca-Cola gradually regained ownership of some operations, only to relinquish control once more. However, the franchise model has consistently proven to be the most effective organizational approach for both the brand and its partners.
Granting considerable control to third parties can present risks. Coca-Cola cannot be certain that the product it furnishes will wind up in quality bottles on the shelves. The company must keep partners accountable and invest ample time ensuring quality standards are met.
Regardless, for an organization servicing nearly a quarter of the global population daily, the model has proven remarkably successful. It permits Coca-Cola to focus on its strengths: marketing, syrup production, and financial allocation to shareholders, without becoming entangled in contract negotiations for glass supply and distribution networks in developing countries.
Coca-Cola maintains a firm grip on its partners, with agreements stipulating prescribed terms for contract duration, termination in case of quality deterioration, ownership changes, or financial decline.
The Colossal Coca-Cola System
In 2010, Coca-Cola acquired its North American bottler, Coca-Cola Enterprises, streamlining operations and cutting costs. But by 2013, the parent company chose to divest from the business. By 2017, Coca-Cola celebrated a "major milestone", announcing that "nearly 70 independent Coca-Cola bottlers across the US are now running their trucks and bottling operations as a fully refranchised system". The North American market is now largely under the purview of independent bottlers.
This change bore fruit for Coca-Cola's bottom line. In the second quarter of 2017, the company's operating margin, excluding refranchising asset impairment and restructuring charges, increased by 375 basis points over the first quarter of 2016.
Coca-Cola's grip on its most valuable asset—the precise formula for Coca-Cola's natural flavors—is restricted. The number of syrup factories manufacturing this key ingredient remains undisclosed, but it is thought that three or four operate worldwide, with the primary factory residing in the brand’s hometown of Atlanta, Georgia.
As of the end of 2024, Coca-Cola operated 31 owned or leased syrup or concentrate factories and 81 owned or leased bottling facilities. Albeit the article's focus has been on the Coca-Cola product, the company boasts a portfolio including more than 200 brands and thousands of beverages under categories such as sodas, waters, coffees, teas, juices, and beyond.
Bottling operations that remain under the company's control are concentrated on manufacturing non-soft drink products that cannot be produced from concentrate. Bottling partners use concentrate to manufacture syrups for fountain retailers. At the apex, Coca-Cola segregates its businesses into two categories: concentrate operations and finished-product operations. In 2024, the concentrate segment generated 59% of the total group revenue, while finished-product business accounted for 41%.
The company remains tight-lipped about the profitability breakdown of these two divisions. Notwithstanding, an examination of independent bottlers reveals that Coca-Cola's reported operating profit margin dropped from 24.7% to 21.2%, while one of its major bottling partners, Coca-Cola HBC (LSE: CCH), reported a margin of 11%, up from 9.4% the previous year. In layman's terms, bottling operations are significantly less profitable than manufacturing and selling syrup and concentrates alone.
This underscores the profitability gap, however the independent bottlers are not unattractive investments. Coca-Cola HBC has outperformed Coca-Cola itself over the past decade, yielding a total return to investors of 12.6% versus 7.8% for the larger corporation. Over the past five years, the former has garnered a return of 18.2% per annum on a total return basis, compared to the latter's 13.3%.
Major Players in the Coca-Cola Franchise
HBC and Coca-Cola Europacific Partners (LSE: CCEP)—both listed in London—are amongst the world's largest Coca-Cola bottlers. The latter, the largest by net revenue and the second-largest by volume, operates in Europe, Australia, Asia-Pacific, Indonesia, and the Philippines, while Coca-Cola HBC is the main bottler for European regions and Africa.
Coca-Cola HBC offers more than simply Coke products, hosting a "24/7 portfolio" of drinks that cater to various consumption occasions, ranging from water and sports drinks to tea, snacks, and alcoholic beverages. This diversification exemplifies how these franchise businesses have capitalized on their partnerships with Coca-Cola and steady revenue inflows from bottling operations to expand into new fields and work with other clients.
Stable revenue streams afford these bottling companies ample opportunity to invest in their core operations. With significant fixed costs and substantial scale, these businesses are greatly leveraged to volume and scale increases.
Analysts at asset manager Berenberg have noted that with large fixed costs, the bottlers can appeal to other customers, opening larger production facilities in proximity to the end consumer. This confers economies of scale due to reduced transportation costs, and presents an opportunity for the bottlers to secure better deals with suppliers.
The potential for growth in regions such as Italy, where the level of carbonated beverage consumption is 40 liters per capita compared to Spain's 61 liters, suggests that Coca-Cola HBC's sales will increase by 5.5% in 2025, 2.6% in 2026, and 2.4% in 2027. Thanks to these economies of scale, earnings before interest and taxes could expand by 13.8% in 2025, 5% in 2026, and 6.2% in 2027.
Coca-Cola Europacific Partners operates a model similar to that of its London counterpart. The introduction of other brands to its portfolio has facilitated growth in markets like the energy-drink sector: a partnership with Monster Beverage propelled a 6.3% surge in energy-drink sales last year. Ready-to-drink alcoholic beverages also performed strongly thanks to the rollout of Absolut Vodka & Sprite, while Jack Daniel's & Coca-Cola Zero Sugar expanded distribution to the Philippines and other markets.
Europacific Partners has projected a 7% increase in operating profit this year, and free cash flow of at least €1.7 billion. It has outlined plans to repurchase €1 billion in shares over a 12-month period commencing from February 2025, with half of free cash flow earmarked for dividend payouts.
Emerging Markets
The largest bottler by volume is Coca-Cola FEMSA (NYSE: KOF), which lies in Mexico and operates in various Latin American countries and the Philippines. The Philippines, Brazil, and other Latin American countries offer significant growth potential for the beverage industry due to expanding urban populations and burgeoning disposable incomes.
Volumes rose 2% in the first quarter, building upon a 10% jump in the same period the previous year. In the smaller Argentine market, volumes surged 9%. Coca-Cola FEMSA is growing invested capital, which, according to UBS, "should remain elevated at 8.5%- 9.5% of sales... as the company continues to expand installed capacity".
This should result in "greater volume output," and UBS anticipates a 30 basis-point increase in return on invested capital thanks to the anticipated economies of scale. Sales growth is projected to hit 11.9% in 2025, 8.6% in 2026, and 6.2% in 2027, yet despite these projections, the firm, which presents the most growth potential of the large triad, remains the cheapest of the trio.
Coca-Cola Consolidated (Nasdaq: COKE) is the largest Coca-Cola bottler in the US, and Coca-Cola holds the largest stake at 22%. The second-largest shareholder is J. Frank Harrison, currently the group's CEO. While Coca-Cola Consolidated operates in a mature market, it has managed consistent revenue growth at 7.4% per annum over the past five years. Much of this growth has grown from pricing. For instance, last year, volume decreased 0.6% as net sales increased 3.7% over the year. However, the company benefited from economies of scale, like its peers in other markets. The gross profit margin for the year escalated from 39.1% to 39.9%, and income from operations jumped 10.3%.
Trading at a forward P/E ratio of 20, Coca-Cola Consolidated is the costliest of the large bottler group. However, the nature of its significant shareholders ensures tighter ownership and affords Coca-Cola Consolidated more attention to capital allocation. Additionally, unlike most US-listed companies, the company opts to return capital through buybacks rather than dividends.
The dividend yield on the shares is scant, but last year the group authorized a $3.1 billion tender offer to repurchase shares in the first half of the year. In August, the company announced an additional $1 billion repurchase. With these aggressive buybacks, it is no surprise that the stock has soared by 400% over the past five years, surpassing the S&P 500’s 107% growth.
For investors seeking a more adventurous investment, there are other Coca-Cola bottling prospects. Among them is Arca Continental (Mexico City: AC), a major Coca-Cola bottler in Latin America, operating in Mexico, Argentina, Ecuador, Peru, and the southwestern US. Arca Continental is the fourth-largest bottler, and thanks to its exposure to Latin America, it is likely to benefit from growth trends in the region. UBS predicts earnings per share to grow at a compound annual rate of 9.2% over the subsequent three years. Shares are trading at a forward P/E ratio of 13.7 with a yield of 4.7%.
Elsewhere, among smaller or more local bottlers, there's Embotelladora Andina (NYSE: AKO.A), a Chilean company bottling and distributing Coca-Cola products in Chile, Argentina, Brazil, and Paraguay. Coca-Cola holds a small stake in the group, and it is likely to benefit from South American growth trends, although it is significantly smaller than Coca-Cola FEMSA.
There's also Coca-Cola Icecek (Istanbul: CCOLA), the Turkish firm distributing Coca-Cola's products in Turkey, the Middle East, Central Asia, and Pakistan. Lastly, Kirin (Tokyo: 2503), the Japanese beer and beverages group, owns Coca-Cola Beverages Northeast, another major Coca-Cola bottler in the US.
- The franchising model adopted by Coca-Cola has enabled local firms to handle bottling and distribution tasks, ensuring that the drink reaches consumers efficiently, even in regions such as southern Europe and South America.
- Coca-Cola's financial allocation to shareholders is primarily focused on marketing, syrup production, and maintaining global brand management, as the key components are manufactured by the parent company.
- Technological advancements have been leveraged by some key regional companies to secure deals with Coke's counterparts, thereby influencing the distribution process of Coca-Cola products in various markets.
