Analysis - Coca-Cola Co and the 2020 Vision alternatives
Coca-Cola has ambitious plans to double revenue in 11 years
Back in 2009, The Coca-Cola Co set out its so-called “2020 Vision”, a strategy that targeted a doubling of annual sales in 11 years.
Fast forward to today and that ambitious plan appears even more onerous after a 2013 in which Coca-Cola's full-year sales slipped by 5% and a first quarter of this year that was similarly disappointing.
In February Stifel analyst Mark Swartzberg called on Coca-Cola's management to “eliminate” the 2020 Vision. Now that call has intensified as Nomura's Ian Shackleton also casts doubt on the soft drink maker's long-term goal.
“The target,” Shackleton said in a note today (29 April), “which might have been realistic when set in 2009, looks challenging in today’s world.”
The analyst pointed to the health concerns over sugar and artificial sweeteners that have hit Coca-Cola's North American sales. However, he does outline some alternative paths, and though most have been mooted before, they do offer an interesting choice of potential tailwinds for Coca-Cola to escape its current doldrums.
The most intriguing is Shackleton's suggestion that Coca-Cola copy rival PepsiCo and broaden its portfolio into the food business. Previously, investors favoured Coca-Cola over PepsiCo because the one thing it specialised in - beverages - it did very well. That view has changed, and with PepsiCo's snacks business growing faster than its stagnating beverage units, Shackleton asks why Coca-Cola is not using its global distribution networks to shift more than just cans and bottles.
Similarly, Coca-Cola lags behind PepsiCo in the diversity of its non-sparkling beverages.
“If Coca-Cola were to match PepsiCo by expanding its non-sparkling business, it could, in theory, add 15% to volumes,” Shackleton said.
Another suggested route to growth is one that Coca-Cola may already have started down. During Coca-Cola Enterprises' analyst call after its Q1 results last week, management was quizzed on the likelihood of Coca-Cola raising concentrate prices for the bottler. Analysts were worried because back in February another bottler, Coca-Cola Hellenic revealed its concentrate costs for 2013 were up by EUR40m (US$55m). Is Coca-Cola attempting to squeeze more out of its bottler networks?
If so, the company would have the backing of Shackleton, who in today's note said that if Coca-Cola could lower its bottler returns to less than 5% (from 8.5% in 2012 and 10% in 1994) it could realise an extra US$5bn in EBIT.
At equal to half of last year's operating profits, it's a considerable sum. But is it enough to make Coca-Cola CEO Muhtar Kent turn back on his 2020 Vision? Seeing as Kent continues to mention it in all of his speeches and conference calls, probably not any time soon.
But with analysts queuing up to offer alternatives, and Coca-Cola results refusing to improve, it does suggest time is running out on the idea.
Sectors: Soft drinks
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