Opportunities for investments in the Coca-Cola industry

Coca-Cola is much more than a single, massive company

Investments in their own right are being promised by the companies that bottle and distribute the popular soft drink.

One of the most valuable and well-known brands in the world is Coca-Cola. However, a lot of people are unaware that the brand's products are distributed by a number of different companies worldwide, each of which is in charge of getting the drink into the hands of consumers in their respective markets.

Coca-Cola is run somewhat similarly to a franchise system. The parent company, Coca-Cola (NYSE: KO), which is probably familiar to most investors, produces the essential parts and oversees the global brand. Distributing and bottling the product in their respective markets is the responsibility of smaller regional companies.

Key local businesses handle this distribution business from southern Europe to South America; the majority of them have expanded into new markets and negotiated agreements with Cokes' competitors.

The history of Coca-Cola.

A local pharmacist in Atlanta, Georgia named John Stith Pemberton created the syrup for Coca-Cola in the late 1800s, giving rise to the black, gooey beverage that most people now know as Coke. According to the history of the Coca-Cola company, Pemberton brought a jug of the new product to Jacobs Pharmacy and sold it as a soda fountain drink there for five cents per glass.

In the latter part of the 1850s, soda fountains gained popularity in pharmacies. Popular substances like cocaine and caffeine were combined with the soda to create easy cures for common illnesses, which were widely used by people looking to treat physical ailments. In the late 1800s, other beverages like milkshakes were introduced, and younger customers started to favor soda fountains.

When Pemberton began selling his product in 1886, he entered this world. Sales averaged just nine drinks per day during the first year. Frank Robinson, Pembertons' partner and bookkeeper, contributed to the beverage's logo design. Local newspapers and signs throughout the town began to feature the now-iconic Coca-Cola logo and its illustrative script.

A Coca-Cola sign.

Almost 25% of the world's population drinks Coca-Cola every day.

The Coca-Cola Company was established in Atlanta in 1892 after businessman Asa Griggs Candler bought the formula and brand after the company had grown steadily for a number of years and its founders had put in a lot of work. The syrup was being sold all over the United States by the middle of the decade, and the business drastically altered its business strategy in 1889.

The franchise business model was introduced by management in order to grow without having to invest a large amount of money in new production facilities. In what became known as the "Coca-Cola system," the company paid a small upfront fee to independent bottlers across the nation to grant them exclusive bottling rights.

Because the system model has been the most successful organizational model for the brand and its partners, the company has moved some operations back under its ownership over the years, only to sell them off again.

Because it gives third parties a lot of control, most brands don't operate in this manner. Coca-Cola cannot guarantee that the product it supplies will end up in the bottles that are sold. It must put time and effort into making sure its partners uphold the quality and have faith in them.

However, for a company that provides daily services to almost 25% of the world's population, this model has proven to be extremely effective, enabling it to concentrate on its core competenciesmarketing and producing syrup and returning capital to shareholdersrather than getting bogged down in negotiating glass supply contracts and distribution networks in developing nations.

Coke also maintains strict control over its partners. Contracts are set for a specific amount of time, and Coke has the right to end them if the quality declines, the business changes ownership, or its financial status worsens.

The system of Coca-Cola.

Benefits of the Coca-Cola system have been evident over time. The company bought its North American bottler, Coca-Cola Enterprises, in 2010 in an effort to reduce expenses and simplify operations. However, the parent company decided it wanted to leave the business after only three years. Noting that "nearly 70 independent Coca-Cola bottlers across the US are now running their trucks and bottling operations as a fully refranchised system," Coke celebrated a "major milestone" in 2017. In North America, independent bottlers now control almost the whole market.

These adjustments had a big effect on the bottom line. After accounting for restructuring charges and refranchising asset impairment, Cokes' operating margin grew by 375 basis points, or almost four percentage points, in the second quarter of 2017 compared to the first quarter of 2016.

Refranchising the North American bottling business was cited by the group's chief financial officer as the reason for the margin expansion. It is a significant change to see an operating-margin increase of 4% on what were then £36 billion in annual sales.

The team is still learning this lesson and pulling away from the bottling industry. Coca-Cola recorded net gains of £599 million and £293 million associated with the refranchising of bottling operations in the Philippines and in certain territories in India, respectively, in its first quarter results. The company also recognized losses as a result of the refranchising of bottling operations in Bangladesh and the Philippines.

Coke primarily sells a syrup concentrate to bottlers and the hospitality industry instead of the final bottles. These businesses then combine the syrup in the soft drink dispenser, which is the contemporary equivalent of the soda fountain from the 1880s, and either serve it directly to customers or mix it into bottles. Coke's most valuable asset, the exact recipe for Coca-Cola's natural flavorings, is limited because it keeps the syrup manufacturing in-house.

No information has been released regarding the number of syrup factories that produce this crucial component for Cokes. The primary operation is situated in Coke's hometown of Atlanta, Georgia, but there are reportedly three or four around the world. At the end of 2024, the Coke group owned or leased 81 bottling facilities and 31 concentrate or syrup factories.

The Coca-Cola product and its derivatives, like Diet Coke, have been the main focus of this article thus far. The Coca-Cola Company now sells thousands of beverages under more than 200 brands in a variety of categories, such as juices, sodas, waters, coffees, teas, and more. Producing non-soft drink products that cannot be made from a concentrate is the primary goal of the company's remaining bottling operations.

Nevertheless, whenever feasible, the syrup (or concentrate, for fruit juices) is produced in a Coca-Cola factory before being delivered to a bottling partner. Nonetheless, Coke continues to produce a significant amount of its own product, as evidenced by the number of owned bottling facilities. Additionally, some concentrate is used by bottling partners to make syrups that are sold to fountain retailers. The two lines of business that Coke divides into at the highest level are concentrated operations and finished-product operations. Of the group's revenue in 2024, 41% came from the finished-product business, while 59% came from the concentrate division.

The company does not display the margin breakdown between the two divisions, but by examining its independent bottlers, we can gain some insight. Coca-Cola reported an operating profit margin of 21.2% last year, which was lower than the previous year's 24.7%. The London-listed Coca-Cola HBC (LSE: CCH), one of its biggest bottling partners, reported a margin of 11%, up from 9.4% the previous year. Simply put, making and selling the syrup and concentrates alone is far more profitable than bottling.

The bottlers are not necessarily poor investments, though. Actually, quite the contrary. For the past ten years, Coca-Cola HBC has performed significantly better than Coca-Cola, giving investors a total return of 12 percent as opposed to 7 percent for the larger group. On a total return basis, the stock has returned 18.2% annually over the last five years, while the US giant has returned 13.3%.

The biggest bottlers.

London is home to the listings for Coca-Cola HBC and Coca-Cola Europacific Partners (LSE: CCEP). In terms of net revenue, the latter is the biggest independent Coca-Cola bottler in the world, and in terms of volume, it ranks second. Coca-Cola HBC is the primary bottler for Europe and Africa, while it operates in Europe, Australia, Asia-Pacific, Indonesia, and the Philippines.

The third-largest major bottler of Coca-Cola, Coca-Cola HBC operates in 29 countries across three continents and provides much more than just Coke products. It offers a "24/7 portfolio" of drinks, including water, tea, sports drinks, snacks, and alcoholic beverages, that are suitable for hourly consumption. It is a great illustration of how these franchise companies have worked with other clients and expanded into new markets by utilizing their partnership with Coke and consistent revenue streams from bottling Coke.

These bottling companies have been able to make significant investments in their business of bottle drinks due to stable revenue streams. They can lower expenses and negotiate better prices with suppliers by taking advantage of the enormous economies of scale in their respective markets. The local knowledge is useful in this situation. Coca-Cola would only produce Coke at its own facilities, but bottlers could reach a wider audience. Therefore, they can use brand relationships to drive economies of scale and open larger factories closer to the end market (shipping bottles around the world is prohibitively expensive). In a recent report on Coca-Cola HBC, analysts at asset manager Berenberg pointed out that the bottlers' business models are heavily leveraged to volume and scale increases due to their large fixed-cost structure.

Coca-Cola HBC has scale and volume, which it can use even more in the years to come to spur growth. According to Berenberg, the group "remains sub-scale in several of its core markets," including Italy, where the per capita consumption of carbonated drinks is 40 liters, compared to 61 liters in Spain.

Egypt and Nigeria, two more important markets for the group, are also expected "to record rapid increases in urbanization, which bodes well for growth in disposable income and hence increases in per-capita consumption of soft drinks." Berenberg projects that Coca-Cola HBC's sales will increase by 5 percent in 2025, 2 percent in 2026, and 2 percent in 2027, based on growth projections for these markets. Earnings before interest and taxes could increase by 13.8 percent in 2025, 5.2 percent in 2026, and 6.2 percent in 2027 due to economies of scale.

Coca-Cola Europacific Partners follows a very similar business model to its London-based counterpart. Other brand additions have fueled growth in sectors like the energy drink market. For example, a collaboration with Monster Beverage helped the group record a 6.3 percent increase in energy drink sales last year, surpassing the respective 3.6 percent and 0.9 percent for Coca-Cola Zero Sugar and Original Taste. Absolut Vodka and Sprite's introduction helped ready-to-drink alcoholic beverages do well as well, and Jack Daniels and Coca-Cola Zero Sugar were added to more markets, including the Philippines.

Europacific Partners anticipates free cash flow of at least £1.07 billion and a 7% increase in operating profits this year. It has stated plans to repurchase £1 billion worth of shares over a 12-month period beginning in February 2025 and is dedicated to making a dividend payment of 50% of free cash flow.

New markets.

Coca-Cola FEMSA is the biggest bottler in terms of volume (NYSE: KOF). This operates throughout Latin America and the Philippines, with its headquarters located in Mexico. Brazil is a major market, with one of the highest per capita consumption rates of carbonated beverages worldwide, at almost 60 liters annually.

Following a ten percent increase in the same period last year, volumes increased by two percent in the first quarter. Volumes in the smaller Argentine market increased by 9%. UBS states that Coca-Cola FEMSA's capital expenditures "should remain elevated at 8.5 percent of sales." The company is currently increasing spending. as the business keeps increasing its installed capacity.

Due to future economies of scale, the investment bank has projected a 30 basis-point increase in the group's return on invested capital, which should result from "greater volume output." The company with the greatest growth potential among the big three is also the least expensive. Sales growth is predicted to reach 11.9 percent in 2025, 80.6 percent in 2026, and 6.2 percent in 2027.

The 2026 forward price/earnings (p/e) ratio for Coca-Cola FEMSA is 12 points, while that of Coca-Cola HBC is 15 points, and that of Coca-Cola Europacific is 17 points. It produces 48%, whereas both of its peers provide 31%. UBS projects that FEMSA's earnings-per-share will grow by 11% between 2025 and 2027, HBC's by 88%, and Europacific's by 6.5 percent.

With 22 percent of the company's shares, Coca-Cola is the largest shareholder in Coca-Cola Consolidated (Nasdaq: COKE), the biggest Coca-Cola bottler in the United States. J is the subsequent largest shareholder. Frank Harrison, the group's CEO at the moment. Despite operating in a comparatively saturated market, Coca-Cola Consolidated has increased its revenue at a rate of 73.4 percent annually over the previous five years. Pricing has been a major factor in this growth. For instance, last year, net sales rose 3.7 percent over the same period, while volume decreased 0.6 percent. Nevertheless, the group, like its counterparts in other markets, profited from economies of scale. The year-over-year gross profit margin increased from 39.1% to 39.9%, while operating income increased by 10.3%.

Of the large group of bottlers, Coca-Cola Consolidated is the most costly, trading at a forward price/earnings of 20. However, due to the characteristics of its largest shareholders, the majority of the stock is held in tight holdings, and less liquid stocks typically fetch higher prices. Additionally, because of the concentrated ownership, management is better able to allocate capital. Additionally, the company has chosen to use buybacks rather than dividends to return cash, like the majority of US-listed businesses.

The shares have a dividend yield of less than 1 percent, but the group authorized a £3 billion tender offer last year to buy back shares during the first half of the year. In August, it announced a further £1 billion repurchase, which is a significant buyback for a company with a £10 billion market value. The stock has returned 400 percent over the last five years, outpacing the S&P 500's 107 percent return, which is understandable given these aggressive buybacks.

There are other names in the Coke-bottling industry for investors who are more daring. Among the biggest Coca-Cola bottlers in Latin America, Arca Continental (Mexico City: AC) has operations in Mexico, Argentina, Ecuador, Peru, and the southwestern United States. Thanks to its exposure to Latin America, this fourth-largest bottler is expected to reap some of the same growth trends as Coca-Cola FEMSA. Over the next three years, UBS anticipates that earnings per share will increase at a compound annual rate of 9.2%. The shares have a yield of 4 percent and are currently trading at a forward price-to-earnings (p/e) ratio of 13 percent.

Embotelladora Andina (NYSE: AKO) is another of the smaller or more regional bottlers. A) is a Chilean company that distributes and bottles Coca-Cola products in Paraguay, Brazil, Argentina, and Chile. Because it is only about a sixth of the size of Coca-Cola FEMSA, the Coca-Cola Company, which owns a minority stake in the group, will not be able to take advantage of the economies of scale enjoyed by its larger peer.

Additionally, there is Coca-Cola Icecek (CCOLA in Istanbul). Distributing Coca-Cola products in Turkey, the Middle East, Central Asia, and Pakistan, the company is headquartered in Turkey. Finally, Coca-Cola Beverages Northeast, another significant bottler in the US, is owned by the Japanese beer and beverage group Kirin (Tokyo: 2503).