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BUS420 - Strategy in Action

FMCG Industry Report


Table of Content

List of figures ............................................................................................................................................................ 3


Executive Summary ................................................................................................................................................. 4
1. Introduction ...................................................................................................................................................... 6
1.1. Global industry overview....................................................................................................................... 6
1.2. European Industry Overview ................................................................................................................ 7
2. External Analysis .............................................................................................................................................. 8
2.1. Macro-environment analysis ................................................................................................................. 8
2.2. Industry Structure Analysis ................................................................................................................... 9
2.3. Strategic Groups ...................................................................................................................................... 9
2.4. Industry Life Cycle................................................................................................................................. 10
2.4.1. Growth Phase................................................................................................................................. 10
2.4.2. Maturity Phase ................................................................................................................................ 11
2.4.3. Decline ............................................................................................................................................. 11
2.5. Opportunities and Threats .................................................................................................................. 12
2.6. Implications of macro-environment analysis on industry structure ........................................... 12
3. Internal Analysis ............................................................................................................................................. 12
3.1. Mission/Vision, organisational structures, organisational processes and organisational
culture ................................................................................................................................................................. 13
3.1.1. Mission and Vision ......................................................................................................................... 13
3.1.2. Organisational Structures and Processes ................................................................................. 14
3.1.3. Organisational Culture ................................................................................................................. 14
3.2. Corporate Social Responsibility and Business Ethics issues and strategies .............................. 15
3.3. Business System/Business Model and its configuration ................................................................. 15
3.4. Corporate, Business and Network level strategies ....................................................................... 18
3.4.1. Network Level Strategy ............................................................................................................... 18
3.4.2. Corporate Level Strategy ............................................................................................................ 19
3.4.3. Business Level Strategy ................................................................................................................ 20
3.5. Current competitive strategies .......................................................................................................... 21
3.6. Value proposition .................................................................................................................................. 23
3.7. Strategic capabilities or distinctive core competencies leading to sustainable competitive
advantage ............................................................................................................................................................ 27
4. Strategic Financial Analysis .......................................................................................................................... 30
4.1. Growth .................................................................................................................................................... 30
4.2. Profitability .............................................................................................................................................. 32
4.3. Financial leverage ................................................................................................................................... 33
4.4. Liquidity ................................................................................................................................................... 34
4.5. Shareholder ............................................................................................................................................. 35
4.6. Specific Investment advice to existing and potential clients of the consultancy considering
investing in this industry .................................................................................................................................. 36
5. Future Industry Development and Recommendations ......................................................................... 37
5.1. Option generation, option evaluation and option selection ........................................................ 37
5.2. Specific recommendations for the various Strategy Levels; ......................................................... 39
5.3. Selected Recommendations’ Impact on Business System ............................................................ 39
6. References....................................................................................................................................................... 41
7. Appendix ......................................................................................................................................................... 50
Appendix 1. Porter’s 5 forces of the soft drink industry ......................................................................... 50
Appendix 2. The Coca-Cola Company’s Carroll’s CSR Pyramid .......................................................... 55
Appendix 3. The Coca-Cola Company’s Human Rights initiatives ........................................................ 55
Appendix 4. The Coca-Cola Company’s CSR initiatives ......................................................................... 56
Appendix 5. The Coca-Cola Company Culture Web Model ................................................................. 56

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Appendix 6: The Coca-Cola Company’s Opportunities and Threats................................................... 56
Appendix 7: The Coca-Cola Company’s Outbound Partners ................................................................ 57
Appendix 8. Complete Ratio Table (2011 - 2014) .................................................................................... 58

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List of figures
Figure 1. Global soft drink market value 2010-2014 ($ billion) and growth rate (%) .............................. 6
Figure 2. Global soft drink market geography segmentation 2014 (% share) ............................................ 6
Figure 3. Global soft drink market share 2014 (% share) .............................................................................. 6
Figure 4. Global soft drink Category segmentation 2014 (% share) ............................................................ 6
Figure 5. European soft drink market value 2010-2014 ($ billion) and growth rate (%) ........................ 7
Figure 6. European soft drink market geography segmentation 2014 (% share) ...................................... 7
Figure 7. European soft drink market share 2014 (% share) ......................................................................... 7
Figure 8. European soft drink Category segmentation 2014 (% share) ...................................................... 7
Figure 9. Porter’s 5 forces of the soft drink industry...................................................................................... 9
Figure 10. Perceptual Map of Coca-Company and its main competitors ................................................... 9
Figure 11. Europe soft drinks market value forecast: $ billion, 2014-2019.............................................. 11
Figure 12. Opportunities and threats of the soft drink industry ................................................................ 12
Figure 13. Ashridge Mission Model (Muzondo, 2012)................................................................................... 13
Figure 14. Coca-Cola Company Vision statement ......................................................................................... 13
Figure 15. The Coca-Cola Company’s Regional Structure .......................................................................... 14
Figure 16. Coca-Cola Company Seven Core Values ..................................................................................... 15
Figure 17. Coca-Cola Company Resource Base............................................................................................. 16
Figure 18. Geographic Scope of Coca-Cola Company - Unit Case Volume, 2014. ............................... 19
Figure 19. Ansoff Matrix of Coca-Cola Company’s historical growth strategies ................................... 20
Figure 20. Soft drink industry global distribution channels repartition in 2015 ...................................... 21
Figure 21. Coca-Cola Company and Competitors’ Generic Strategy ....................................................... 22
Figure 22. Growth prospects in 2012-2017 .................................................................................................... 22
Figure 23. Coca-Cola Company’s BCG Matrix ............................................................................................. 23
Figure 24. Product bases for competitive advantage ..................................................................................... 25
Figure 25. Strengths and Weaknesses of Coca-Cola Company ................................................................. 27
Figure 26. Coca-Cola Company’s Value Chain ............................................................................................... 27
Figure 27. Coca-Cola Company VRINE Analysis ........................................................................................... 29
Figure 28. Revenue Growth (2011-2014) ........................................................................................................ 30
Figure 29. Gross Profit Growth (2011-2014) ................................................................................................. 30
Figure 30. Operating Income Growth (2011-2014) ...................................................................................... 30
Figure 31. Net Income Growth (2011-2014) .................................................................................................. 30
Figure 32. Earnings per Share (2011-2014)...................................................................................................... 31
Figure 33. Earnings Before Tax Margin (2011-2014) ..................................................................................... 32
Figure 34. Return on Assets (2011-2014) ........................................................................................................ 32
Figure 35. Return on Equity (2011-2014) ........................................................................................................ 32
Figure 36. Return on Invested Capital (2011-2014) ...................................................................................... 32
Figure 37. Assets/Equity Ratio (2011-2014) .................................................................................................... 33
Figure 38. Debt/Equity Ratio (2011-2014) ....................................................................................................... 33
Figure 39. Current Ratio (2011-2014) .............................................................................................................. 34
Figure 40. Quick Ratio (2011-2014) .................................................................................................................. 34
Figure 41. Dividend Payout Ratio (2011-2014)............................................................................................... 35
Figure 42. Price-Earning Ratio (2011-2014)..................................................................................................... 35
Figure 43. Investment Breakdown ..................................................................................................................... 36
Figure 44. Current Business Strategy Diamond of Coca-Cola Company ................................................ 37
Figure 45. Option Generation, Option Evaluation and Option Selection ................................................ 38
Figure 46. Recommendations at the Network, Corporate and Business Levels .................................... 39
Figure 47. Ansoff Matrix of Coca-Cola Company’s recommended growth strategies ......................... 39

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Executive Summary
This report aims to dissect the company Coca-Cola within the European soft drink industry. The
European soft drink market has experienced lower growth and is more fragmented than the global
market. However, the level of rivalry within the European soft drink market appears to be higher
than it is elsewhere in the world. Coca-Cola is a main player within the soft drink market in Europe
and on a global level. Carbonated soft drinks still hold the largest share of the soft drink market,
however, growth has been exponentially higher within the still beverage sector.

Through a thorough external analysis there is evidence that the soft drink industry is in the
maturity phase. There seems to be a significant decline of carbonated products. Growth can be
seen within beverages such as: energy drinks, dairy drinks, and water, therefore, soft drink
companies should focus on adopting these beverages in order to generate higher revenues.
Opportunity lies within factors such as: BRIC nations, healthy lifestyle trend, acquisitions and
mergers. The threats include: declining carbonated products sales, strong dollar, and low
consumption due to health awareness. A PESTLE analysis has dissected the European market and
consumers and discovered that European consumers still enjoy soft drink brands, however, they
too are turning more health conscious and substituting their colas for juices. Government
regulations are tightening up through regulations such as the Sugar Tax imposed on some European
countries such as France. Through a five force analysis, it has been discovered that the soft drink
industry has become saturated with high levels of rivalry amongst leading global brands such as
Coca-Cola and Pepsi, it is virtually impossible for a new comer to enter the market without facing
aggressive tactics such as price wars from leading soft drink companies. Leading soft drink
companies are also extremely technologically advanced and have decreased power of suppliers by
owning bottling companies. Buyers are important within the soft drink industry; it is essential for
them to maintain positive relations with large retailers in order to have their product placed on the
best shelves. Substitutes for the product include other beverages such as juices and tea. Despite the
maturity of the soft drink industry, this is still an industry in which new entrants would face a
difficult time.

Through an internal analysis it has been discovered that The Coca-Cola Company relies on a
number of resources such as: relationships, reputation, knowledge, global reach, distribution
system, employees, and financial resources. The company has built a network of sponsors,
downstream vertical partners, competitors, indirect horizontal relations and joint ventures with
competitors whose goals are aligned and can be better pursued together. Coca-Cola implements
the embedded organization perspective at the network level strategy by: cooperating with

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competitors for lobbying purposes and resource linking, and industry outsiders such as sports
organizations as well as downstream vertical partners. At corporate level the strategy revolves
around two main axes: forward vertical integration through acquisition of bottling companies and
diversification of its product range through internal development of new products and acquisition of
promising related brands. At the corporate level Coca-Cola draws from elements of both the
integrated perspective and portfolio perspective by acquiring and developing new products to
respond to changing consumer tastes. At business level Coca-Cola has a broad product portfolio
including: juices, tea, water and carbonated beverages, and differentiates itself through brand image
and cost leadership. The business level strategy reflects an outside in perspective as the company
expands its product portfolio following changes in the external environment and acquires growing
brands and developing partnerships in new substitute products.

The company has an excellent vision statement but ambiguous mission statement, which may hinder
it from maximizing the corporation and allowing employees to reach full potential. There is an
effective combination of centralized and decentralized organizational structures and processes that
allow the company operations to flow as efficiently as possible. Coca-Cola also has an impressive
organizational culture, which has constantly been recognized as the top 10 for worlds’ most
admired company for all industry by Fortune magazine. Furthermore, the company has initiated
numerous CSR activities to fulfil ethical and philanthropic responsibilities.

A financial analysis depicts the after-effects of the financial crisis, and demonstrates that there are
signs of recovery within the industry. There is an indication of efficiency of each company in:
increasing revenue, liquidity level, shareholder return and funding their assets, operations and etc.
through various ratios. There has been a discovery that Coca-Cola has not performed as well as
competitors due to lack of diversity within their product portfolio, therefore, indicating a feasibility
of investing for potential investors. This leads to a recommendation that Coca-Cola should expand
its portfolio by following the latest consumer trends, and retaining market share and maintaining or
increasing its competitive position.

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1. Introduction
This report will analyse the soft drink industry at the global level and European level, depending on
the level of analysis required by different frameworks. It will focus on its main player, i.e. Coca-Cola
Company in order to identify its competitiveness and profitability relative to the industry. With this
purpose, the company will be examined from an external and internal perspective, and its financial
situation will also be assessed. Finally, based on the results of the analysis, recommendations will be
proposed in order to further secure Coca-Cola Company’s position in the soft drink market.

1.1. Global industry overview


Figure 1. Global soft drink market value 2010-2014 ($ Figure 2. Global soft drink market geography
billion) and growth rate (%) segmentation 2014 (% share)
650 626.1 6 2%
601.6
600 578.7 Americas
556.5 4
550 533.9 27% 41% Europe
2
500
30% Asia Pacific
450 0
2010 2011 2012 2013 2014
Market Value ($billion) % Growth
Source: MarketLine Industry Profile Global Soft Drinks, Source: MarketLine Industry Profile Global Soft
2015 Drinks, 2015

As can be seen from Figures 1 and 2, the global soft drink market value has been growing from
$533,9 million in 2010 to $626,1 million in 2014. In addition, the growth of the global market value
has remained rather stable between 2010 and 2014, with values ranging from 4% to 4.2%.
Furthermore, the Americas represent the largest share of the market with 41% market share,
followed by Europe (30%), Asia Pacific (27%), and the Middle East &Africa, which hold a
comparatively very small market share of 2%.

Figure 3. Global soft drink market share 2014 (% Figure 4. Global soft drink Category segmentation
share) 2014 (% share)
3% -1% Carbonates
The Coca-Cola 11%
Company Bottled Water
25%
Pepsico, Inc. 33% Juices
11% Functional drinks
51% 12%
Nestle S.A. 18% Tea & coffee
24% Concentrates
7% Group Danone Other
5%
Source: MarketLine Industry Profile Global Soft Drinks, Source: MarketLine Industry Profile Global Soft Drinks,
2015 2015
The Global soft drink market appears to be quite fragmented, with the four largest players (Coca-
Cola Company, PepsiCo, Nestle and Danone) holding 49% of the market, while the rest is split

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between smaller competitors. The market is dominated in terms of product categories by
carbonated soft drinks (33%), bottled water (24%) and juices (18%), while the remaining 25%
include functional drinks, tea and coffee and concentrates.

1.2. European Industry Overview


Figure 5. European soft drink market value 2010-2014 Figure 6. European soft drink market geography
($ billion) and growth rate (%) segmentation 2014 (% share)
200 3
189.7 Germany
190 185.6
181.5 2 United Kingdom
180 177.1 21%
173 35% Spain
1
170 15% Italy
160 0
France
2010 2011 2012 2013 2014 9%
9% 11% Rest of Europe
Market Value ($billion) % Growth
Source: MarketLine Industry Profile Soft Drinks in Europe, Source: MarketLine Industry Profile Soft Drinks in
2015 Europe, 2015

The European soft drink market has been growing at a slower pace than the global market, ranging
from 2.2% to 2.5% per year. In 2010, the European market contributed to 32.4% of the global
market, while it was only 30.3% in 2014. In addition, the European market is concentrated around 5
main countries, with Germany, the UK, Spain, Italy and France adding up to 65% of the market.

Figure 7. European soft drink market share 2014 (% Figure 8. European soft drink Category segmentation
share) 2014 (% share)
3% 3% 1%0% Carbonates
The Coca-Cola 8%
Company Bottled Water
20%
Pepsico, Inc. 38% Juices
8% 20% Functional drinks
60% Nestle S.A. Tea & coffee
7%
Concentrates
5% 27%
Group Danone Other

Source: MarketLine Industry Profile Soft Drinks in Source: MarketLine Industry Profile Soft Drinks in
Europe, 2015 Europe, 2015

The European market is even more fragmented than the global market, given that the 4 main
competitors occupy only 40% of the market, while the remaining 60% is split among smaller
competitors. Therefore, rivalry is higher in the European market than at the global level. In addition,
the European market is less diversified with 3 product categories: carbonated soft drinks, bottled
water and juices taking up 85% of the market. It can be inferred from this information that the soft
drink industry is more competitive at the European level than at the global level.

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2. External Analysis
In order to analyse the external environment of Coca-Cola Company and the soft drink industry, a
PESTLE analysis will be developed to identify threats, opportunities and trends affecting the
industry, Porter’s 5 forces framework will also be deployed to assess the level of competition,
profitability and overall attractiveness of the industry at the European level. In addition, the industry
life cycle, strategic groups and key success factors will also be analysed.
2.1. Macro-environment analysis
Political/Legal Economic Socio-Cultural
FDA must approve ingredients Food and drink industry contributes to Health awareness has put the soft
before soft drinks can be available in about 19.3% of the EU’s economy drink industry in decline
the market (European Food Industry Data Trend
Report 2014) Predicted in 2018 for soft drinks to
European countries require have a tough time as world wide
nutritional information labelled on During the recession in 2013 sales of government regulations to promote
soft drink products large soft drink industries still better drinking habit will become
continued to grow, for example Coca- stricter
Some European governments such Cola had £1.6 billion in sales (Britvic
as France have implemented a sugar Report 2014) Soft drinks will be replaced by
tax on soft drinks by 35% (Soft Sales of soft drinks down in Finland by consumers with ‘healthier’ drinks as
Drink International Report 2010) .8% (Soft Drink International Report the world becomes a more conscious
2010) place
Manufacturers must abide by EU
OSHA Standards and Regulations Large soft drink companies invest Large soft drink brands that invest
which require workers within heavily in advertising, for example heavily in advertising make extensive
factories (e.g. bottling factory) to PepsiCo spent an average of $4 use of celebrity endorsements and
have safe and healthy working million on 30 second adverts in 2012 sponsorships of local community
conditions (Ibis World 2013) activities within the country they
operate in
UK Food Standard Agency urging Soft drink industry had an overall
soft drink companies to reduce decline of 1% in 2014 (Ibis World Soft drink companies make extensive
amount of added sugar in soft drinks 2013) use of social media outlets such as
Twitter and Facebook to reach out to
Industry’s contribution to economy a younger target market
decrease by 2.7% (Ibis World 2013)
Technological Environmental Conclusion
Soft Drink Industries spend heavily Large soft drink companies use Through this brief PESTLE analysis it
on technology and R&D for factors environmental sustainability is evident that soft drink companies
such as increasing economies of foundations and campaigns to be are a mature and technologically
scale and developing ways to reduce perceived as responsible advanced industry with aggressive
the use of artificial sweeteners in levels of rivalry. However, as trends
products Water Footprint Sustainability made change and the world becomes a
by Coca-Cola in 2007, where the more health conscious place the soft
Large soda brands such as Coca- company discovered they used over drink industry is gradually coming into
Cola have started using technology 300 billion litres of water in their decline
to reduce the water waste they plants while making their products and
create created the Water Footprint Network
to reduce and monitor the amount of
The method of technology to create water they used in their products as
soda brands has been the same for well as replenishing water in
decades however, technological underdeveloped communities through
advances have made the production local partnerships and projects
process easier and more advanced,
All large soft drink companies use
for example using robotic interfaces
recyclable packaging such as PET
to adjust the machine (Ibis World
bottles as well as creating awareness
2013)
and preaching the importance of
recycling within local communities 
e.g. Coca-Cola partnership with Tidy
Britain Group
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2.2. Industry Structure Analysis
Figure 9. Porter’s 5 forces of the soft drink industry
Rivalry Threat of Substitutes Threat of New Entrants Supplier Power Buyer Power
High Low Medium Low Medium

According to Porter’s Five Forces (See Appendix 1) the soft drink industry is a highly saturated
market with large companies dominating the industry and making it near impossible for new
competitors to enter due to high rivalry levels amongst large companies. If a new comer were to
enter the market they would face aggressive price wars from large companies such as Pepsi,
therefore making the threat of new entrants quite low unless new entrants could create a unique
alternative to soda. There is a medium level of substitution within the industry; as the world
becomes more health conscious consumers are turning away from soft drinks and turning to other
drinks such as juices and tea. When it comes to substitutes outside the beverage industry, ice
cream could prove a good alternative within the summer months as a refreshing treat, however, it
should be noted that there aren’t any real alternatives to soft drinks as alternative beverages belong
within the same industry. Supplier power is low as most large soft drink companies own bottling
companies and there are numerous suppliers of raw materials within the market, therefore, giving
these suppliers of raw materials little to no power. However, the buying power is medium as
retailers such as Tesco purchase in bulk and therefore it is essential for soft drink companies to
maintain an amicable relationship with large retail companies to have their products placed on
favourable shelves. Due to high level of advertising amongst large companies, consumers have a
medium level of buying power. Overall the soft drink industry is not an attractive market for new
entrants.

2.3. Strategic Groups


Figure 10. Perceptual Map of Coca-Company and its main competitors

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Coca-Cola Company and PepsiCo have a similar strategy, which makes them one of the strategic
groups of the soft drinks industry. Both companies offer a variety range of products including
bottled water, energy drinks and colas (Coca-Cola, 2015, PepsiCo, 2015). Moreover, the
geographical locations and countries where they operate are almost identical, demonstrating that
both organisations follow each other into new markets to maintain or gain global market shares. In
terms of marketing strategies, each organisation aims to reach the same target market as the other
using different promotion media channels and campaign message. For example, when a Football
tournament is being held, both organisations get footballers to do their advertisements and show
how the tournament will be watched better while consuming their products. Therefore, it could be
stated that both organisations use a similar strategy to compete with each other, as well as,
improving their market shares. However, Coca-Cola Companyuses cost leadership competitive
strategy, which helps them to reduce costs, as well as, offer affordable products, which gives them a
slight advantage over PepsiCo (Michman and Mazzi, 1998).
Nestle, also has a high variety of products and operates in all European countries, which places it in
the same strategic group as both PepsiCo and Coca-Cola Company. However, organisations such
as Danone have a high geographical scope like other major organisations, but they don’t offer a
wide range of products as they mainly focus on dairy products and water.

2.4. Industry Life Cycle


The industry lifecycle consists of four major phases, namely: introduction, growth, maturity and
decline. The soft drinks industry is now in the maturity phase and the two major companies, Coca-
Cola Company and PepsiCo, are dominating the market, which has become saturated. Also, there
are other companies such as Nestle S.A and Danone. However, Coca-Cola Companyis the market
leader in this industry with a 19.7% market share (See Figure 7 p.6). (Marketline, 2015)

2.4.1. Growth Phase


In the growth phase of the soft drinks industry, there are products such as bottled water that are
growing rapidly and have the potential to gain massive revenues and profits (Forbes, 2015). Coca-
Cola Company and PepsiCo, both launched bottled water products approximately 15 years ago
(Michman and Mazzi, 1998). Bottled water is considered to be one of the major elements for major
future revenues and profits for organisations within the industry and is already proving to be an
essential addition (See Figure 8 p.6) (Forbes, 2015). Organisations are now also adding energy
drinks to their range of products, however, they face a massive task to gain high market shares due
to well-established market-leader Redbull. During this phase, organisations tend to use market
development and consolidation strategy, making them move to new markets with existing products,
as well as, developing new products and entering new markets.

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2.4.2. Maturity Phase

In this phase, growth slows down, therefore, organisations must seek new strategies or products to
maintain or acquire more market shares. The soft drink industry’s main focus now is prices, quality
and brand loyalty (Deichert and Ellenbecker, 2006). Furthermore, the customers’ focus now is not
whether or not they will buy soft drinks, but rather which brand better satisfies their wants
(Deichert and Ellenbecker, 2006). Due to growth levels not being as high as before with an average
of 2.9% yearly, companies enter other sectors such as bottled water and energy drinks (Marketline,
2014). Moreover, due to the market saturation in the United States and Europe, the BRIC nations
markets have the most potential for further growth and high profit margins
(strategicmanagementinsight, 2013). The classic carbonated products such as Coke and Pepsi are in
the maturity phase and are considered as Cash cows for their organisations (Studymarketing.com,
2015). Organisations tend to merge with or acquire other top companies from different
segmentswithin the soft drink industry to increase their product portfolio and have other streams
of income and revenue.

Figure 11. Europe soft drinks market value forecast: $ billion, 2014-2019
Year $ billion % Growth
2014 189.7 2.2
2015 194.5 2.5
2016 199.1 2.3
2017 204.1 2.5
2018 209.1 2.5
2019 214.5 2.6
Source: MarketLine Industry Profile Soft Drinks in Europe, 2015

2.4.3. Decline

The Soft drink industry is one of the most profitable and successful industries, thus, it is difficult to
predict if it will decline anytime soon. However, Coca-Cola Company’sCoke and PepsiCo’s Pepsi
sales have been declining for the past decade due to consumers buying alternative products with a
healthier image (CNBC, 2015). Thiscould potentially cause the decline of the soft drinks industry in
the future.
Furthermore, due to water scarcity and the quantities used for carbonated drinks production, it is
feared that they will have to reduce the amount significantly, which could severely affect the
industry (strategicmanagementinsight, 2013). In addition, products such as flavoured Coke and Pepsi
Twist, as well as, white Pepsi declined.

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2.5. Opportunities and Threats
Figure 12. Opportunities and threats of the soft drink industry
Opportunities Threats
 Focusing on emerging markets,  Increasing competition
where consumption will be high  Stagnated soft drinks Market
 Healthy lifestyle trend  Low growth and low profit margins
 Acquisitions of other companies  Low consumption due to health
with existing products in new awareness
market sectors.  Strong dollar against othercurrencies.
(strategicmanagementinsight, 2013). (strategicmanagementinsight, 2013).
Refer to Appendix 6 for further explanation

2.6. Implications of macro-environment analysis on industry structure


IBISWorld (2015) identifies the following key success factors for the soft drink industry:
 Economies of scale; by producing in larger quantities, manufacturers benefit from lower
unitary fixed costs,
 Economies of scope: by extending to new products that act as substitutes to carbonated
soft drinks, companies can deliver products to a larger number of customers and leverage
existing manufacturing plants for new products, thus reducing fixed costs per unit.
 Marketing and product differentiation: to gain market shares, soft drink manufacturers invest
heavily in marketing and attempt to retain customers by developing loyalty to their brands
and through product differentiation.
 Control of the distribution: the management of the distribution side of the soft drink
industry is vital for companies’ profitability.
 Establishment of long-term relationships with suppliers: to secure supply of raw ingredients
and stabilize their costs.
Key trends affecting the soft drink industry include the growth of still and healthier soft drinks
segment at the expense of the carbonated soft drink segment, the decrease in thevolume of sales in
mature markets such as North America and Europe, and the growth ofother markets such as
Eurasia & Africa, and Asia Pacific (Coca-Cola, 2014).

3. Internal Analysis
This section will focus on the internal analysis of Coca-Cola Company by examining its mission,
vision, organizational structure and processes as well as its corporate social responsibility and
business ethics approach. In addition, the company’s business system, network, corporate and
business level strategiesand strategic capabilities as well as value proposition will also be studied in
order to identify the strength and weaknesses of Coca-Cola Company.

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3.1. Mission/Vision, organisational structures, organisational processes and
organisational culture

3.1.1. Mission and Vision


In order for the Coca-Cola Company to be competitive in the soft drink market globally, Coca-
Cola (2015a) devised and published a roadmap to guide its company growth in the form of mission
and vision statements, which are the following:
Figure 13. Ashridge Mission Model (Muzondo, 2012)

Purpose: It identifies only its roles to


provide refreshments and joy

Mission Statement
-To Refresh the World
Strategy: It identifies its main -To Inspire Moments of Values: It identifies the
strategy to differentiate itself Optimism and beliefs of its products'
and provide values Happiness offerings
-To Create Value and
Make a Difference

Standards and Behaviours: It


identifies only refreshing its
customers as company standard

Figure 14. Coca-Cola Company Vision statement


Vision Statement
People: Be a great place to work where people are inspired to be the best they can be.
Portfolio: Bring to the world a portfolio of quality beverage brands that anticipate and satisfy people's
desires and needs.
Partners: Nurture a winning network of customers and suppliers, together we create mutual, enduring
value.
Planet: Be a responsible citizen that makes a difference by helping build and support sustainable
communities.
Profit: Maximize long-term return to shareowners while being mindful of our overall responsibilities.
Productivity: Be a highly effective, lean and fast-moving organization.
Source: Coca-Cola, 2015

Coca-Cola Company has been extremely successful since its launch in 1886 and has consistently
appeared in the Fortune 500 list since its first publication in 1950, and is currently ranked 63
(Fortune, 2015a). However, the company's mission statements are still highly ambiguous, as it does
not provide a clear image of the company and the nature of its products. This lack of accuracy may
prevent the company from reaching its full potential. On the other hand, the company's vision
statement will be able to fulfil the aim stated in its mission statement through the seamless
combination of the following organisational structures and strategies. Smith et al. (2015) inferred
the importance of a company's mission and vision statements as not only a strategic and
management tool, but also its ability to instil a company's core purpose and focus to its employeesin
order for the organization to advance smoothly. Miller and Dess (1996) reaffirm it by stating that
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the establishment of clear mission and vision will set operational objectives and clear goals for
employees that have a cause and effect relationship with a firm’s success or failure.

3.1.2. Organisational Structures and Processes


With the sheer size of the Coca-Cola Company and its global sales volume, the company has a top-
down centralised organisational structure, in which the CEO and its executive committees make
the key strategic decisions (Coca Cola Enterprises, 2015). However, Coca-Cola Company's
President Robert Woodruff in 1941 had envisioned Coca-Cola Company to be "within an arm's
reach of desire" (Coca Cola, 2015b). In order to fulfil this vision, Coca-Cola Company has been
using both a centralised and decentralised structure in combination with a regional organisational
structure by dividing its business into six geographic segments to increase organisational flexibility
for localisation efforts, as shown in Figure 15.

Figure 15. The Coca-Cola Company’s Regional Structure

Regional
Structure

North Asia,
Southeast Asia European
North America Africa Eurasia & Latin America
& Pacific Rim Union
Middle East

Source: Business Case Studies, 2015

Localisation is one of the key success factors for Coca-Cola Company as different geographical
regions may have different cultures and preferences that may affect their decision making process in
purchasing the company's products over its competitors’. Therefore, each geographic region uses a
decentralised organisational structure to a certain extent to allow the flexibility required for
optimal localisation of products by having each region operating as a team under a director that
reports to a regional manager (Business Case Studies, 2015). Once any best practices are
discovered, it is then shared amongst other regions in order to accomplish the productivity and
portfolio section of its company's vision statements.

3.1.3. Organisational Culture


Coca-Cola Company has been awarded the Top 10 Worlds’ Most Admired Companies for 2
consecutive years, ranked 1st in the Beverage industry and 6th for overall industry, as shown in
thecompany’s culture web model in Appendix 5(Fortune, 2015b). The company prides itself on the
following seven core values, which display its corporate ethics through Corporate Social
Responsibility efforts (Coca Cola, 2015c):

14
Figure 16. Coca-Cola Company Seven Core Values
Corporate Social Responsibility
Leadership: The courage to shape a better future,
Collaboration: Leverage collective genius,
Integrity: Be real,
Accountability: If it is to be, it's up to me,
Passion: Committed in heart and mind,
Diversity: As inclusive as our brands,
Quality: What we do, we do well.
Source: Coca-Cola, 2015

3.2. Corporate Social Responsibility and Business Ethics issues and strategies
Over the years, Coca-Cola Company has been the target of complaints and lawsuits due to being
the industry's most recognized brand andbeingblamed as one of the top contributors of obesity,
making heart diseases the leading cause of death, i.e. 7.4 million deaths in 2012 (NHS, 2014; World
Heart Foundation, 2012; World Health Organization, 2014;Young and Nestle, 2002). This includes
claims of alcohol and cocaine contents and reports of unethical behaviours by Coca-Cola Company
and its bottling partners, e.g. labour violations, greenwashing and food poisoning (Evening Standard,
2013; Johnson and Peppas, 2003).
In addition to responsibilities achieved shown in Carroll's CSR Pyramid (Appendix 2), it also took
the additional step to take human rights initiatives (Appendix 3) and others (Appendix 4), Coca-
Cola Company has additional notable initiatives and achievements as follows:
2007 - Launched 100% Water Replenishment Goal by 2020.
2010 - Launched '5by20' initiative that empowers 5 million female entrepreneurs by 2020.
2014 - Recognised as Beverage Bottler Industry's World Leader by Dow Jones Sustainability Indices,
scored 89% (Coca Cola HBC, 2014).
2015 - Launched PlantBottle, the world's first PET plastic bottle that is made entirely from plants to
reduce carbon footprint.

3.3. Business System/Business Model and its configuration


Coca-Cola Company started its business by relying on independent businesses to produce and
distribute its products due to lack of facilities and infrastructure (Koros, 2014). In the early years
Coca-Cola Company chose the expansion method by selling its bottling rights to increase its
product reach, which suits the following theories:
 Transaction cost theory (Tsoukas and Knudsen, 2003) theorises that high transaction costs
accumulate at every development stage, e.g. information gathering, negotiation and quality
control. Thus, it was not in Coca-Cola' Company’s best interest to do Foreign Direct
Investment (FDI) to expand the business due to lack of infrastructure and advantages to do
so.

15
 It started by selling its first beverage "Coca-Cola" in a pharmacy and sold its US bottling
rights shortly after, which fits the Uppsala Model (Forsgren and Johanson, 2014). It states
that a company should start its business in domestic market to gain experience and gradually
intensify its activities until it does FDI to a far geographical region.
 It also follows the OLI Framework/Eclectic Paradigm that states the advantages that a
company should have before choosing its market entry method, i.e. ownership, location and
internationalization advantages (Dunning, 1981).
Over time, after gaining sufficient funds and experience, Coca-Cola Company did a FDI and built its
own bottling plants on different strategic geographical locations globally, to complement its current
network. In addition, they also made strategic alliances with other bottling plants and logistic
companies that allow Coca-Cola Company to be extremely successful and possess one of the
world's leading distribution networks.

Figure 17. Coca-Cola Company Resource Base

16
Figure 17. Coca-Cola Company Resource Base
Resource Base

Intangible
Tangible Resources
Resources

Buildings: "As of December 31,


2014, in North America, the
Relational Resources Competences Coca-Cola Company owned 65
beverage production facilities,
10 principal beverage
concentrate and/or syrup
manufacturing plants, one juice
concentrates for food service
Relationships: Its use manufacturing facility, and
relationship with bottling Knowledge: (Patents, 2 bottled water facilities. It
partners that are part of the Copyrights, Trademarks): leased 1 beverage production
Coca-Cola system is an these include the packaging facility, 1 bottled water facility
important resource for the of the company’s products, and 4 container manufacturing
the design and operation of facilities; and operated 260
company. principal beverage distribution
certain processes and warehouses, of which 98 were
equipment, quality leased and the rest were owned.
management software, and Outside of North America, as of
product formulae that are December 31, 2014, the
company trade secrets. Company owned and operated
(Annual report 2014) 18 principal beverage
Reputation: The Coca-Cola concentrate manufacturing
brand was worth $ 83.84 plants, (3 in Eurasia & Africa, 3
in Europe, 5 in Latin America
billion in 2015. In addition, and 7 in Asia Pacific). (annual
the company’s portfolio report 2014). On December 31,
includes 20 “billion-dollar” 2014, the carrying value of the
brands (brands passing $ 1 Global reach: The Coca-Cola
Coca-Cola Company’s Property,
billion retail sales a year). Company is presently in more Plant and Equipment amounted
than 200 countries to $14,633 million (net of
Coca-Cola Company received depreciation)". (Annual report
4 awards in 2014 ("U.N. 2014)
Women’s Empowerment
Principles Leadership
Award, Award for Corporate Distribution system: Its
Excellence, Champion of the distribution system, which
Year Award, Best Global has been transitioning from Employees: 129,200
Initiative for Women’s Direct Store Delivery only to employees at 31 December
Economic Empowerment" a combination of the latter 2014, 65,300 of which are
Coca-Cola, 2015) and of retailer warehouses, located in the United States
However, Coca-Cola allows the firm to reach (annual report 2014)
Company has to be careful in customers through a
order to maintain its combination of distribution
reputation, as it can be channels (see graph)
negatively impacted by
scandals such as that of Money: The Company
Dasani water in 2004, when provided $7.0 billion in 2014
it had to recall 500,000 in Marketing and Promotion
bottles in the UK due to high programs to its bottlers and
and toxic levels of bromate resellers, and it reported $
were found in the product 3.5 billion In addition, the
(BBC, 2004) company’s cash and cash
equivalents amounted to $
8,958 million in 2014.
(Annual report 2014)

17
3.4. Corporate, Business and Network level strategies

3.4.1. Network Level Strategy


Network partners of the Coca-Cola Company include socio-cultural actors, such as the sports
events that the company sponsors; the Olympic Games, the World Cup, with which the company
cooperates in order to create added value through increased visibility and brand association.
Other members of the Coca-Cola Company’s network are its downstream vertical partners; the
bottling companies that are not integrated, but which the company manages as franchises. This
relationship allows for the franchises to handle the manufacturing and distribution of the products,
while the Coca-Cola Company takes care of the advertising.
In addition, The Coca-Cola Company cooperates with competitors such as PepsiCo. and bottling
companies, through the American Beverage association, which is the trade association representing
the interests of the non-alcoholic beverage industry and lobbies against health taxes on soft drinks
(American Beverage Association, 2015).
Furthermore, the Coca-Cola Company has developed indirect horizontal relations with other soft
drinks manufacturing companies. In 2010, the company entered a long-term strategic partnership
with Monster Beverage Corporation. This partnership comprises the transfer of Coca-Cola’s
energy drinks business unit to Monster (including Burn, Full Throttle and Mother brands) and the
transfer of Monster’s non-energy drinks businesses to the Coca-Cola Company (Coca-Cola, 2014).
This transfer of activities is designed to leverage each partner’s competencies in their respective
main business units. In addition, in 2014, the Coca-Cola Company has developed a strategic
partnership with Green Mountain Coffee Roasters Inc. in order to gain a foothold in the coffee
beverage sector, by purchasing a 10% minority equity stake (Coca-Cola, 2015b) and developing a
Common Stock Purchase Agreement.
The Coca-Cola Company also developed a strategic alliance with its competitor Nestlé through the
Beverage Partners Worldwide joint venture to develop tea and coffee products such as Nestea, to
combine Nestlé’s brand image in tea and coffee beverages with its own distribution system, thus
putting together complementary resources (Nestlé, 2001).
At the network level, the Coca-Cola Company favours the embedded organization perspective
over the discrete organization perspective. Indeed, the American Beverage association shows that
Coca-Cola Company and some of its competitors work together to achieve a common goal, since
they share an interest; they have parallel objectives that they can pursue more efficiently by
cooperating. In addition, Coca-Cola Company collaborates with other organizations that are
industry outsiders, such as sports organizations (the Olympics, the World Cup), and with
downstream vertical partners (bottling companies).

18
3.4.2. Corporate Level Strategy
The corporate scope of the activities of the Coca-Cola Company is limited to non-alcoholic
beverages, contrarily to its main competitor, PepsiCo, who in addition to producing soft drinks,
also produces snack foods. The Coca-Cola Company’s strategic business units include carbonated
soft drinks, sports drinks, water, energy drinks, fruit juices, coffee & tea based products.

Figure 18. Geographic Scope of Coca-Cola Company - Unit Case Volume, 2014.

16% Eurasia & Africa


22%
Europe
13% Latin America
20% North America
29% Asia Pacific

Source: Coca-Cola CompanyOperating Group Summaries, 2014

At the corporate level, the Coca-Cola Company’s strategy revolves around two main axes: vertical
integration through acquisition of bottling companies, and horizontal diversification of its product
range by developing new products. These two elements of the Coca-Cola Company’s corporate
level strategy reflect an emergent strategy, developing following changes in the market and industry
conditions.
The Coca-Cola Company has implemented forward vertical integration by buying some
independent bottling companies that used to be managed as franchises, forming Coca-Cola
Enterprises in 1986 (Coca-Cola, 2009), which subsequently purchased many bottling companies
worldwide. In 2010, the Coca-Cola Company proceeded to buy additional interests of Coca-Cola
Enterprises, thus acquiring more than 90% of the volume of the North American market
(ChangeLab Solutions, 2012). The company expected to generate $350 million in cost synergies
over the four years following this acquisition in 2010 (Morningstar, 2010).
Indeed, the Coca-Cola Company initially limited its activities to the manufacturing of concentrates
and to the marketing of the final beverage. Therefore, it sold concentrates to franchised local
bottlers who then manufactured the beverages. However, due to the increase in the product line,
and given the high transaction costs of operating with independent bottlers, the Coca-Cola
Company started the process of forward integration (Kench, Knox & Wallace, 2012, Muris,
Scheffman & Spiller, 1992), in order to reduce costs and gain additional control of its production
and distribution processes (IbisWorld, 2015a).
In addition, the Coca-Cola Company also implemented a related diversification strategy through an
acquisitive mode by expanding its product offering by; adding juices and bottled water to their

19
product portfolio, in order to respond to changing consumer tastes (Kench, Knox & Wallace,
2012). This change from a concentrated, high-volume market based essentially on carbonated soft
drinks to a more fragmented, low-volume niche products has led the Coca-Cola Company to adapt
its distribution system. Indeed, the company moved from its initial Direct Store Delivery, in which
bottlers deliver to stores directly and are responsible for managing shelf space, to a more
centralised distribution system using warehouses.
Furthermore, the Coca-Cola Company’s growth is driven by both acquisition and internal
development of new products. The company has acquired brands such as Minute Maid, Odwalla,
Honest Tea, and Innocent, and developed strategic partnerships with existing brands, such as its
acquisition of 16.7% of shares in the energy drink manufacturer Monster Beverage Corporation
(Coca-Cola, 2015c). Its organic growth strategy is achieved through brand extensions, with the
introduction of low-calorie, low-sugar, and stevia-based products (IbisWorld, 2015a). The different
growth strategies of Coca-Cola Company are summarized in the Ansoff matrix below.

Figure 19. Ansoff Matrix of Coca-Cola Company’s historical growth strategies


Existing product New Product
Existing Market Penetration Product Development
Market Expansion of the number of packaging options and Development of new products in existing
bundling of products markets such as new carbonated soft drinks
(e.g. Pepsi)
New Market Development Diversification
Market Development of existing products in new markets such Acquisition of new products in new markets
as variations of the original Coca-Cola (e.g. Diet Coke, (e.g. Minute Maid, Odwalla, Innocent, Dasani)
Coke Zero, Coca-Cola Life) to reach a greater number
of customers

At the corporate level, the Coca-Cola Company adopts elements of both the Integrated
perspective and the Portfolio perspective. Indeed, in terms of the Integrated perspective, the
company is made up of a number of related business units that are grouped around the core
competence of the company, namely its bottling and distribution system. The acquisitions
performed by the company are part of a related diversification strategy. In terms of the Portfolio
perspective, the company favours responsiveness over synergy, by adapting to the changing tastes
of customers and acquiring new substitutes for its products.

3.4.3. Business Level Strategy


The Coca-Cola Company’s product offering focuses on distribution (its carbonated soft drinks are
widely available in stores, vending machines, restaurants, bars, etc., chilled and ready for
consumption) and image.

20
Figure 20. Soft drink industry global distribution channels repartition in 2015
Supermarkets, grocery stores and
8% supercenters
9% Convenience stores, gas stations and
5% vending machines
43% Food service establishments
6%
Exports

Grocery wholesalers
29%
Other

Source: IbisWorld Global Soft Drink and Bottled Water Manufacturing 2015

Regarding Porter’s generic strategies, Coca-Cola Company has a broad market scope since it has
diversified its product portfolio, adding non-carbonated soft drinks such as fruit juices, tea & coffee,
bottled water, etc. In addition, the Coca-Cola Company also achieves both differentiation through
packaging, marketing and brand image, and cost leadership, due to its effective distribution system
and bottling network, as well as economies of scale (Vrontis and Sharp, 2003).
The business level strategy of the Coca-Cola Company corresponds to an outside-in perspective.
Indeed, it has expanded its product portfolio following changes in the external environment, in
order to seize attractive market opportunities such as demand for healthier products and the
development of energy drinks. Given that consumer tastes have started shifting from traditional
carbonated soft drinks to healthier and less caloric products, the company has develop its product
range by adding bottled water, fruit juices and smoothies, while leveraging its economies of scale. In
addition, the company’s acquisitive growth is also aligned with an outside-in perspective given that it
has acquired brands that were successfully developing with a growing market share, thus taking
control of the competition (such as its acquisition of the Innocent smoothie brand in 2010 (Lucas,
2013), as well as developing partnerships in new substitute products such as the energy drink brand
Monster (McGrath ,2014).

3.5. Current competitive strategies


In the research concerning the industrial economics, Porter (1980) investigated why some
industries and some companies within the same industry have higher average profits than others.
He identified that companies may have one of four different strategies, costs leadership,
differentiation leadership and focus on one of these aspects. Porter (1980) argues that the
competitive positioning is concerned with both “where to compete” and “how to compete”. These
strategies are presented in Figure 21.

21
Figure 21. Coca-Cola Company and Competitors’ Generic Strategy
Competitive Advantage
Lower Cost Differentiation
Cost Leadership Differentiation
Broad
Target
Competitive
Scope Cost Focus Differentiation focus
Narrow
Target

Source: Viswanathan, 2015


Coca-Cola Company adopted a differentiation strategy. Namely, it offers a large variety of non-
alcoholic drinks, about 305 varieties in almost 200 countries (Coca Cola, 2015a). Therefore, the
large success of the company is due to its variety of products. Moreover, Coca-Cola Company is
attempting to satisfy the needs of different consumers by offering drinks that are specifically made
for niche markets different geographic regions.
The differentiation strategy of the company is supported by its superior quality and brand
recognition that surpasses its nearest rivals. The bottle itself serves a differentiation purpose, as it is
recognized worldwide (Vrontis & Sharp, 2003). For those two reasons, the differentiation of the
products, and covering whole market(s), it can be said that that company has a differentiation
strategy, while also achieving cost leadership through an effective distribution system and bottling
network, as well as economies of scale (Vrontis and Sharp, 2003).
However, although the Coca-Cola Company with such competitive positioning succeeded to grow
over the last couple of years, the reported sales in Europe declined by 1% in 2013 (Euromonitor,
2013). Moreover, Europe together with North America has lowest prospects for growth as
presented in Figure 22.

Figure 22. Growth prospects in 2012-2017

Source: Euromonitor, 2013

These low growth prospects and recent downturn in company’s revenue figures in Europe, was
primarily due to the decrease in sales of carbonated drinks (Euromonitor, 2013). This is mostly due

22
to the economic recession in Europe, but also due to changes in tastes and preferences of
consumers towards healthier beverages. In response to this situationCoca-Cola Company has
focused on expanding its product portfolio and developing healthier drink choices.
The BCG (Boston Consulting Group) matrix in Figure 23 is useful to identify how the Coca-Cola
Company allocates its resources to its different product segments.

Figure 23. Coca-Cola Company’s BCG Matrix


Relative Market Share
High Low
Stars Question marks
Powerade (drink for sportsmen- Monster in the category of fast growing
High growth of 21% about 24% market energy drinks industry segment and Fairlife
share) (Coca Cola, 2015a; MacArthur, (Monster increase in sales by 14,3%) (Coca
2015). Cola, 2015a; Bailey, 2015).
Growth
Cash cows Dogs
Rate
Coca-Cola, Fanta, Diet Cola and Sprite Coca-Cola Vanilla (number of times closed
– four of the top five non-alcoholic and relaunched) (Coca Cola, 2015b).
Low
world’s beverages (sparkling beverages
- decrease in sales by 3,5%) (Coca
Cola, 2015a, 2015b).

3.6. Value proposition


The value proposition of the Coca-Cola Company is to provide non-alcoholic beverages to its end
consumers, through a wide market portfolio of more than 500 brands (ChangeLab Solutions, 2012)
constituted by carbonated soft drinks, bottled water, fruit juices, smoothies, dairy drinks, coffee and
tea, that are easily and conveniently accessible in more than 200 countries, ready to drink (chilled).
The products are delivered to the end consumers, through the company’s 250 bottling partners and
distribution partners, at the rate of 1.9 billion servings each day. The company’s products are made
accessible to end-consumers through a variety of channels; vending machines, retailers
(supermarkets, convenience stores) and bars and restaurants.
The Coca-Cola Company’s end consumers are segmented geographically in the following way:
 Eurasia and Africa (representing 16% of total company 2014 unit case volume, with a growth
in unit case volume in 2014 of 4%).
 Europe (representing 13% of total company 2014 unit case volume with a growth in unit
case volume in 2014 of 2%).
 Latin America (representing 29% of total company 2014 unit case volume with a growth in
unit case volume in 2014 of 1%).
 North America (representing 20% of total company 2014 unit case volume with a growth in
unit case volume in 2014 of 0%).
 Asia Pacific (representing 22% of total company 2014 unit case volume with a growth in unit
case volume in 2014 of 5%).

23
In addition, its products are sold at a premium price compared to generic soft drinks, due to the
strong brand image and marketing efforts conducted by the company.
DeWit and Meyer (2014) argue that firms attempt to outperform their rivals by developing a
competitive advantage. However, not all competitive advantages can be sustained over a long
period of time. Therefore, those that are most sustained are also most valuable (DeWit and Meyer,
2014). According to CUSoM (2011) the value proposition can significantly “improve a company’s
bottom line and make customers understand why they should buy that product”. It is one of the
most important sales techniques, which according to Magretta (2013) need to answer three
questions: Which customers? Which needs? and What relative price? Bryan (1999, p.54) argues
that Coca-Cola Company developed a superior value proposition by adopting physical and
intangible assets. According to CUSoM (2011), Coca-Cola Company is focused on the impact on
customers (through slogans such as “open happiness”). This focus on the impact and benefits to the
end-consumers, in contrast to technical and factual aspects of the products, proved to be an
important element of success for the company (CUSoM, 2011).
According to Hooley, Saunders & Piercy (1998) there are six main dimensions along which the
company can position and differentiate itself from its competitors: price, quality, innovation, service,
benefits and bespoke offering (Figure 24). It seems that Coca-Cola Company is differentiating itself
by most, if not all of these dimensions. Namely, the company’s proprietary recipe to produce its
drinks that arguably taste better than those of competitors (Cola-Cola, 2015a); it has the ability to
innovate and continuously develop new products; the company alsohas one of the most
comprehensive distribution systems that make their products accessible to billions of people in
almost every country and every city (Coca Cola, 2015a). Moreover, it is already mentioned that the
company is advocating the benefits of its products to be happiness and joy for consumers. Lastly,
through a wide variety of products, it is able to capture customers with different tastes and
preferences.
In Figure 24, the main attributes of products that can serve as a competitive advantage will be
presented forCoca-Cola Company, and its main competitors: Pepsi, Nestle and Danone, with
21.2%, 9.9%, 3.7% and 4.7% of the total global volume share, respectively (Euromonitor, 2013). It
can be seen that all companies have developed product offerings, making them the four main
competitors in Europe by volume and revenue (Euromonitor, 2015). However, it seems that the
Coca-Cola Company has a primacy in some of these features, primarily with regard to recognition
of its Coca-Cola bottle, bundling with other complementary products, brand image as well as
personal relationships (printing name on Coca Cola bottle). Other features are presented in Figure
24.

24
Figure 24. Product bases for competitive advantage
Bases Coca Cola Pepsi Nestle Danone
Coca Cola is setting its prices very close Generally uses the competitive Nestle recently adopted Danone adopts premium price
to competitor’s, as they want to be prices, often drop prices in order competitive pricing of its strategy that should reflect the quality
perceived different but also affordable. to get higher market share products in order to lift sales of their products (Merrett, 2009).
Price Once they are established in the new (SDCW, 2012a). due to tough market conditions,
markets, they reposition themselves as especially in Europe
premium relative to competitors (Koltrowitz, 2013).
(SDCW, 2012a).
Coca Cola bottle is one of the most Pepsi is amplifying its pop-culture Nestle is focused on creation of Health and nutritious products with a
recognized brand in the world (Vrontis & relevance and use number of pop good and appealing packaging as mission to bring health to large
Sharp, 2003). stars and social networks to “Packaging is the first contact number of people (Danone, 2015a).
develop its overall products consumers have with our
Features
offering (Grandinetti, 2013). brands. Just remember that 70%
of purchase decisions are taken
at the Point Of Purchase
(POP)” (Maggio, 2006).
Coca Cola is bundling its products to Similarly to Coca Cola, Pepsi is It seems that Nestle doesn’t Dairy products of Danone are usually
Bundling offer more for lower price for its also bundling its products to offer offer significant bundling of their offered as bundle with lower price per
customers. lower prices. products. product offering.
Coca Cola (2015a) argues that they have PepsiCo (2015) adopted large Nestle (2012) declares that it High quality products that are usually
secret recipes that make the taste of number of standards with regard ensures high quality standards referred as healthy, nutritious,
their drinks better than the competitors. to water, packaging, caramel with regard to food and drinks, delicious, tasty etc. (Danone, 2015b).
colouring etc. in order to offer in order to offer best products
high quality products to to its customers. However,
consumers. there was recently a scandal
Quality
that Nestlé’s products were
causing infants illness and death
in poor communities, by
promoting bottle feeding
instead of breastfeeding (Muller,
2013).

25
It has one of the most comprehensive Similarly to Coca Cola, Pepsi has Nestle (2015) has Danone adopted innovative
distribution systems making their extensive distribution system, comprehensive distribution distribution channels in order to offer
products accessible for billions of people through direct store delivery, system, that is guided on products that are available for
Distribution in every country and city of the world customer warehouse and optimizing networks, and “everyone, everywhere” (Danone,
(Coca Cola, 2015a). distribution network, that gives assessing alternative methods of 2015c).
them competitive advantage distribution to decrease carbon
(MarketRealist, 2014). emission.
About 20% of the marketing budget of While Coca Cola focused on the Nestle is one of the world’s High image in the minds of consumers
Coca Cola is spent on differentiation emotional side of the brand, Pepsi most recognized brands with as it offers premium quality products
strategy, primarily with regard to got “stuck” with it high energy, relation to health, nutrition and (for example Evian water). Moreover,
Image
enhancing the image as symbol for joy music and comedy driven strategy wellness drinks (Nestle, 2006) Danone company is investing rather in
and fun (SDCW, 2012b). (Johnson, 2011). company image than in brand image
(Gummersson, 1999).
Company is building personal relationship Although company is building Developed cross brand Danone (2015d) has developed
with the customers. Latest example is a relationship with social media and relationship marketing. Ensuring personal communication strategy with
possibility to print customer’s name on other forms of direct contact with customer satisfaction through their consumers, through its presence
the Coca Cola bottle (Coca Cola, 2015d) consumers, one of the recent personal and non-personal on social networks. Moreover, it
However it is also building relationships success project was Refresh communication strategy. offers a number of other means of
with other complementary brands, such Project (community based communicating with the company,
as Dominos, McDonalds, Subway etc. projects) of the company, that such as phone, mail, internet etc.
Relationship
(Lutz and Nudelman, 2013). turned number of customers into (Danone, 2015d).
“brand evangelists” (Watson,
2010)
Creating relationships with
complementary brands such as
Pizza Hut, KFC, Taco Bell etc.
(Lutz and Nudelman, 2013)

26
3.7. Strategic capabilities or distinctive core competencies leading to sustainable
competitive advantage

Furthermore, in order to better understand the competitive advantage of the Coca-Cola


Company, Porter’s (1980) value chain is evaluated in Figure 26. The main focus will be on the
primary activities: inbound logistics, operations, outbound logistics, marketing and sales and
service.
The Value chain analysis (Figure 26) shows that the main value creation is achieved, with regard to
primary activities, in operations, outbound logistics and marketing, and in the support activities in
technology development. High quality product, developed in operations, is distributed through
possibly the best network of partners to be effectively marketed to the end-consumer.
Technology development serves to enhance the business operations not only by introducing new
products, but also by improving the logistics in the value chain (thorough IT systems in inbound
logistics). These activities constitute the main differences between Coca-Cola Companyand its
competitors, with the main accent being on outbound logistics and technology development, and a
unique marketing strategy. Based on the value chain analysis, the VRINE analysis in Figure 27 shows
the strategic resources and capabilities that are a source of sustainable competitive advantage for
Coca-Cola Company.

The strengths and weaknesses of the Coca-Cola Company that have been identified throughout
the internal analysis of the company are summarised in Figure 25.

Figure 25. Strengths and Weaknesses of Coca-Cola Company


Strengths Weaknesses
 Wide product portfolio  Products perceived as unhealthy
 Effective bottling and distribution  Dominance of carbonated soft drinks
network in product portfolio
 Widely recognized brand
 Advertising power
 Financial resources
 Market leader

Figure 26. Coca-Cola Company’s Value Chain

27
Raw materials are purchased from a wide range of suppliers from all over the world. The company is using
Inbound ABC classification to group its products. Coca Cola (2015b) adopted number of practices for effective
Logistics development of inbound logistics, such as optimization of distribution facilities to minimize the costs of
shipping materials, and development of IT systems to increase efficiency for acquiring materials.
Coca Cola is not a single entity from both managerial and legal point of view (Dudovskiy, 2015). The company
manufactures the concentrate, bases and syrups for its beverages, that are then sold to their partners
Operations
throughout the world to be bottled and marketed. These partners thus, distribute the final products to the
end customers
From the total of almost 29 billion unit cases, 19% was sold in US, while 31% in Mexico, China, Brazil and Japan
Primary during 2014 (Coca Cola, 2015c).As it was mentioned, the company’s main outbound partners are bottling
Activities Outbound companies, that distribute and market their products. According to Coca Cola (2015c) five main outbound
Logistics partners (bottling companies) are: Coca Cola FEMSA, Coca Cola Hellenic, Arca Continental, New CCE and
Swire Beverages (please see Appendix I for information on geographical division of these companies). These
five companies accounted for one third of the whole sale volume in 2014 (Coca Cola, 2015c).
The company is using integrated marketing strategy of many forms of advertising, sales, promotions,
Marketing &
distribution techniques, public relations etc. The main marketing message of the products is associated with
Sales
happiness, joy and active lifestyle (Coca Cola, 2015a).
On the corporate website there is comprehensive volume of information and answered questions (FAQ
Service section) that are covering most aspects of their products. Moreover, it has online customer service or
customer may call service by phone on the dedicated customers’ service phone (Dudovskiy, 2015).
According to Dudovskiy (2015) water as one of the main ingredient for the company’s products is often
difficult to obtain. Additionally, the company is using HFCS high fructose corn syrup, that is mainly acquired
Procurement from the US suppliers and delivered via trucks. The juice concentrate are primary delivered from Florida and
“Southern Hemisphere (particularly Brazil)” (Coca Cola, 2015c). The company specifically values the diversity
in the supply chain, and constantly experiencing increase in international purchases (Dudovskiy, 2015).
Technology Constantly working on improvement and development of new products and delivery systems. As such, recently
Support Development company launched new Coca Cola product – Coca Cola Life (Dunn, 2015)
Activities
Constant improvement of personnel through education and training. Holistic approach to reward and
HRM compensate employees. Developed Coca Cola University to provide knowledge and practical skills for their
employees.
Firm According to Coca Cola (2015c), the company has about 90.000 million in assets. Large distribution network.
Infrastructure High brand value.

28
Figure 27. Coca-Cola Company VRINE Analysis
Resources/ Non-
Value Rarity Inimitability Exploitability
Capabilities Substitutability
Intangible Assets
Yes: It gives No: Competitors Yes: difficult and Yes: the bottler and Yes: The
the company such as PepsiCo costly to imitate distribution networks company uses
flexibility to use this system as as Coca-Cola are necessary for the this capability to
use either well. Company’s bottler products to be have an efficient
DSD network was built present in all the distribution and
Distribution over a long period distribution channels reach its
network or of time and used by the company. customers.
Bottler
use retailer’s requires managing
network &
warehouses. a large number of
Distribution
It provides local firms. It
network
greater control would be very
of retail shelf difficult for new
space & entrants to
improves sales replicate their
performance distribution
for mass network.
products.
Yes: Coca- Yes: Few Yes: $ 3.5 billion Yes: Due to low Yes: Coca-Cola
Cola is one of companies have spending in product Company
the world’s such a strong advertising & differentiation on exploits this
most brand image as marketing in 2014 core characteristics, resource and
recognizable Coca-Cola (one of (accounting for customer’s builds on it to be
brands, and the the world’s most 6.9% of revenue) perception depend a market leader.
Advertising
company recognizable (Investopedia, on brand image and
Scale/Brand
implements brands and valued 2015). Rivalling brand awareness.
Image
effective at $ 83 billion in with Coca-Cola
marketing and 2014). Marketing on advertising and
promotional is one of its two brand image
campaigns main activities requires spending
with concentrate huge amounts on
manufacturing. marketing and
advertising.
Tangible Assets
Yes: The No: Other No: Competitors No: Smaller Yes: The
company’s companies have can develop companies can still be company
consolidated high financial financial resources effective competitors. leverages its
Balance Sheet resources. comparable to For instance, financial
showed $ Coca-Cola companies with less resources,
8,958 million Company financial resources including by
Financial
of cash and can use guerrilla spending great
resources
cash marketing in order to amounts in
equivalents in target their advertising and
2014 (Coca- customers, which promotion.
Cola, 2015). does not require
such financial
resources.

29
4. Strategic Financial Analysis
This section will study Coca-Cola Company’s financial position relative to its main competitors and
the overall soft drink industry. For this purpose, relevant ratios will be analysed to evaluate the
company in terms of growth, profitability, leverage, liquidity and shareholder value. Investment
recommendations will be formulated following this analysis.

4.1. Growth

Figure 28. Revenue Growth (2011-2014) Figure 29. Gross Profit Growth (2011-2014)
35.00 65.00
25.00
60.00
15.00

5.00 55.00

%
%

-5.00
50.00
-15.00
45.00
-25.00
2011 2012 2013 2014
2011 2012 2013 2014

Figure 30. Operating Income Growth (2011-2014) Figure 31. Net Income Growth (2011-2014)
25.00 45.00
35.00
15.00 25.00
15.00
5.00
5.00 -5.00
%
%

-15.00
-5.00 -25.00
-35.00
-45.00
-15.00 -55.00
-65.00
-25.00 -75.00
2011 2012 2013 2014 2011 2012 2013 2014

Sources: Nasdaq, Reuters, Morningstar, Bloomberg and Stock-Analysis-On

The revenue growth (Figure 28) of Coca-Cola Company started on a high note of 32.53% in 2011,
but it dropped drastically to -1.83% in 2014, which was due to growing concerns that Diet Coke's
artificial sweetener might cause cancer. PepsiCo suffereda similar fate by having its revenue growth
drop from 14.98% in 2011 to 0.40% in 2014, while Danone also had an apparent downward pattern.
Nestlé is the only company that hasan opposite upward leap from -23.37% in 2011 to 10.38% in
2012, that was due to the diverse food product brands held by Nestlé. This general drop in growth
is caused by the perception of carbonated beverages as unhealthy, and as the most recognized

30
brands of the industry, Coca-Cola Company’s and PepsiCo’s sales take the biggest impact (Suddath
and Stanford, 2014). In addition, the drop was also contributed by a 3% increase of cost of goods
sold and a 10 % drop of income from assets.
Regarding gross profit growth (Figure 29) all the companies remained stagnant throughout the
period. The discernable pattern from operating income growth (Figure 30) also supports the
revenue growth drops of Coca-Cola Company, PepsiCo, Danone and the industry, and also
Nestlé’s upward leap. Although the revenue and operating income growth values seem highly
volatile, the net income growth of all the companies were not as heavily affected due to efficient
cost control. Except forNestléwhich has a net income growth of -72.29% in 2011 caused by
Greenpeace's 2010 "Orang-utan, Have a Break?" protest against Nestle which instigated a large
scale product boycott for procuring palm oil, whose cultivationdestroys rainforest and animal
habitat (Hickman, 2011). Nestle was then forced to immediately prioritize sustainability in its
procurement process which minimized sales drop and caused the net income growth to rise up to
44.34% by 2014.

Figure 32. Earnings per Share (2011-2014)


45.00
Coca Cola
25.00 Company
5.00 PepsiCo Inc
%

-15.00
Group Danone
-35.00
-55.00 Nestle S A
-75.00
2011 2012 2013 2014
Source: (Nasdaq, Reuters, Morningstar, Bloomberg and Stock-Analysis-On)

This Earning per Share (EPS) growth (Figure 32) shows a similar pattern to that of net income
growth. Nestlé has an extremely positive growth in EPS, from -70.75% in 2011, to 44.41% in 2014
due to its recovery of sales by adopting Greenpeace approved sustainable palm oil procurement
process and stopping the public boycott on its products (Greenpeace, 2015). Coca-Cola
Company’s, PepsiCo's and Danone's EPS growth remained negative overall due to the low amount
of net income growth. These overall negative figures will negatively affects investors’ interest to
invest in the soft drink industry as most of its top companies have low growth rate of sales and
EPS,leading investors to doubt the companies' and industry's profitability.

31
4.2. Profitability
Figure 33. Earnings Before Tax Margin (2011-2014)
30.00
Coca Cola
25.00 Company
20.00 PepsiCo Inc
15.00

% 10.00 Group Danone


5.00
Nestle S A
0.00
2011 2012 2013 2014
Source: Nasdaq, Reuters, Morningstar, Bloomberg and Stock-Analysis-On

Figure 33 shows the Earning before Tax (EBT) Margin of the soft drink industry. Coca Cola's EBT
shows a significantly better financial performance compared to its main competitors and to the
industry average. Coca-Cola Companyis nearly twice more efficient in managing labour and supplies
in its production processes compared to its competitors, but it suffered a drop of approximately
4% in 2014. Meanwhile, its competitors, PepsiCo, remain relatively stable, Nestle drops by over 3%
from 2012 to 2014, while Danone drops by approximately 4%, which is the worst performance of
all. This general drop in the industry was caused by the growing trend of healthy lifestyle, which led
consumers to favour healthy beverages at the expense of carbonated soft drinks such as juices, tea
and coffee (Balakrishnan, 2015; Kell, 2015).
Figure 34. Return on Assets (2011-2014) Figure 35. Return on Equity (2011-2014)
12.00 35.00
10.00 30.00
25.00
8.00
20.00
6.00
%

15.00
4.00
10.00
2.00 5.00
0.00 0.00
2011 2012 2013 2014 2011 2012 2013 2014

Figure 36. Return on Invested Capital (2011-2014)


18.00
16.00
14.00 Coca Cola Company

12.00 PepsiCo Inc


%

10.00 Group Danone


8.00 Nestle S A
6.00 Industry Average
4.00
2011 2012 2013 2014
Sources: Nasdaq, Reuters, Morningstar, Bloomberg and Stock-Analysis-On
32
The Return on Assets (ROA) (Figure 34) shows that Coca-Cola Company had the highest efficiency
in generating income from its assets in 2011 compared to its competitors but starts to drop by
approximately 1-2% per yeardue to the total drop of 17.2% of net income and 15.06% increase of
its total assets. Coca-Cola Company then got overtaken by Nestle that shoots up by over 3% from
2013 to 2014 due to Nestle selling 8% of L'Oreal's shares back to L'Oreal for € 6.5 billion in April
2014 (Wendlandt and Denis, 2014). Danone also followed a negative trend, its ROA starting at
5.91% in 2011 and dropping to 3.57% in 2014, which is lower than the industry average due to the
drop of 21.3% in Danone's net income. The Return on Equity (ROE) (Figure 35) of PepsiCo is higher
than the industry's average, which shows that itis more efficient at generating profits using
shareholder's cash investment compared to its competitors. The discrepancies between the ROA's
and ROE's of Coca-Cola Company and PepsiCo suggest that both companies have large amount of
debts. The Return on Invested Capital (ROIC) will complement ROE by adding the company's
liabilities to equities to reveal the ability of a company to generate earnings from a company's
available capital base. (Figure 36) shows that Coca-Cola Company's ROIC has dropped by 5%,
PepsiCo's dropped by 1% and Danone's by nearly 10%, while Nestle’s ROICincreased by 4% due to
a more diversified product portfolio mitigating investment risks. During 2011-2014, Nestle was the
company that best managed their debt and equity capital funding.

4.3. Financial leverage


Figure 37. Assets/Equity Ratio (2011-2014) Figure 38. Debt/Equity Ratio (2011-2014)
4.50 1.60
1.40
4.00
1.20
3.50
1.00
3.00 0.80
0.60
2.50
0.40
2.00
0.20
1.50 0.00
2011 2012 2013 2014 2011 2012 2013 2014

Sources: Nasdaq, Reuters, Morningstar, Bloomberg and Stock-Analysis-On

PepsiCo has the highest Assets to Equity ratio (A/E) (Figure 27)throughout the period, reaching 4.05
in 2014, which means that by 2014, only a quarter of PepsiCo's total assets were funded by
shareholder equity. The increase of Pepsi's A/E ratio from 2013 to 2014 was due to the company’s
investment of $3 million in Mexico followed by an additional USD 2 million the following years
(PepsiCo, 2014). However, the 39.23% drop in shareholder equity outweighs the $3 million spent,
33
which causes an increase of Pepsi's A/E ratio from 2013 to 2014. Coca-Cola Companyhas a stable
incremental A/E ratio, with an extra jump in 2014, which is due to a 29.05% growth ofCoca-Cola
Company's short term investment return, with Danone having an almost exact opposite drop in
investment return that caused its drop in A/E ratio. This shows that by 2014, about one-third of
Coca-Cola Company’s, half of Nestlé’s and almost one-third of Danone's total assets were funded
by shareholder equity. With these high numbers, all of the companies except Nestle are highly
leveraged, especially PepsiCo. However, a high Assets-Equity Ratio may also have more return on
borrowed capital that outweighs the cost of capital, which may apply for Coca-Cola Companyand
PepsiCo as both have higher percentage of current assets over total assets.
Regarding the Debt to Equity Ratio (Figure 38), Coca-Cola Companystood at 0.63 in 2014, Danone
at 0.53, Nestle at 0.18 and PepsiCo is overwhelming the others with 1.37, relatively similar to the
industry average. This general upward trend illustrates the fact that all companies were using more
and more debt to finance their growth, in order to benefit from tax deductibility of debt interest,
and more independence from shareholders.
However, as these are generally low ratio values, it poses only a small risk to the company that may
cause some volatility in its earnings due to additional interest expenses that may affect companies'
abilities to fund other activities, e.g. marketing, research and development.

4.4. Liquidity
Figure 39. Current Ratio (2011-2014) Figure 40. Quick Ratio (2011-2014)
1.40 1.00
1.20
0.80
1.00
0.80 0.60

0.60 0.40
0.40
0.20
0.20
0.00 0.00
2011 2012 2013 2014 2011 2012 2013 2014

Sources: Nasdaq, Reuters, Morningstar, Bloomberg and Stock-Analysis-On

The Current Ratio (Figure 39), which is also known as Working Capital Ratio, shows the ability of a
company to use its assets to pay for its liabilities. Coca-Cola Company had a Current Ratio of 1.05
in 2011, 1.09 in 2012, 1.13 in 2013 and 1.02 in 2014; the drop was caused by a 26.54% increase in
short-term debt, amounting up to $5 billion with its biggest bond offering (Mead, 2013), whereas
PepsiCo invested $3 billion in Mexico leading to PepsiCo's drops in current ratio. This shows that

34
Coca-Cola Company and PepsiCo have sufficient current assets to pay for current liabilities
obligations, double that of industry's average. Nestle’s Current Ratio remains below 1.0 from 2011
to 2013 which implies that if obligations were at maturity, Nestle would not be able to pay the
current liabilities even if all current assets were sold.
The Quick Ratio (Figure 40) also known as Acid Test Ratio, has similar pattern to that of the
Current Ratios with all companies dropping by approximately 0.3 in value due to removing of
Inventories from Current Assets during calculation of liquidity value. However, Danone suffered
the smallest drop,which suggest that Danone has a lower level of inventory compared to its
competitors. Although it shows that the companies have generally good liquidity ratios, more than
50% of cash was made up of short term investments and receivables that are not possible to be
converted into liquid cash immediately if liabilities were due right away.
Figures 39 and 40 show that the companies have the ability to repay most of their current liabilities
using their current assets and are not overly dependent on inventories for current assets
calculation that will give potential investors a boost of confidence and some risk protection to a
certain degree.

4.5. Shareholder
Figure 41. Dividend Payout Ratio (2011-2014) Figure 42. Price-Earning Ratio (2011-2014)
90.00 35.00
80.00 30.00
70.00
25.00
60.00
50.00 20.00
40.00 15.00
30.00
10.00
20.00
10.00 5.00
0.00 0.00
2011 2012 2013 2014 2011 2012 2013 2014

Sources: Nasdaq, Reuters, Morningstar, Bloomberg and Stock-Analysis-On

Figure 41shows a growing trend for all the companies’ Dividends Pay-out Ratio (DPR), whichis a
positive signs for potential investors. Coca-Cola Company's DPR value doubled from 34% in 2011
to 66.30% in 2014, while Nestlé’s DPR value almost quadrupled 18% in 2011 to 71.80% in 2014,
Danone's DPR value increases from 0% to 80.50% and only PepsiCo's DPR value only increases by
5% from 2011 to 2014. These fast increments of DPR value were likely for the companies to repay
their shareholders after recovering from the 2008 financial crisis, which caused them to minimize
the DPR value to enable the companies to finance daily operations during the crisis. In addition,
Figure 42showsthe Price-Earnings Ratio (P/E Ratio), which indicates how much investors are willing
35
to pay per dollar of earnings and assesses the company's potential ability to generate cash flow. All
companies’ P/E Ratio shows a positive outlook by uniformly increasing by approximately 10% in 3
years, except Nestlé’s had a sudden drop from 23.14% in 2013 to 15.83% in 2014 which was
attributed to the company's recovering from its product boycott stage due to Greenpeace's protest
that increases the EPS and consequently decreasing its P/E Ratio. In addition, Coca-Cola Company,
Pepsi and Danone were expected to have a higher earnings growth compared to Nestle that has a
lower P/E Ratio.

4.6. Specific Investment advice to existing and potential clients of the consultancy
considering investing in this industry
As shown in the strategic financial analysis, the industry is still negatively affected by the aftereffects
of the financial crisis and other factors that greatly affect therevenues of the industry leader, i.e.
Coca-Cola Company. Although the industry is still not at its prime, it starts to show signs of
recovery, which also means that it is still potentially cheaper for investment opportunities
compared to when the economy was more stable, and increase in share's market price. It would be
wise not to invest all of the intended capital into a single company, but instead to diversify it. In
terms of companies, it would be wise to choose companies like Nestle and Pepsi to invest in due to
its diversified product portfolios that are not only in the soft drink industry, but also food products,
thus mitigating risks, e.g. yoghurt and coffee powder for Nestle and oatmeal and potato chips for
PepsiCo (Reynolds, 2015). In addition, due to the bad press on 'fattening' soft drinks, it worsens the
condition for beverage-only product portfolio companies like Coca-Cola Company. Nevertheless,
Coca-Cola Company has started to branch out by not only licensing with Monster for its energy
drinks sector, which is a huge growing market, it also acquired some healthier beverage, i.e. UK's
Innocent fruit juice. By continual efforts of Coca-Cola Companyin its CSR activities in addition to its
healthier beverage product expansion and its current distribution network which is one of world's
biggest, Coca-Cola Company still has the potential to grow further.
Figure 43. Investment Breakdown
Therefore, it is recommended that for a prudent
0%
investment, the breakdown should be approximately
Coca-Cola
25% Company 50% Nestle, 25% Coca-Cola Companyand 25% PepsiCo,
Pepsico Inc.
50% as Nestle had the overall best financial performance in
25% Nestle terms of past and future growth potentials for stable
return on investments, and is followed closely by Coca-
Cola Company and PepsiCo. Furthermore, all 3
companies have a steadily growing DPR.Although PepsiCo has a more diversified product portfolio

36
which would make it a more logical investment choice compared to Coca-Cola Company, Coca-
Cola's existing brand awareness as one of the world most acknowledged brand with a dominant
market share, a product portfolio that consists of 15 brands estimated to be worth approximately
$1 billion each and a widely established distribution network, are investment factors to consider for
the long term benefits (Bhasin, 2011).

5. Future Industry Development and Recommendations


Based on the previous external, internal and financial analysis, we will formulate potential
recommendations for Coca-Cola Company’s future strategy. To this extent, after identifying the
issues relating to the company’s strategy, this section will go through the process of generating
options and evaluating them based on specified criteria before detailing the selected
recommendations.

5.1. Option generation, option evaluation and option selection


Figure 44. Current Business Strategy Diamond of Coca-Cola Company
Staging Economic Logic Differentiators
Speed of expansion: Coca-Cola Economies of scale, high Image: one of the world’s most
frequently acquires and develops bargaining power with recognizable brand, sponsorship,
new products suppliers, celebrity endorsement.
Standardized product sold to Customization: bottle name
bottling companies and customization “share a coke”, limited
retailers, edition products.
Premium prices due to image Styling: glass bottle shape.
and brand High speed to market
Vehicles Arenas
Internal development: Coke variations (diet, zero, Product categories: Non-alcoholic beverages
life) Channels: Hypermarkets, convenience stores, retail,
Joint ventures: Monsters beverage, Fairlife, Keurig vending machines, outlets, restaurants, gas stations.
Green Mountain, SABMiller Market segments: all age groups
Licensing/franchising: franchises with bottling Geographic areas: Eurasia and Africa, North America,
companies that sell their products, Lipsmacker Latin America, Asia Pacific, Europe
coke lip balms & L’Oreal. Core technologies: bottling equipment, syrup and
Experimentation: Coke vanilla concentrate production.
Acquisitions: Innocent Value-creation strategies: Marketing and large product
portfolio

37
Figure 45. Option Generation, Option Evaluation and Option Selection

38
5.2. Specific recommendations for the various Strategy Levels;
Figure 46. Recommendations at the Network, Corporate and Business Levels
Recommendation Dasani (Middle Dasani Market Product Development
/Strategy Level East and Flavoured Development Fairlife Fairlife Milk with Fruits
Europe) Water (US) Milk (Europe, Asia) Flavour (US)
Network Wholly owned R&D Embedded organisation R&D
subsidiary perspective
Discreet Embedded organisation
Discreet organisation Long term perspective
organisation perspective
Long term
perspective
Long term
Long term
Corporate Increase of Horizontal Increase of geographic Horizontal related
geographic scope related scope diversification
diversification
Integrated Integrated perspective Increase of product scope
perspective Increase of
Market development Internal development
product scope
Market
Portfolio perspective
development Internal
development
Portfolio
perspective
Business Outside-in Outside-in Outside-in perspective Outside-in perspective
perspective perspective
Expand customer base
Expand customer
base

5.3. Selected Recommendations’ Impact on Business System


Figure 47. Ansoff Matrix of Coca-Cola Company’s recommended growth strategies
Existing product New Product
Existing Market Penetration Product Development
Market Development of Dasani in Middle East through Development of Fairlife in the US through
advertising and bundling of products variations in flavour and Dasani in the US
through flavoured water
New Market Development
Market Development of Dasani in Europe and Fairlife in Europe
and Asia

After reviewing Coca-Cola Company's current external and internal environment, and performing a
financial analysis of the soft drink industry, it appears that it will be necessary for the Coca-Cola
Company to take action as its carbonated beverages segment’s sales are dropping due to growing
awareness of health issues related to the consumption of sodas. In addition, we identifiedareas with
potential for growth, namely Coca-Cola’s brandsof milk (Fairlife) and water (Dasani), which
respond to the growing demand for healthy alternatives to carbonated soft drinks. Therefore,
according to the Ansoff Matrix (Figure 50) and ranking of recommendations according to various
criteras as shown in Figure 48, we recommend that Coca-Cola Company implement a market
penetration strategy to develop Dasani in the Middle East market whereit is already present but
where it still has potential for growth. We also recommend implementing a market
developmentstrategy for Dasani to enter the European market. In addition, since Dasani is already
39
successful in the United States, we recommend developing new products by introducing flavoured
water under the Dasani brand, which could be a stepping-stone before expanding to other
geographic regions.
In terms of long term strategy, as Coca-Cola Company has acquired the know-howto filter milk
components in order to change the content in proteins, lactose, fat and calcium, when it acquired
Fairlife, we recommend that the company expand the geographic scope for this product by entering
the European and Asian markets. Finally, Coca-Cola Company should expand develop new
variations in taste for Fairlife by introducing fruit flavoured milk into the North American market.

40
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7. Appendix

Appendix 1. Porter’s 5 forces of the soft drink industry


Intensity of Rivalry- High
The soft drink industry is extremely concentrated, with four big players dominating about 39.5% of
the European soft drink industry (MarketLine 2014). Companies operating under high fixed costs
with their expensive marketing campaigns and specialist production facilities do not have the option
to scale down during period of slow growth. However, the nature of the European soft drink
market favours economies of scale and expansion through mass manufacturers. Therefore,
companies are in direct competition with one another for a limited number of consumers.
It should be noted that with a limited number of players in the industry the competition is
diminished as each player acquires a more established market segment, with the help of solid
branding and product differentiation. In addition, the soft drinks market is mature, which increases
the degree of rivalry. There are also high exit barriers, due to high investment in fixed assets (e.g.
Coca-Cola Company had $ 14,633 million of property, plant and equipment in 2014), high
redundancy costs (e.g. Coca-Cola Company employed 129,200 people in 2014), and contracts with
suppliers and buyers, which prevent existing firms from exiting the market. Furthermore, low
switching costs, and low industry growth (Coca-Cola Company observed a decrease of its
European market of 2% in 2014) also contribute to a high intensity of rivalry among existing firms.

Purchases
Marketing
Rent & Utilities
Industry costs (2015)
Wages
Depreciation
0 50 100 Other
Profit
Source : Global Soft Drink & Bottled Water Manufacturing, IbisWorld

Number of competitors: The main rivals within the European soft drink industry are Coca-Cola,
Pepsi, Dr. Pepper Snapple Group and Nestle, and also there are retailers such as Aldi that have
contracts with bottling companies. Products within this industry are quite undifferentiated especially
amongst the big players, therefore it is not surprising that some companies have decided to
diversify their portfolio by reaching outside the soft drink industry. Diversity of competitors:
 Nestle: has a diversified portfolio and offers a variety of products such as soft drinks,
chocolate, infant foods, frozen foods, pet care etc.
 Pepsi: is diversifying its portfolio by acquiring food companies such as Lays and therefore
offers both beverages such as soft drinks and tea as well as snacks.

50
 Dr Pepper Snapple Group and Coca-Cola have a integrated perspective within their
portfolio and focus only on soft drinks with Coca-Cola offering 133 soft drinks within
the industry.

Threat of Substitutes – Low


The threat of substitutes is low as all the alternatives to soft drinks are within the beverage industry
such as: tea, coffee, juices, bottled water, energy drinks. Large soft drink companies have diversity
in their product portfolio to reduce threat of substitution by owning other beverage types.

Global Soft Drinks Market


7%
9% Carbonated soft drinks
Bottled waters
11% 45% Fruit beverages
Functional beverages
Sports drinks
15%
Other
13%

Source : Global Soft Drink & Bottled Water Manufacturing, IbisWorld 2013

The demand determinants for soft drinks include prices, trends in the consumption of beverages,
health-consciousness of consumers, and innovation. Demand for soft drinks tends to be income-
inelastic, so a change in consumer income has very little effect on consumption. However, for
emerging markets, which have the highest growth for soft drink manufacturers (in 2014, unit case
volume growth in Eurasia & Africa was 4% and 5% in Asia Pacific), have more income elasticity
regarding soft drink consumption than declining developed countries. In addition, on the one hand,
branded products are more impacted than generic products by changes in consumer income, due
to their higher prices. On the other hand, branded products benefit to a certain extent from
consumers’ loyalty to the brand and are therefore less substitutable than non-branded products.
Demand for soft drinks can also be impacted by price variations, although this price-sensitivity
varies in different parts of the world. In addition, demand for soft drinks is driven by health
concerns and lifestyle habits. As consumers in developed countries lead busier lives, the need for
ready-for consumption products such as packaged soft drinks increases. However, the rising health
concerns in developed countries have a negative impact on consumer demand for carbonated soft
drinks, leading consumers to favour healthier alternatives such as fruit juices and bottled water.

51
Furthermore, the demand for soft drinks is impacted by the increasing number of products that
result from the innovation of soft drinks manufacturers.
There are low switching costs in the soft drinks industry for end-consumers, which increases the
threat of substitutes. Brand loyalty is the main switching cost, which is maintained by companies
through advertising and marketing campaigns. Soft drinks are easily substitutable and there are no
significant differences in product quality. In addition, the increasing numbers of new products acting
as substitutes that are launched on the soft drinks industry increase the competitive rivalry within
the industry. Other substitutes for soft drinks within other industries are milkshakes and other ice
cream products, where a consumer could purchase a cool dessert as opposed to a soda in the
summer months, there would be relatively low switching costs for this alternative.

Threat of New Entrants- Medium


Brands such as Coca-Cola and Pepsi dominate the soft drink industry on a global scale due to the
high level of brand awareness they generate. Therefore, it would be extremely difficult to compete
with such brands. Perhaps new entrants could reach a small scale of success if they bring a unique
product and concept into the market. New entrants may also have to consider how expensive it
would be to enter the European soft drink industry as production processes are performed under
licensing agreements by bottling companies, therefore, there must be an investment in
manufacturing capacity. Large brands create awareness by extensive and expensive use of
advertising and marketing, and therefore, it may be costly for a new entrant to compete with such
brands. According to an Ibis World report, marketing expenditures make up approximately 7.9% of
revenues (Ibis World 2013).
Dominant brands such as Coca-Cola benefit from economies of scale, which may also make it
difficult to enter the soft drink industry. For example, Coca-Cola’s property plant and equipment
amounted to approximately USD 14,633 million in 2014 (Marketline 2014). Perhaps it is due to
such factors that the soft drink industry has experienced little to no growth within Europe, which
may also make new entrants wary of entering this market. Switching costs for suppliers are
relatively low, however, when it comes to consumer switching costs they are also relatively low as
consumers may switch brands during factors such as discounts, and prices may vary according to
geographical locations.
New entrants would also have to be cautious of the various regulations within Europe for the soft
drink industry. These regulations regard monitoring factors such as: ingredients, safety, and label
requirements (nutritional), which became stricter in December 2014. Some European governments
have imposed taxes on soft drinks with the purpose of addressing health concerns. For example,
France imposed taxes on sugar- sweetened soft drinks in 2012.
52
Supplier Power- Low
Suppliers within the soft drink industry supply raw materials such as: sweeteners, sucrose (refined
sugar), and aspartame in regards to ingredients as well as materials such as aluminium to produce
cans or plastic for bottles.
These ingredients are generally accessible from a variety of suppliers. However suppliers for the
ingredient aspartame are few. If market prices of such inputs are high, even the rarest of ingredients
can be replaceable, even if the price of aspartame is too high it can by substituted by saccharine or
similar ingredients, therefore switching costs for soft drink companies can be deemed as relatively
low. However, it should be noted that the price of sugar has risen overall in the market by 44.3 %
as of 2010 (Ibis World 2013) and such an ingredient is a key requirement for soft drink products,
therefore, suppliers have an upper hand as manufacturers need this ingredient for their product.
Manufacturers purchase raw material in bulk, which therefore, decreases the supplier power as
suppliers want to main positive relations with soft drink manufacturers. For example, industries that
handle materials such as aluminium are somewhat reliant on soft drink companies to survive.
Advertising agencies play a colossal role in building reputations of brands within the soft drink
industry, and thus strengthening supplier power. This is due to the fact that the European
advertising industry has become extremely concentrated due to years of consolidation (MarketLine
2014).

Buyer Power- Medium


Types of Buyers: bottlers, supermarkets, grocery stores, super centres, convenience stores,
bottlers, gas stations, vending machines, food service establishments, exports, and grocery stores.
Within Europe there is a large number of buyers available, as the distribution of soft drinks has
been achieved through various means. Manufacturers of these soft drinks produce beverages ready
for consumption and supply their retailers directly. Players within the soft drink industry generate a
large amount of revenue by producing concentrates, which are then sold to bottling companies.
Although some bottlers are independent, most of them are owned by big name manufacturers and
are deemed as customers or partners. For example, the main bottling company for Coca-Cola
products in Western Europe is Coca Cola Enterprises and Anchor Bottler is responsible to
penetrate Coca-Cola products within Eastern Europe. Such bottling companies are licensed to:
transform raw materials into soft drinks, package with manufacturer branding, and finally distribute
the final product to buyers. It should be noted that most bottlers are free to make their own
business decisions, however, close relations between the manufacturers and bottlers means that
beverage and food retailers have the upper hand as buyers with a higher level of power, therefore,
through this form of vertical integration these bottling companies have significantly low to medium
53
buying power as well as no pull through.
As demonstrated in the graph hypermarkets and supermarkets such as Tesco and Sainsbury are the
main buyers of the soft drink product. These buyers purchase soft drinks in bulk and therefore have
a high buying power as they receive soft drink products at discounted rates. This increases buyer
power as soft drink companies compete to have their product placed on the best shelves within
these retail outlets.

Global Distribution Channels


repartition in 2015
Supermarkets, grocery
8% stores and
9% supercenters
5%
43% Convenience stores,
6% gas stations and
vending machines
29% Food service
establishments

Source: IbisWorld Global Soft Drink and Bottled Water Manufacturing 2013

In regards to switching costs for buyers, switching costs for consumers of the product may be low
if the supermarket they frequent to has their own soft drink private label, this form of backwards
intergration is usually cheaper than big brands and has a similar taste to the big brand products.
These private labels may make switching costs low for large retailers such as Aldi and Lidl. This
being said if hypermarkets were to eliminate large soft drink brands from their shelves they may
loose many customers who are loyal to brands such as Pepsi and Coca-Cola. Switching costs for
bottlers would be extremely high also as bottling companies are under a contractual agreement
with manufacturers, and therefore cannot end a contract without any legal penalties.
The fact that bottling companies are under legal contracts, there is a relatively low form of price
sensitivity for these buyers. However, when it comes to large retailers price sensitivity is more of
an issue as soft drink companies would like to stay on good terms with these distributors and
therefore keep good relationships with retailers by offering them discounts when they purchase in
bulk.

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Appendix 2. The Coca-Cola Company’sCarroll’s CSR Pyramid

Appendix 3. The Coca-Cola Company’s Human Rights initiatives

Source: Coca Cola, 2015d

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Appendix 4. The Coca-Cola Company’s CSR initiatives

Source: Coca Cola, 2015e

Appendix 5. The Coca-Cola Company Culture Web Model

Source : Johnson and Scholes, 2012

Appendix 6:The Coca-Cola Company’s Opportunities and Threats


Opportunities:
 The healthy lifestyle trend and the emerging calls for healthy food and beverages give Coca-
Cola an opportunity to introduce products that are have fewer calories.
 They could also focus on new markets and countries where the consumption level is high
and growing instead of stagnated markets.

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 Penetrate new markets through acquisitions.
Threats
 Intensified competition, especially in the BRIC nations
 The industry is in the maturity phase with the soft drinks market saturated and fears of
decline in future.
 The increase of the cost of production materials has affected coca cola profit margin and
may continue to do so in the future.
 The healthy lifestyle trend made changes in consumer tastes and many are reducing the
consumption of carbonated drinks.
 Money currencies exchange may affect the overall income, especially if the dollar is strong
compared to other nations they operate in.
Source : strategicmanagementinsight, 2013

Appendix 7: The Coca-Cola Company’s Outbound Partners


“Our five largest independent bottling partners based on unit case volume in 2014 were:
 Coca-Cola FEMSA, S.A.B. de C.V. (“Coca-Cola FEMSA”), which has bottling and distribution
operations in a substantial part of central Mexico, including Mexico City, and the southeast
and northeast parts of Mexico; greater São Paulo, Campinas, Santos, the state of Mato
Grosso do Sul, the state of Paraná, part of the state of Goiás, part of the state of Rio de
Janeiro and part of the state of Minas Gerais in Brazil; Guatemala City and the surrounding
areas in Guatemala; most of Colombia; all of Costa Rica, Nicaragua, Panama and Venezuela;
greater Buenos Aires, Argentina; and all of the Philippines;
 Coca-Cola HBC AG (“Coca-Cola Hellenic”), which has bottling and distribution operations
in Armenia, Austria, Belarus, Bosnia-Herzegovina, Bulgaria, Croatia, Cyprus, the Czech
Republic, Estonia, the Former Yugoslav Republic of Macedonia, Greece, Hungary, Italy,
Latvia, Lithuania, Moldova, Montenegro, Nigeria, Northern Ireland, Poland, Republic of
Ireland, Romania, Russia, Serbia, Slovakia, Slovenia, Switzerland and Ukraine;
 Arca Continental, S.A.B. de C.V., which has bottling and distribution operations in northern
and western Mexico, Ecuador and northern Argentina;
 New CCE, which has bottling and distribution operations in Belgium, continental France,
Great Britain, Luxembourg, Monaco, the Netherlands, Norway and Sweden; and
 Swire Beverages (“Swire”), which has bottling and distribution operations in Hong Kong,
Taiwan, seven provinces in mainland China and territories in 11 states in the western United
States.” (Coca Cola, 2015c, p.6)

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Appendix 8. Complete Ratio Table (2011 - 2014)
Ratio Coca Cola Pepsi Danone Nestle Industry Avg.
Margin % of Sales
24.58/24.59/ 13.28/12.68/ 12.60/11.72/ 14.41/14.57/ 13.35/13.60/
EBT Margin
24.50/20.27 13.39/13.13 8.76/8.70 13.46/11.18 13.89/9.47
Profitability
11.21/10.86/ 9.14/8.38/ 5.91/5.77/ 8.41/8.83/ 9.50/9.29/
ROA
9.74/7.80 8.86/8.80 4.70/3.57 8.12/11.39 9.04/7.94
27.37/28.00/ 30.92/28.87/ 13.85/13.71/ 15.99/18.02/ 26.77/27.64/
ROE
26.03/22.36 28.99/31.29 12.43/10.00 16.22/21.79 27.68/25.61
14.87/14.27/ 15.06/13.85/ 13.85/13.71/ 12.17/12.66/ 12.88/12.68/
ROIC
12.58/9.86 14.09/14.24 13.57/5.34 11.59/16.46 12.71/11.29
Growth
32.53/3.17/ 14.98/-1.52/ 13.57/8.03/ 2.06/- -23.37/10.38/ 16.98/0.26/
Revenue
-2.42/-1.83 1.41/0.40 0.72 0.05/-0.55 -0.07/-0.32
Operating 20.18/6.16/ 15.61/-5.41/ 5.86/0.66/ -22.99/11.72/ 16.67/0.31/
Income -5.11/-5.08 6.51/-1.28 -22.53/1.08 -6.20/--16.55 -0.08/-1.85
-27.41/5.21/ 1.95/-4.11/ -10.64/0.06/ -72.29/11.85/ -15.04/0.81/
Net Income
-4.82/-17.31 9.10/-3.37 -14.95/-21.31 -5.62/44.34 0.68/-9.80
Earnings per -27.08/6.78/ 3.07/-2.73/ -8.88/0.00/ -70.75/12.16/ 5.92/1.69/
Share -3.55/-15.79 10.20/-1.16 -12.64/-22.31 -5.72/44.41 5.68/2.90
Efficiency
Inventory 6.34/6.00/ 8.78/8.45/ 9.37/9.66/ 5.14/5.27/ 7.27/7.19/
Turnover 5.63/5.61 8.94/9.43 9.35/8.53 5.50/5.42 7.27/7.36
Receivables 9.96/9.92/ 10.05/10.10/ 9.89/10.75/ 6.58/6.90/ 8.61/8.69/
Turnover 9.73/9.85 10.99/11.25 11.48/11.40 7.21/7.16 8.53/8.32
Payables Period 40.67/39.66/ 86.68/49.77/ 81.91/84.26/ 108.26/105.73/ -
38.66/41.03 54.47/59.10 102.90/108.65 115.80/128.60
Financial Health/Liquidity
Gross Profit 60.90/60.30/ 52.50/52.20/ 50.60/50.10/ 47.20/47.60/ 53.80/53.63/
Margin % 60.70/61.10 53.00/53.70 48.50/47.70 47.90/48.20 54.38/54.48
Current Ratio 1.05/1.09/ 0.96/1.10/ 0.88/0.81/ 0.95/0.91/ 0.43/0.48/
1.13/1.02 1.24/1.14 0.74/0.70 0.91/1.03 0.54/0.59
Quick Ratio 0.78/0.77/ 0.62/0.80/ 0.71/0.68/ 0.66/0.60/ 0.43/0.48/
0.90/0.81 0.93/0.85 0.62/0.57 0.59/0.69 0.54/0.59
Assets/Equity 2.53/2.63/ 3.55/3.35/ 2.33/2.42/ 2.01/2.07/ 1.82/1.97/
2.71/3.04 3.20/4.05 2.89/2.71 1.92/1.90 2.06/2.22
Debt/Equity 0.43/0.45/ 1.00/1.06/ 0.00/0.00/ 0.11/0.15/ 0.98/1.11/
0.58/0.63 1.00/1.37 0.00/0.53 0.17/0.18 1.20/1.35
Price-Earning 18.91/19.12/ 16.46/17.72/ 20.44/21.30/ 19.23/19.68/
-
Ratio 21.29/26.34 19.04/22.12 26.34/31.07 23.14/15.83
Current Assets 31.88/35.19/ 23.93/25.08/ 21.50/23.44/ 29.21/27.89/
-
34.76/35.85 28.66/29.31 25.38/23.46 24.96/25.45
Current 30.36/32.28/ 24.91/22.90/ 24.49/28.96 30.88/30.70/
-
Liabilities 30.88/35.18 23.02/25.66 34.30/33.47 27.33/24.65
Short Term 18.65/20.74/ 8.51/6.45/ 0.00/0.00/ 14.11/14.71/
-
Debt 19.90/24.65 6.85/7.20 0.00/7.35 9.45/6.60
Long Term Debt 17.08/17.10/ 28.22/31.54/ 0.00/0.00/ 5.44/7.14/
-
21.27/20.72 31.41/33.78 0.00/19.65 8.60/9.29
Dividends 34.00/51.80/ 49.90/54.20/ 0.00/51.80/ 18.00/57.50/
-
Payout Ratio 56.70/66.30 51.90/54.10 50.70/80.50 60.00/71.80
Stockholder's 39.56/38.05/ 28.25/29.87/ 42.91/41.27/ 49.78/48.28/
-
Equity 36.84/32.95 31.34/24.73 34.58/36.84 51.95/52.55
Sources: Nasdaq, Reuters, Morningstar, Bloomberg and Stock-Analysis-On

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