No matter if you like sweet drinks or not. As a shareholder, you will almost inevitably come across the Coca-Cola share at some point. The dividend yield is currently an inviting 3.5 percent and Coca-Cola also has prominent advocates. One example is Warren Buffett, who has been raving about the dark shower and the Coca-Cola share as an investment for decades. But also in the private circle I know people with whom I am sometimes unsure whether they might drink more cola than water. The Coca-Cola Company has positioned itself at the top of the beverage industry over the years. Thanks to the protected brands and the secret recipes, the business model is almost unassailable, since it can hardly be copied by competitors. This analysis shows whether you, as a shareholder, can also benefit from this business model.
In the following I use the terms “Coca-Cola” and “Coca-Cola Company” as a synonym for the company.
|Market capitalization||€ 182.6 billion|
|Stability dividend||1.0 of max. 1.0|
|Stability gain||0.84 of max. 1.0|
The business model: How Coca-Cola earns money
The Coca-Cola Company is mainly associated with the eponymous drink. However, the product range also includes a variety of other beverages. These include some heavyweights, such as Sprite and Fanta. The company also owns brands for water and sports drinks, juices and coffee and tea. The Coca-Cola Company is so much more than just the seller of a dark colored soft drink. These business areas should not be underestimated. Because there, too, Coca-Cola is at the forefront. In the following graphic you can see that Coca-Cola has the largest share of the value in the market in 4 beverage categories.
Although there have been comparable products for a long time, such as the Pepsi cola, many customers only drink the drink of their favorite brand. In the minds of millions of consumers, Coca-Cola has an extremely deep moat, as Warren Buffett would call it. This means that Coca-Cola’s business model is very difficult to attack for other companies. On the one hand the recipe is secret and on the other hand customers have got used to the brand and taste. A potential competitor would have to develop a noticeably “better” product in order to assert itself on the market. How does that work? There are competitors who offer similar drinks. However, these have never prevailed against Coca-Cola and at best occupy niches. Coca-Cola’s business model is well secured against competitors and will therefore continue to generate profits for shareholders for a long time.
The franchise model
Coca-Cola is a franchise company. This means that, for a license fee, other companies and individuals are allowed to sell the products themselves. Coca-Cola supplies the syrup concentrate for the drinks and the franchisee fills the bottles and then sells them. Since the value of the concentrates is mainly based on their recipe, the profit margin on the franchise is very high. With the pure possession of recipes, Coca-Cola makes sales that hardly cost anything. In contrast, the filling of the drinks is significantly less profitable. For this reason, Coca-Cola has focused its business model on the sale of concentrates in recent years and separated from some of their own bottling plants. If you did my analysis of McDonalds last week read, this strategy will already be familiar.
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