Future Prospects (3) Coca-Cola competes through differentiation.

The company has many strong brands that consumers prefer and are willing to pay a premium for. This preference is enhanced through advertising; In 2008 Coca-Cola spent $3B (almost 10% of revenue) on advertising. Moreover, the companys products tend to be a very small portion of consumers budgets; this makes it more likely that consumers that enjoy the companys products will absorb price increases without looking for a substitute. The most sustainable source of Coca-Colas competitive advantage is the scale of its advertising and distribution system, which can be used to market new non-alcoholic beverages. So although consumer tastes can change (albeit slowly), Coca-Colas competitive advantage will endure. The following discussion of Coca-Colas competitive position is based off of the five forces of industry competition, as described in Michael Porters excellent book, Competitive Advantage. Buyer Bargaining Power The bargaining power of Coca-Colas buyers varies widely. Since they typically only carry a single type of Cola Beverage (usually either Pepsi or Coke), very large restaurant chains have the highest amount of bargaining power, and this is where Coca-Colas margins are thinnest. Although authorized bottlers purchase concentrate in large volumes, this is where Coca-Cola makes its largest profit margins. There are several reasons for this; one being that for many of the bottlers, Coca-Cola is their largest (or sometimes only) customer. There is also the risk of forward integration if the bottlers try to capture too much of the profit. Historically, overall bargaining power has been strong, allowing Coca-Cola to realize a 28% ten-year average operating margin. Supplier Bargaining Power The raw materials for the companys beverages are generally readily available from many sources, giving Coca-Cola good bargaining power with suppliers. The exceptions are several artificial sweeteners that are sourced from only a few companies. The fact that Coca-Colas gross margins are high (65%) and very stable indicates a low risk of supplier bargaining power impacting profitability. Although some employees are unionized, the companys high ($110,000) pre-tax earnings per employee indicate a relatively low sensitivity to changing labor costs. To date, collective bargaining has not led to a significant pension liability. Barriers to Entry Coca-Cola in combination with its bottling partners has an extraordinary global distribution network that through economies of scale creates a formidable barrier to

competition. Coca-Cola also has a large economy of scale in advertising spending, and the companys strong brands provide a barrier to competition. The industry is very concentrated, with Coca-Cola and PepsiCo being the largest companies. The barriers to entry are lower for generic products sold in grocery stores under private labels. Here, due to the higher margins on private label sales, the store will be willing to allocate some shelf space to its private label products, and it is possible that if these are sold at a low profit margin and are well-received by consumers, then Coca-Colas bottlers may need to price their products cheaper, with the eventual result that Coca-Cola will need to drop its concentrate prices so that the bottlers can stay in business. On the other hand, even if a consumer develops a taste for the private label product, it will likely only be available at that particular grocery chain, and the consumer will likely stick with Coke elsewhere. Since these private label brands are not available at restaurants, and the brands are not reinforced through advertising, they will most likely gain share slowly due to the low level of exposure of their product to consumers as compared to Coke and Pepsi. Looking in my local grocery stores, products by Coca-Cola and Pepsi dominate the shelf space, with minimal space allocated to private label drinks. Intensity of Competition The economic growth of developing countries will allow the companys penetration of many emerging markets (as measured by beverages consumed per capita per year) to approach that of developed countries.Consequently, volume growth will likely exceed global GDP growth over the next several decades. This should keep rivalry controlled, as companies will be able to grow volume without gaining market share. The strong brands of the industry incumbents should also reduce rivalry. Threat of Substitutes The largest risk of substitution stems from Coca-Colas most profitable product, Coke, and its other sweetened carbonated beverages. The risk is that as people become more health conscience, they will drink less of a product that contains empty calories, or calories without much health benefit, and replace this consumption with juice, bottled water, and sports drinks, which currently account for a smaller percentage of Coca-Colas revenues. However, Coca-Cola is addressing this risk (which today is primarily in developed countries) by rolling out Coca-Cola Zero, which has (according to reviews) the taste of Coke without any calories. Coca-Colas expansion into juices, sports drinks, and bottled water should also dampen the effect of an increasingly health conscience customer base.

To date, sales of Coke are still holding up well in North America and Europe, and over the next twenty years most of Coca-Colas growth will be in emerging markets, where Coca-Cola classic should continue to sell well. The economics of the most likely substitutes (juice, water, and energy drinks) are similar to that of sweetened carbonated beverages. Moreover, the customers and distribution channels are the same, as are the margins. This means that Coca-Cola has a good chance of following any substitution to these types of beverages and still maintain its high return on capital. Demand for Coca-Colas products has historically remained fairly stable through the economic cycle, even during severe recessions (like now). Risks to Competitive Position The largest risk is from changing consumer preferences, as discussed under Threat of Substitutes. This risk is most prevalent in developed countries such as North America and the European Union, which collectively account for 39% of revenues. During 2008, North American case volume and revenue have fallen 1%, whereas in Europe case volume has risen 3%. Over Q1 2009, volume in North America and Europe both fell by 2%. Total company case volume in 2008 has increased 5%, and if international growth continues to make up for the declines in North America, this substitution to healthier beverages should not impact profitability. Since the increased attention consumers are paying to health has been going on for several years, and case volume has still been growing, this risk is probably manageable. The risk of competition from private label products is minor, as they do not have the scale to even come close to Coca-Colas level of marketing.Private label products have been around for decades, and yet Coca-Colas volume growth is still strong. Overall, I believe that Coca-Colas competitive advantage will be sustainable well into the future, and that the industry dynamics will remain stable. Opportunities for Growth Globally, per capital consumption of Coca-Colas beverages has grown from 32 drinks in 1985 to 55 drinks in 1995, and on to 77 drinks per person in 2005. As the following chart shows, much of this increase in the last ten years has been driven by developing countries.

As shown in the following chart, there is considerable room for growth in per capital consumption. Moreover, this consumption is more a function of marketing and consumer taste than wealth; as Mexico has the highest per capital consumption in the world, well in excess of Europes. Since the vast majority of the worlds population resides in developing countries, where per capita consumption is low, in the long-term, there is obviously considerable room for global growth in the beverage industry. Considering the wide range of beverages Coca-Cola can bring to market in a country, and the companys success with marketing, it seems reasonable that CocaCola will capture a large part of this growth. Another source for growth is purchasing competitors with local brands that have the potential for a wider market. When these new brands are integrated into Coca-Colas distribution network and marketed globally, the return on these acquisitions can be impressive, even when Coca-Cola purchases the company for a substantial premium. One recent example is Coca-Colas acquisition of Glaceau.

Financial Strength (3.3)

Coca-Colas debt should not be a problem, as maturing debt is easily payable out of retained earnings, and the company has a high fixed charge coverage ratio. Pension exposure is small in relation to pre-tax earnings. Pre-tax earnings per employee are high at $110,000, indicating a low sensitivity to labor costs. Gross margin (65%) is also high, indicating a low sensitivity to changes in the cost of input materials, distribution, manufacturing labor, and manufacturing related capital expenditures (to the extent they are captured by depreciation expense).

Today, almost 120 years later, The Coca-Cola Company is still going strong and is one of the most sought-after stocks on the New York Stock Exchange. Coca-Colas competitive advantage has proven its sustainability over the last 100 years. This can be ascribed to:
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The secret recipe for Coca-Cola, which arguably tastes better than other cola drinks. Their ability to continue developing new products and re-inventing old ones CocaCola currently offers over 400 brands in 200 markets worldwide. The worlds most comprehensive distribution system has made Coca-Cola accessible to billions of people worldwide. Coca-Cola is often available in ample supply to people in

areas where other consumer goods companies would never consider delivering their products. The African continent is an excellent example its fairly common to see a small shop selling cold Coke in the middle of nowhere. Coca-Colas production techniques are so well developed that it costs a fraction of the selling price to manufacture their product, resulting in high profit margins.

Competitive Advantage
Market Leadership. Coca-Cola FEMSA is the largest bottler of Coca-Cola trademark beverages in the world in terms of total sales volume, with operations in Mexico, Guatemala, Nicaragua, Costa Rica, Panama, Colombia, Venezuela, Argentina and Brazil. Business partnerships. Coca-Cola FEMSA is working together with the Coca-Cola Company to develop more advanced joint business models to continue exploring and participating in new lines of beverages, extending existing product lines and effectively advertising and marketing our products. As partners, we have a shared incentive to capture important growth opportunities in Latin Americas fast-growing, but under-developed non-carbonated beverage segment, developing and expanding our still beverage portfolio through innovation, strategic acquisitions and by entering into agreements to jointly acquire companies with The Coca-Cola Company. Strong brand portfolio. The company offers a powerful and wide portfolio of beverages to its customers and consumers, and continuously explores promising beverage categories to capture growth in its different markets. To get closer to its customers and help them to satisfy consumers expanding needs, Coca-Cola FEMSA has become a one-stop shop for its retailers by offering a complete beverage portfolio - including carbonated soft drinks, bottled water, juices, orangeades, isotonics, teas, energy drinks, milk, coffee and even beer in some markets such as Brazil. Collaborative customer relationships. As an organization, Coca-Cola FEMSA continually looks to deepen its customer relationships. Our company is working closely with its largest clients to develop stronger multifaceted relationships. Among the companys initiatives, are tailoring its extensive portfolio of products and packages for their stores - based on the local markets socioeconomic demographics, relevant consumption occasion and the stores distinctive characteristics. We partner with our customers on multiple fronts-from knowledge management and capabilities development to go-to-market and point-of-sale execution-to ensure each and every shoppers trip counts. Channel Marketing. In order to provide more dynamic and specialized marketing of our products, our strategy is to classify our markets and develop targeted efforts for each consumer segment or distribution channel.

Our principal channels are small retailers, on-premise consumption such as restaurants and bars, supermarkets and third party distributors. Presence in these channels entails a comprehensive and detailed analysis of the purchasing patterns and preferences of various groups of beverage consumers in each of the different types of locations or distribution channels. In response to this analysis, we tailor our product, price, packaging and distribution strategies to meet the particular needs of and exploit the potential of each channel. Multi-Segmentation. We have been implementing a multi-segmentation strategy in the majority of our markets. This strategy consists of the implementation of different product/price/package portfolios by market cluster or group. These clusters are defined based on consumption occasion, competitive intensity and socio-economic levels, rather than solely on the types of distribution channels. Client Value Management. We have been transforming our commercial models to focus on our customers value potential using a value-based segmentation approach to capture the industrys potential. We have started the rollout of this new model in our Mexico, Brazil, Colombia and Central America operations. Go-to-market strategies. We continuously evaluate our distribution model in order to fit with the local dynamics of the marketplace and analyze the way we go to market, recognizing different service needs from our customersfrom traditional mom-and-pop retailers to modern hyper and supermarkets, while looking for a more efficient distribution model. As part of this strategy, we are rolling out a variety of new distribution models throughout our territories looking for improvements in our distribution network. Flexible sales and distribution models. We use several sales and distribution models depending on market, geographic conditions and the customers profile: (1) the pre-sale system, which separates the sales and delivery functions, permitting trucks to be loaded with the mix of products that retailers have previously ordered, thereby increasing both sales and distribution efficiency, (2) the conventional truck route system, in which the person in charge of the delivery makes immediate sales from inventory available on the truck, (3) a hybrid distribution system, where the same truck carries product available for immediate sale and product previously ordered through the pre-sale system, (4) the telemarketing system, which could be combined with pre-sales visits and (5) sales through third-party wholesalers of our products. Full Operating Potential. More with less is a key part of the Coca-Cola FEMSA corporate culture. The company continually seeks to optimize manufacturing and distribution capacity to maximize operating efficiency, adapting its organizational processes to address changing competitive, economic, and sociopolitical environments. In addition, we rely on state-of-the-art market intelligence systems that enable the company to execute and refine its channel-marketing and multi-segmentation strategies, consistent with customers and consumers purchasing patterns and preferences. Managerial expertise. We focus on management quality as a key element of our growth strategy and remain committed to fostering the development of quality management at all levels. Both FEMSA and The Coca-Cola Company provide us with managerial experience. To build upon these skills, we also offer management training programs designed to enhance our executives abilities and to provide a forum for exchanging experiences, know-how and talent among an increasing number of multinational executives from our new and existing territories. Sustainable Development. Sustainable development is an important pillar of our Companys strategy. We continually develop programs that ensure the creation of social and economic value by fostering the quality of life of our employees, promoting a culture of health and well-being, supporting our surrounding communities and minimizing our operations environmental impact.