In its 2009 annual review the management of Coca-Cola (NYSE: KO) explained the importance of trademarked Coke products to the overall operation. The short version: Trademark Coca-Cola is the profit engine that propels everything else. (“Trademark Coca-Cola” is a term used by management to refer to the product category that includes the Coca-Cola Classic beverage and variants thereof (e.g. Diet Coke, Coca-Cola Zero etc).
So far this all sounds pretty obvious; I mean you kind of expect these products to be the strongest and most profitable of all. That said I wonder how many folks realize just how steady things have been on the domestic front. For instance let’s cast our minds back to 1989; a year in which Coca-Cola sold 2.6 billion unit cases of Trademark Coca-Cola products in North America. Now, if I had to ask a simple yes or no question: “Does Coca-Cola sell more Trademark Coke beverages in North America now than it did back then?”, I’d wager that most folks would answer yes.
Twenty-eight years on, however, and it seems that not much has changed at all. Last year Coca-Cola sold 29.2 billion unit cases worldwide in total. It noted that 19% of that figure came from the United States, and that 43% of that figure came from sales of Trademark Coca-Cola products. Add the data for Canada and we get around 2.6 billion unit cases across North America in 2017. (It’s perfectly possible that I stuffed up the numbers somewhere along the way – feel free to leave a comment to point out the error – because it seems unbelievable).
Anyway it would be tempting to assume this has been a poor period for the Company. I mean we are talking about core product volume in its core market not really growing in thirty or so years. That said just take a look at the list of things this domestic profit engine has funded.
First up there is the obvious international expansion. I mean the figures for Mexico alone are astonishing. In 1992 the average Mexican drank 292 company beverages a year. By 2012 that figure had grown to 745. Bear in mind that these are per-capita figures. Over the same time frame the population of Mexico rose from roughly 88 million to just over 120 million. We’re probably talking about billions of dollars in incremental profit over the years from that one country alone.
(Source: Coca-Cola Company Annual Review FY 2012)
Second up we have the domestic profit growth. This is the point that makes it easy to overlook the flatline trend in Trademark Coca-Cola sales because the average shareholder won’t really care. I mean all most folks see over the years is the growing bottom line. For instance in 1988 the company made an operating profit of $400 million from the USA. Last year the comparable figure was around $2.5 billion for North America as a whole. North America unit case volume, across all products, grew from roughly 3 billion per annum to around 5.55 billion per annum over the same time frame.
The reason I mention all this is because the company has come under fire for lack of growth. Just like domestic Trademark Coca-Cola sales things seem to be in a steady state. For example Coca-Cola has spent $4 billion on advertising in each of the last three years. Global unit case volume for that period reads like this: 29.2 billion (2015), 29.3 billion (2016), 29.2 billion (2017).
Now, as it stands Coca-Cola stock offers a 5% earnings yield. On top of that, the company can try to do four things to boost growth. Firstly, it can attempt to increase worldwide per capita consumption of its products. Secondly, global population growth could do heavy lifting on its own should that prove difficult. Thirdly, it can make its underlying operations more profitable. Finally, it could use its current $10 billion annual profit engine to do other things (e.g. acquisitions). Despite it being a poor performer over the past few years I think the path to double-digit long term returns isn’t as tough as it seems.