Coca-Cola: The Domestic Trademark Coke Engine

by The Compound Investor

In its 2009 annual review, the management of Coca-Cola (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 – 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. Cast your minds back to 1989 for example, a year in which Coca-Cola sold 2.6b 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 29.2b unit cases worldwide in total. 19% of that figure came from the United States, and 43% of that figure came from sales of Trademark Coca-Cola. Add the data for Canada and we get around 2.6b 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).

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 over thirty 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. The figures for Mexico alone are astonishing. In 1992, the average Mexican drank 292 company beverages a year. That figure had grown to 745 by 2012. Bear in mind that these are per-capita figures. The population of Mexico rose from roughly 88m to just over 120m over the same period. We are probably talking about billions of dollars in incremental profit over the years from that one country alone.

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 $400m from the USA. Last year, the comparable figure was around $2.5b for North America as a whole. North America unit case volume, across all products, grew from roughly 3b per annum to around 5.55b per annum over the same timeframe.

The reason I mention all this is because the company has come under fire for lack of growth. I mean, it has spent $4b on advertising in each of the last three years. Global unit case volume for that period reads like this: 29.2b (2015), 29.3b (2016) and 29.2b (2017). Now, the stock currently offers a 5% earnings yield. On top of that, the company can do four things to boost growth. Firstly, it can increase worldwide per-capita consumption of its products. Secondly, global population growth can add nominal gains on top. Thirdly, it can make underlying operations more profitable. Finally, it could use its current $10b annual profit engine for things like 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.

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