Did you know that Coca-Cola makes the majority of its profit from selling its secret-formula of flavoring?
Business Breakdown [THREAD]
Business Breakdown [THREAD]
1/ Let's start with some history. In 1886, John Pemberton, a pharmacist in Atlanta, created the first batch.
Apparently the name was derived from two ingredients: coca-leaf extract and caffeine from the kola nut.
A year later, Asa Candler, bought Pemberton out for $2,300.
Apparently the name was derived from two ingredients: coca-leaf extract and caffeine from the kola nut.
A year later, Asa Candler, bought Pemberton out for $2,300.
2/ After 134 years Coca-Cola is still going strong. 82% of its cases are sold outside of the US.
Out of the 30.3 billion cases sold last year, 45% of those are from Coca-Cola itself. The company also owns Sprite, Fanta, Vitamin Water, Fresca, etc.
Out of the 30.3 billion cases sold last year, 45% of those are from Coca-Cola itself. The company also owns Sprite, Fanta, Vitamin Water, Fresca, etc.
3/ Ok, now we'll get into the business model. Before reading on, just stop and think about the process of turning sugar into a purchase of Coke at Walmart.
What are the components of the value chain? What role exactly does Coca-Cola play?
What are the components of the value chain? What role exactly does Coca-Cola play?
4/ The company makes money in two main ways:
- selling its concentrate (that secret-formula mixture of flavoring that gets added to water to make syrup)
- selling finished bottles of its drinks
Concentrate now accounts for more than half of the company's sales.
- selling its concentrate (that secret-formula mixture of flavoring that gets added to water to make syrup)
- selling finished bottles of its drinks
Concentrate now accounts for more than half of the company's sales.
5/ Just look at the difference in the past decade. In 2011, concentrate made up less than 40% of sales.
6/ Ok, but now we have to deal with the question: who does Coca-Cola sell the concentrate to?
And this is very key.
A big part of the company's moat, along with its brand, is its distribution network.
As you can see, only 17% of cases sold are finished products.
And this is very key.
A big part of the company's moat, along with its brand, is its distribution network.
As you can see, only 17% of cases sold are finished products.
7/ This 17% means that Coca-Cola acts as the bottler. So it is vertically integrated (or owns the bottler) where the actual drinks are made and then shipped off to retailers.
The other 83%, where the concentrate is sold, consists of independent bottlers.
The other 83%, where the concentrate is sold, consists of independent bottlers.
8/ These independent bottlers are essentially franchisees.
They invest money in plants where the mixing of the concentrate and the bottling is done and in return, they get syrup supply and the weight of the Coca-Cola brand.
They invest money in plants where the mixing of the concentrate and the bottling is done and in return, they get syrup supply and the weight of the Coca-Cola brand.
9/ It's similar to a car dealership. The supplier (GM, Ford) have relationships w/ dealers who are obligated to buy new cars. This ensures the manufacturer has steady demand.
However, Coca-Cola is capital light. It's a whole lot easier making a combination of sugar than a car.
However, Coca-Cola is capital light. It's a whole lot easier making a combination of sugar than a car.
10/ This shows up in Coca-Cola's margins.
Gross margins are 61% and EBIT margins are 27%. Especially as the company has transitioned to selling concentrate, margins have increased.
Over the past 8 years, revenue has declined $9 billion but EBIT has stayed the same.
Gross margins are 61% and EBIT margins are 27%. Especially as the company has transitioned to selling concentrate, margins have increased.
Over the past 8 years, revenue has declined $9 billion but EBIT has stayed the same.
11/ In fact, look at the consolidated operating margins by geography.
In Latin America, operating margins are nearly 60%. The overall margin is brought down by corporate expenses and the company-owned bottling segment.
In Latin America, operating margins are nearly 60%. The overall margin is brought down by corporate expenses and the company-owned bottling segment.
12/ Supplying to the bottlers is a much better business than being a bottler.
For instance, a few of Coca-Cola's bottlers are public like Coca-Cola Bottling (the ticker is COKE).
Rather than 60% gross and ~ 30% EBIT margins, COKE's margins are 34% and ~ 4% respectively.
For instance, a few of Coca-Cola's bottlers are public like Coca-Cola Bottling (the ticker is COKE).
Rather than 60% gross and ~ 30% EBIT margins, COKE's margins are 34% and ~ 4% respectively.
13/ As mentioned before, Coca-Cola sold 30.3 billion cases last year. On that, it did about $37.3 billion in sales.
Split into concentrate and finished products the revenue looks like this:
Concentrate: $20.5 billion
Finished: $16.8 billion
Split into concentrate and finished products the revenue looks like this:
Concentrate: $20.5 billion
Finished: $16.8 billion
14/ But remember, 83% of the unit volume was from concentrate (through independent bottlers).
If you break that down per bottle (a case is 24, 8-oz servings) Coca-Cola gets 3 cents in revenue on the concentrate but keeps a little less than half of that in profit.
If you break that down per bottle (a case is 24, 8-oz servings) Coca-Cola gets 3 cents in revenue on the concentrate but keeps a little less than half of that in profit.
15/ The company does about $10 billion in EBIT so 50% margins on $20 billion in concentrate sales would mean that "finished product" margins would be around 0%.
I don't think that's true but it's definitely not high. And the re-franchising strategy would back that up.
I don't think that's true but it's definitely not high. And the re-franchising strategy would back that up.
End/ So that's Coca-Cola's business model.
Stay asset-light by continuing to sell the concentrate to independent bottlers.
If you've enjoyed this, please check out the Business Breakdowns newsletter where we break down 2 business per month:
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Stay asset-light by continuing to sell the concentrate to independent bottlers.
If you've enjoyed this, please check out the Business Breakdowns newsletter where we break down 2 business per month:
businessbreakdowns.substack.com
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