Coca-Cola Company

A. Case Abstract

Coca Cola (www.cocacola.com) is a comprehensive business policy and strategic management case that includes the company’s fiscal year-end December 2006 financial statements, competitor information and more. The case time setting is the year 2007. Sufficient internal and external data are provided to enable students to evaluate current strategies and recommend a three-year strategic plan for the company. Headquartered in Atlanta, Georgia, Coca Cola’s common stock is publicly-traded on the New York Stock Exchange under the ticker symbol KO.

Coca Cola operates in over 200 nations around the world and sells carbonated and non carbonated beverages. Coca Cola’s line of non carbonated drinks includes: water, juice, and teas. The company has over 70,000 employees and is led by CEO Neville Isdell.

The Coca-Cola Company’s (Coke’s) operating segments include 1) Africa, 2) East, South East Asia & Pacific Rim, 3) European Union, 4) Latin America, 5) North America, 6) North Asia, Eurasia, and the Middle East, and 7) bottling investments. Not all soft drink products/flavors of the company are available in all the operating groups. The Coca-Cola Company has two major rivals: PepsiCo and Cadbury Schweppes PLC.

It’s interesting to note that PepsiCo has more that double the employees as Coca-Cola as listed in Exhibit 6. Groupe Danone competes to a lesser degree with C oke. The number 3 soft drink producer, Cadbury Schweppes PLC (behind Coca-Cola and PepsiCo Inc.), is a diversified company that produces and markets beverages, chocolate, and chewing gum. Cadbury plans to divest its beverage division in 2007 of PepsiCo, Coca Cola Company, and Cadbury Schweppes PLC. Federal regulations may prohibit PepsiCo and Coke from bidding for Cadbury’s carbonated soft drink business. Analysts however believe the brand Snapple, which Cadbury sells, would be a good fit for Coke. PepsiCo would likely benefit most from acquiring Cadbury’s Mexican assets with such strong brands as Squirt, Crush, and Canada Dry.

B. Vision Statement (actual)

To maintain our reputation as the leading cola company in the world.

C. Mission Statement (actual)

Everything we do is inspired by our enduring mission:

• To Refresh the World... in body, mind, and spirit.• To Inspire Moments of Optimism... through our brands and our actions.• To Create Value and Make a Difference... everywhere we engage.

At Coca Cola we believe our main responsibility is providing customers (1) with refreshing beverages including soft drinks, water, energy drinks, juices, and tea (2) to fit any occasion in their day to day lives (6). Our signature product, Coke (7), is a favorite around the world and a wide variety of our products are sold in over 200 nations (3). We use the only the most sophisticated equipment (4) to process and make our products to ensure each glass of Coke product is as good as the last (5). Our employees (9) are fairly compensated and we practice fair trade in all markets we compete. We value our responsibility to all communities we serve and support many educational and leadership programs (8).

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1. Customer2. Products or services3. Markets4. Technology5. Concern for survival, profitability, growth6. Philosophy7. Self-concept8. Concern for public image 9. Concern for employees

D. External Audit

Opportunities

1. Bottled water consumption has increased 11 percent.2. According to the S&P Industry Survey, consumers are drawn to new smaller beverage brands

that are not sold on a mass scale.3. Word Economic Forum’s annual Davos, Switzerland gathering grants international voice.4. Less developed countries are in desperate need to improve community water supplies.5. Energy drink sales are expected to increase 7 to 8 percent in 2007.6. Disposable income has increased 6.2 percent.7. Consumers are striving to drink and eat their way to better health than pervious generations.8. EPS is expected to rise 7 to 8 percent in 2007.

Threats

1. Consumption of American beverages is denounced by foreign officials in areas where conflicting interest exist.2. Multiple lawsuits against the new Enviga beverage for calorie burning claims in advertising3. Smaller, lesser known brands are turning to major beer distributors for bottling.4. Overall carbonated drink sales have been flat due to links of sugar to obesity and high fructose corn syrup to heart disease.5. Pepsi is more diversified offering beverage and food products.6. High cost of commodities such as sugar, and metals used in production of cans.7. Many smaller companies are fierce competitors around the world in their local markets.

CPM – Competitive Profile Matrix

Coca-Cola Pepsi Cadbury SchweppesCritical Success Factors

Weight Rating Weighted Score

Rating Weighted Score

Rating Weighted Score

Market SharePrice CompFinancial PositionProduct QualityProduct LinesCustomer LoyaltyEmployeesMarketingTotal

0.150.100.120.150.150.150.110.071.00

4 0.603 0.304 0.483 0.45 4 0.604 0.603 0.333 0.21 3.71

3 0.453 0.304 0.483 0.454 0.604 0.603 0.333 0.21 3.56

2 0.303 0.303 0.363 0.453 0.453 0.453 0.333 0.21 2.85

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External Factor Evaluation (EFE) Matrix

Key External Factors Weight Rating Weighted Score

Opportunities1. Bottled water consumption has increased 11 percent.

0.06 4 0.24

2. According to the S&P Industry Survey, consumers are drawn to new smaller beverage brands that are not sold on a mass scale.

0.05 2 0.10

3. Word Economic Forum’s annual Davos, Switzerland gathering grants international voice.

0.02 2 0.04

4. Less developed countries are in desperate need to improve community water supplies.

0.02 2 0.04

5. Energy drink sales are expected to increase 7 to 8 percent in 2007.

0.06 3 0.18

6. Disposable income has increased 6.2 percent.

0.05 3 0.15

7. Consumers are striving to drink and eat their way to better health than pervious generations.

0.07 3 0.21

8. EPS is expected to rise 7 to 8 percent in 2007.

0.07 4 0.28

Threats1. Consumption of American beverages is denounced by foreign officials in areas where conflicting interest exist.

0.02 3 0.06

2. Multiple lawsuits against the new Enviga beverage for calorie burning claims in advertising

0.04 2 0.08

3. Smaller, lesser known brands are turning to major beer distributors for bottling.

0.06 2 0.12

4. Overall carbonated drink sales have been flat due to links of sugar to obesity and high fructose corn syrup to heart disease.

0.10 2 0.20

5. Pepsi is more diversified offering beverage and food products.

0.20 3 0.60

6. High cost of commodities such as sugar, and metals used in production of cans.

0.10 3 0.30

7. Many smaller companies are fierce competitors around the world in their local markets.

0.08 3 0.24

TOTAL 1.00 2.84

E. Internal Audit

Strengths

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1. Product line has over 400 brands.2. Strong global presence, located in over 200 countries.3. Long history has built excellent brand recognition.4. Partnership longevity with established sporting events including the Olympics.5. Industry leader in market capitalization with $112 billion.6. Return on Equity yielded 30 percent in 2006. 7. Leader of dividend yields of 2.6 percent. The company has had 43 consecutive years of an

annual dividend increase.8. Joint venture between The Coca Cola Company and Nestle has resulted in the establishment

of Beverage Partners Worldwide (BPW).9. Coca-Cola has formed a strong partnership with McDonalds, with McDonalds becoming their

largest customer.

Weaknesses

1. Product line is limited to beverages.2. A failed $16 billion acquisition of Quaker Oats hinders long-term growth.3. Negative publicity in India because of water issues, has led to poor brand image and

hindered growth there.4. Lack of management willingness to place foreign products into American markets.5. Marketing deficiencies due to turnover in leadership and a 16 percent decrease in advertising

spending.6. Coca Cola’s inventory turnover is only 5.4 compared to Pepsi Co.’s 8.0.

Financial Ratio Analysis (December 2006)

Growth Rates % Coca Cola Industry SP-500Sales (Qtr vs year ago qtr) 19.20 22.20 11.60Net Income (YTD vs YTD) 8.30 25.70 17.10Net Income (Qtr vs year ago qtr) 13.30 30.00 9.30Sales (5-Year Annual Avg.) 6.54 8.45 13.09Net Income (5-Year Annual Avg.) 5.01 9.38 19.82Dividends (5-Year Annual Avg.) 11.49 12.61 10.00Price RatiosCurrent P/E Ratio 25.4 26.2 20.3P/E Ratio 5-Year High NA 49.9 26.8P/E Ratio 5-Year Low NA 20.7 6.8Price/Sales Ratio 5.00 3.96 2.37Price/Book Value 6.97 5.71 3.45Price/Cash Flow Ratio 21.10 19.60 10.70Profit MarginsGross Margin 64.2 52.7 34.5Pre-Tax Margin 26.0 17.5 17.8Net Profit Margin 19.8 14.2 12.65Yr Gross Margin (5-Year Avg.) 64.4 59.1 34.35Yr PreTax Margin (5-Year Avg.) 27.9 20.1 16.45Yr Net Profit Margin (5-Year Avg.) 21.1 14.9 11.4Financial ConditionDebt/Equity Ratio 0.49 0.69 1.06Current Ratio 0.8 1.0 1.1Quick Ratio 0.6 0.7 0.9Interest Coverage 55.1 41.0 31.8Leverage Ratio 2.1 2.5 3.7Book Value/Share 8.52 10.25 18.53Investment Returns %

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Return On Equity 28.9 22.0 24.9Return On Assets 14.9 11.2 7.6Return On Capital 22.6 16.9 10.2Return On Equity (5-Year Avg.) 32.0 25.4 18.5Return On Assets (5-Year Avg.) 16.7 12.6 6.4Return On Capital (5-Year Avg.) 24.6 18.2 8.6Management EfficiencyIncome/Employee 76,690 56,327 92,892Revenue/Employee 386,732 360,922 806,706Receivable Turnover 9.8 10.1 14.3Inventory Turnover 5.4 6.8 7.8Asset Turnover 0.8 0.8 0.8Adapted from www.moneycentral.msn.com

Date Avg. P/E Price/Sales Price/Book Net Profit Margin (%)12/06 20.30 4.71 6.61 21.112/05 21.00 4.18 5.84 21.112/04 23.30 4.65 6.29 22.312/03 25.00 5.99 8.79 20.812/02 31.10 5.56 9.18 20.3

Date Book Value/ Share

Debt/Equity ROE (%) ROA (%) Interest Coverage

12/06 $7.30 0.27 30.0 17.0 28.712/05 $6.90 0.35 29.8 16.6 25.412/04 $6.61 0.45 30.4 15.4 29.112/03 $5.77 0.38 30.9 15.9 29.312/02 $4.78 0.45 33.7 16.3 27.4

Adapted from www.moneycentral.msn.com

Net Worth Analysis (December 2006 in millions)

1. Stockholders’ Equity + Goodwill = 17,000 + 1,400 $ 18,4002. Net income x 5 = $5,000 x 5= $ 25,0003. Share price = $58.00/EPS 2.34 =$24.78 x Net Income $5,000= $ 123,9314. Number of Shares Outstanding x Share Price = 1,600 x $58.00 = $ 92,800Method Average $65,032

Internal Factor Evaluation (IFE) Matrix

Key Internal Factors Weight Rating WeightedScore

Strengths1. Product line has over 400 brands. 0.09 4 0.362. Strong global presence, located in over 200 countries.

0.10 4 0.40

3. Long history has built excellent brand recognition.

0.06 4 0.24

4. Partnership longevity with established sporting events including the Olympics.

0.05 4 0.20

5. Industry leader in market capitalization with $112 billion.

0.12 4 0.48

6. Return on Equity yielded 30 percent in 0.04 4 0.12

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2006. 7. Leader of dividend yields of 2.6 percent. The company has had 43 consecutive years of an annual dividend increase.

0.04 4 0.16

8. Joint venture between The Coca Cola Company and Nestle has resulted in the establishment of Beverage Partners Worldwide (BPW).

0.06 4 0.24

9. Coca-Cola has formed a strong partnership with McDonalds, with McDonalds becoming their largest customer.

0.10 4 0.40

Weaknesses1. Product line is limited to beverages. 0.09 1 0.092. A failed $16 billion acquisition of Quaker Oats hinders long-term growth.

0.10 1 0.10

3. Negative publicity in India because of water issues, has led to poor brand image and hindered growth there.

0.03 2 0.06

4. Lack of management willingness to place foreign products into American markets.

0.02 2 0.04

5. Marketing deficiencies due to turnover in leadership and a 16 percent decrease in advertising spending.

0.05 2 0.10

6. Coca Cola’s inventory turnover is only 5.4 compared to Pepsi Co.’s 8.0.

0.05 2 0.10

TOTAL 1.00 3.09

F. SWOT Strategies

SO Strategies

1. Improve environmental awareness with community involvement (S2, S4, O2, O3).2. Market new diet drinks that have healthier sugar substitutes (S5, O7).

WO Strategies

1. Market international beverages to American consumers (W4, O2, O6, O7).2. Increase marketing efforts for bottled water (W5, W6, O1).

ST Strategies

1. Acquire Krispy Kreme (KKD) to help diversify the product line (S5, T5).2. Acquire Golden Enterprises (GLDC) to help diversify the product line (S5, T5).

WT Strategies

3. Acquire Krispy Kreme (KKD) to help diversify the product line (W1, T5).4. Acquire Golden Enterprises (GLDC) to help diversify the product line (W1, T5).

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G. SPACE Matrix

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5

4

3

2

1

-6 -5 -4 -3 -2 -1 1 2 3 4 5 6-1

-2

-3

-4

-5

-6Competitive

IS

ES

CA

FSConservative Aggressive

Defensive

Return on Assets (ROA) 6 Rate of Inflation -3Leverage 6 Technological Changes -2Net Income 6 Price Elasticity of Demand -2Income/Employee 6 Competitive Pressure -6Inventory Turnover 3 Barriers to Entry into Market -3

5.4 -3.2Environmental Stability (ES) Average Financial Strength (FS) Average

Environmental Stability (ES)Financial Strength (FS)

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Market Share -1 Growth Potential 5Product Quality -1 Financial Stability 6Customer Loyalty -1 Ease of Entry into Market 4Technological know-how -2 Resource Utilization 5Control over Suppliers and Distributors -2 Profit Potential 5

-1.4 5.0Competitive Advantage (CA) Average Industry Strength (IS) Average

Competitive Advantage (CA) Industry Strength (IS)

x-axis: -1.4 + 5.0 = 3.6y-axis: 5.4 + -3.2 = 2.2Coordinate: (3.6, 2.2)H. Grand Strategy Matrix

Rapid Market Growth

Quadrant II Quadrant I

Strong Competitive

Position

Slow Market Growth

Weak Competitive

Position

Quadrant III Quadrant IV

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I. The Internal-External (IE) Matrix

The IFE Total Weighted Score

Strong Average Weak3.0 to 4.0 2.0 to 2.99 1.0 to 1.99

High I II III

3.0 to 3.99

Medium IV V VI

The EFE Total Weighted Score

2.0 to 2.99

Coca Cola

Low VII VIII IX

1.0 to 1.99

Grow and Build

Divisions Percent Revenue 2006North America 29.1Bottling Investments 21.2North Asia, Eurasia & Middle East 16.5

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European Union 14.6Latin America 10.3Africa 4.6East, South Asia & Pacific Rim 3.3Corporate 0.4

J. QSPM

Strategic Alternatives

Key Internal Factors Weight

Acquire KKD and GLDC

Produce new diet drinks that have healthier sugar substitutes

Strengths AS TAS AS TAS1. Product line has over 400 brands. 0.09 2 0.18 4 0.362. Strong global presence, located in over 200 countries.

0.10 --- --- --- ---

3. Long history has built excellent brand recognition.

0.06 2 0.12 4 0.24

4. Partnership longevity with established sporting events including the Olympics.

0.05 --- --- --- ---

5. Industry leader in market capitalization with $112 billion.

0.12 4 0.48 3 0.36

6. Return on Equity yielded 30 percent in 2006.

0.04 4 0.16 3 0.12

7. Leader of dividend yields of 2.6 percent. The company has had 43 consecutive years of an annual dividend increase.

0.04 --- --- --- ---

8. Joint venture between The Coca Cola Company and Nestle has resulted in the establishment of Beverage Partners Worldwide (BPW).

0.06 --- --- --- ---

9. Coca-Cola has formed a strong partnership with McDonalds, with McDonalds becoming their largest customer.

0.10 --- --- --- ---

Weaknesses1. Product line is limited to beverages. 0.09 4 0.36 1 0.092. A failed $16 billion acquisition of Quaker Oats hinders long-term growth.

0.10 --- --- --- ---

3. Negative publicity in India because of water issues, has led to poor brand image and hindered growth there.

0.03 --- --- --- ---

4. Lack of management willingness to place foreign products into American markets.

0.02 --- --- --- ---

5. Marketing deficiencies due to turnover in leadership and a 16 percent decrease in advertising spending.

0.05 --- --- --- ---

6. Coca Cola’s inventory turnover is only 5.4 0.05 4 0.20 1 0.05

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compared to Pepsi Co.’s 8.0.SUBTOTAL 1.00 1.50 1.22

Key External Factors Weight

Acquire KKD and GLDC

Produce new diet drinks that have healthier sugar substitutes

Opportunities AS TAS AS TAS1. Bottled water consumption has increased 11 percent.

0.06 --- --- --- ---

2. According to the S&P Industry Survey, consumers are drawn to new smaller beverage brands that are not sold on a mass scale.

0.05 1 0.05 3 0.15

3. Word Economic Forum’s annual Davos, Switzerland gathering grants international voice.

0.02 --- --- --- ---

4. Less developed countries are in desperate need to improve community water supplies.

0.02 --- --- --- ---

5. Energy drink sales are expected to increase 7 to 8 percent in 2007.

0.06 --- --- --- ---

6. Disposable income has increased 6.2 percent.

0.05 --- --- --- ---

7. Consumers are striving to drink and eat their way to better health than pervious generations.

0.07 2 0.14 4 0.28

8. EPS is expected to rise 7 to 8 percent in 2007.

0.07 4 0.28 3 0.21

Threats1. Consumption of American beverages is denounced by foreign officials in areas where conflicting interest exist.

0.02 --- --- --- ---

2. Multiple lawsuits against the new Enviga beverage for calorie burning claims in advertising

0.04 --- --- --- ---

3. Smaller, lesser known brands are turning to major beer distributors for bottling.

0.06 --- --- --- ---

4. Overall carbonated drink sales have been flat due to links of sugar to obesity and high fructose corn syrup to heart disease.

0.10 2 0.20 4 0.40

5. Pepsi is more diversified offering beverage and food products.

0.20 4 0.80 2 0.40

6. High cost of commodities such as sugar, and metals used in production of cans.

0.10 --- --- --- ---

7. Many smaller companies are fierce competitors around the world in their local markets.

0.08 --- --- --- ---

SUB TOTAL 1.47 1.44SUM TOTAL ATTRACTIVENESS SCORE 2.97 2.66

K. Recommendations

The QSPM strategies assessed whether acquiring KKD and GLDC (a potato chip and snack food company) was a better option than producing a new diet soda line made form more healthy sugar alternatives. Both scores on the QSPM are relatively close and given the financial condition of KKD and GLDC, it is recommended Coca Cola undertake both strategic alternatives. The Net

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Worth of both companies is provided below. It is estimated it would cost $200 million to research, produce and market the new diet drinks.

Krispy Kreme (KKD) Net Worth January 2008 (in millions).

1. Stockholders’ Equity + Goodwill = 79 + 28 $ 1072. Net income x 5 = $-42 x 5= $ NA3. Share price = $2.73/EPS -0.94 = NAx Net Income $-42= $ NA4. Number of Shares Outstanding x Share Price = 65 x $2.73 = $ 177Method Average $142

Golden Enterprises (GLDC) Net Worth January 2008 (in millions).

1. Stockholders’ Equity + Goodwill = 19.4 + 0 $ 19.42. Net income x 5 = $1.2 x 5= $ 6.03. Share price = $2.95/EPS 0.19 =$15.52 x Net Income $1.2= $ 18.64. Number of Shares Outstanding x Share Price = 11.2 x $2.95 = $ 33.0Method Average $19.3

L. EPS/EBIT Analysis

$ Amount Needed: 360MStock Price: $58Tax Rate: 35%Interest Rate: 5%# Shares Outstanding: 1,600M

Recession Normal Boom Recession Normal BoomEBIT 4,000,000,000 6,000,000,000 8,000,000,000 4,000,000,000 6,000,000,000 8,000,000,000Interest 0 0 0 18,000,000 18,000,000 18,000,000EBT 4,000,000,000 6,000,000,000 8,000,000,000 3,982,000,000 5,982,000,000 7,982,000,000Taxes 1,400,000,000 2,100,000,000 2,800,000,000 1,393,700,000 2,093,700,000 2,793,700,000EAT 2,600,000,000 3,900,000,000 5,200,000,000 2,588,300,000 3,888,300,000 5,188,300,000# Shares 1,606,206,897 1,606,206,897 1,606,206,897 1,600,000,000 1,600,000,000 1,600,000,000EPS 1.62 2.43 3.24 1.62 2.43 3.24

Common Stock Financing Debt Financing

70 Percent Stock - 30 Percent Debt 70 Percent Debt - 30 Percent StockRecession Normal Boom Recession Normal Boom

EBIT 4,000,000,000 6,000,000,000 8,000,000,000 4,000,000,000 6,000,000,000 8,000,000,000Interest 5,400,000 5,400,000 5,400,000 12,600,000 12,600,000 12,600,000EBT 3,994,600,000 5,994,600,000 7,994,600,000 3,987,400,000 5,987,400,000 7,987,400,000Taxes 1,398,110,000 2,098,110,000 2,798,110,000 1,395,590,000 2,095,590,000 2,795,590,000EAT 2,596,490,000 3,896,490,000 5,196,490,000 2,591,810,000 3,891,810,000 5,191,810,000# Shares 1,604,344,828 1,604,344,828 1,604,344,828 1,601,862,069 1,601,862,069 1,601,862,069EPS 1.62 2.43 3.24 1.62 2.43 3.24

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