Coca-Cola’s Secret Ingredient To Success Revealed

Today, let’s talk about a company that has:

• The most widely recognized brand name in the world.
• A 10% share of the entire global market for non-alcoholic beverages.
• A monopoly on the very definition of a multinational corporation.

If you guessed The Coca-Cola Company (NYSE:KO), then you’d be right.

Don’t expect those accomplishments to dim anytime soon either. It should continue quenching investors’ thirst for a safe, profitable purchase.

The all-American company reached and maintained its number-one status by adhering to the same successful formula for decades. And I don’t mean its top-secret cola formula, though obviously that doesn’t hurt.

For that matter, neither does belonging to an industry of consumer staples. Soft drinks are notably resilient in economic downturns.

But Coca-Cola has more going for it than just a hugely successful product. It also has a business strategy focused on diversifying its business into overseas markets. And it was one of the first American companies to derive a large portion of its business from international sales.

Today, the beverage company still follows that same formula for success, relying more heavily than ever on worldwide sales.

Coca-Cola Pours Into Emerging Markets

If you live in America where Coca-Cola ads run everywhere from movie theatres’ opening credits to New York City store fronts, you probably wouldn’t know that it derives over 80% of sales, 75% of income and 95% of operating profits from abroad.

That makes sense though when you figure that its distribution network now covers more than 200 countries and has a 50% share of the global market for carbonated drinks.

Naturally, this opens up a very profitable blue-chip play for investors interested in capitalizing on economic growth overseas, and more specifically in emerging markets.

Because of flat sales in North America and even Europe, Coke has coped in the past through acquisitions of competitors like Nestea, Dasani and Vitaminwater over the last several years. Those purchases probably haven’t hurt, but they haven’t really helped either, since total case sales in North America dropped by 2% so far in 2009.

Yet growth in emerging markets continues rising at a brisk pace. In the second quarter of this year, Coca-Cola enjoyed 33% sales growth in India and 14% sales growth in China. And they remain untapped gushers if you look at both countries through the company’s measuring scale of bottles consumer per capita,

The average American drinks 412 bottles of Coke products a year. In China, that figure drops to 28 bottles and Indians consume only 7.

For example, India has a high birthrate and 1 billion people with an average age of 25… and trending lower. Since young people are particularly susceptible to the lure of carbonated, sugary drinks, that creates a particularly attractive Coke, especially as family incomes in India continue to rise.

Investors should step back a moment and think about those facts and figures … and the opportunities they raise. Because you can bet that Coca-Cola has.

The Chinese Ingredient

Coca-Cola has already proven it can go the distance in China, a country that used to be its seventh biggest market back in 2001. Today, China ranks third on that list, behind only the US and Mexico.

Overall, according to research firm Euromonitor International, the beverage-maker had a 52.5% share of the country’s carbonated drinks market last year. The Coke drink itself took up 22.2% market share, just behind Pepsi’s 23%.

But leading that particular market is Sprite, at 23.4%. And as we all know, Sprite is a Coca-Cola brand.

A good portion of that success comes down to the company’s ability to consider local preferences and conditions, such as its ongoing efforts to combat the belief in parts of China, that cold drinks are unhealthy. To combat that unprofitable idea, Coca-Cola has spent hundreds of millions of dollars to educate the populace that its beverages are safe to drink at any temperature.

And because of a national shortage in refrigeration, it has also invested in new technology, such as super-insulated retail refrigerators that stay cool for 12 hours without power… something that comes in handy in rural areas with unreliable power grids.

Coke feels confident that a continuing investment in China will pay off, especially since China could very well urbanize some 300,000,000 people - the equivalent of the population of the United States - over the next 10 years, assuring the company of further consumer support. Since 1979, it has already spent $1.6 billion in the emerging nation, and plans to invest another $2 billion over the next three years alone!

That includes the recently opened research center in Shanghai, which develops new products intended specifically for the Chinese market, such as the fruit flavors added to the pulpy Chinese version of Minute Maid.

It also plans to expand into the untapped, rapidly growing regions of China, such as Xinjiang and Inner Mongolia, where it has already begun building its 39th Chinese bottling plant.

Coca-Cola shares stand to benefit from the winds of change as well, especially the weakening US dollar, which the company doesn’t hedge as it enters the world of emerging market currencies. If anything, KO is buying back $1 billion of its stock in the second half of 2009.

At this point, any move in Coke’s stock price back to the $48 level would present a bargain for investors. At that level, shares would be selling at only 15 times 2010 earnings estimates… a nearly 20-year valuation low.

For conservative investors (3% yield) who still want growth, but with very little risk, Coca-Cola really does open up happiness.

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