I am really impressed with Coca-Cola Company (NYSE:KO)’s acquisition of Innocent – leader in ready-to-drink smoothies and juices. The maker of world’s favorite cola has been trying to increase its foothold in the non-carbonated beverages segment. In today’s world of growing health awareness this is possibly the only prudent approach.
Coca-Cola had first bought a small 18% stake in Innocent way back in 2009, increased it to over 60% in 2010, and has presently increased it to almost 100%. The brilliance of this move is the cross selling opportunity that this acquisition presents. Coca-Cola has an unparalleled distribution network in the world and long standing relationship with popular restaurant chains. This move will allow Coca-Cola to introduce Europe’s winning brand in the US and gain share in the juices and smoothies market. This acquisition also will help Coca-Cola introduce its other beverages in Europe through Innocent’s channels.
As today’s youth increasingly opt for water, juices, and coffee, soda sales suffer. According to market research firm SymphonyIRI Group, if sales in restaurants, vending machines, and some other venues are to be excluded then there was a decline of 1.8% in soda sales volumes in 2012. In December alone there was a fall of 4.9%. Soda makes up around 25% of the US beverage market with the three top players being Coca-Cola Company (NYSE:KO), PepsiCo, Inc. (NYSE:PEP), and Dr Pepper Snapple Group Inc. (NYSE:DPS). While PepsiCo, Inc. (NYSE:PEP) has a more diversified portfolio the other two derive 60% and 70% of their revenue, respectively, only from soda sales. PepsiCo’s exposure is around 25%. Thus the falling sales volumes have serious implications for all the soda makers. In response all the soda companies are coming out with other beverage options like healthy juices, drinks, ready-to-drink tea, etc. It is worth noting that despite receiving criticism over health issues, the energy drinks market expanded by a solid 14.6% in 2012 according to Supermarket News.
The cross selling opportunity
Coca-Cola already has a strong presence in the US juices and smoothies market with its Odwalla brand. Between PepsiCo’s Naked Juice, Odwalla, and Campbell Soup Company (NYSE:CPB)’s Bolthouse Farms they hold almost 70% of the entire market. Coca-Cola can leverage the existing channels of its Odwalla juices to easily introduce Innocent in the US. It is also possible that it would repeat the same maneuver that it did with Vitamin Water when it struck a deal with Subway to serve Vitamin Water in their stores. Where Coca Cola (NYSE:KO) scores above its competitors is that most restaurant chains and food outlets like McDonalds, Subway, Nando’s, sushi outlets, etc sell Coke. Only KFC and Taco Bells sell PepsiCo, Inc. (NYSE:PEP). So any arrangement that Coca-Cola Company (NYSE:KO) might make with any of its allies will immediately kick start the sales of Innocent juices.
Meanwhile, Innocent has great brand value in the UK as well as in entire Europe. This will provide additional distribution channels for Coca-Cola to push its other beverages into Europe. It is also significant that Innocent has quite a few food offerings in the form of ready meals. This increases the proportion of food products in Coca-Cola’s portfolio.
Value proposition
Coca Cola is a value proposition for investors. The company has recently announced its fourth quarter results where it beat earnings estimates by a penny. Adjusted earnings had come in at $0.45 per share vis-à-vis $.044 per share expected by analysts. The company had increased its organic volumes by 3%. Coca-Cola Company (NYSE:KO) is doing well in emerging markets like Thailand, India, and Russia. These markets are relatively untapped and carry huge growth potential. And so does China. While China volumes were a little soft in the fourth quarter, it still remains a huge opportunity. Coca-Cola will invest $30 billion across the globe through 2017 and China and India will be key focus areas.
At the same time the company is increasing its non-carbonated beverages business significantly to counter the declining soda sales trends in the US and it achieved 10% growth in 2012 in terms of volume. The acquisition of Innocent will further augment this.
And as bonus incentives for investors, the healthy dividends and share buybacks are also on the offer.
The article Coca Cola’s strategic move originally appeared on Fool.com and is written by Eshna De.
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