coke's increasing brand power; it is irrational consumers and investors

The soda and sugar

Consider this: You take some soda water, mix it with some sugar, ok, lots of sugar and some flavor, and offer it to your friend. Then offer to him a branded cola, say, a coke. Now, ask him two questions: were the two any different and which one tasted better. Chances are that he will say, yes to the first question (wrong answer) and coke to the second one (not an honest answer). If you want correct answers from him, give him these two drinks blindfolded.

 

Irrational excitement...the brand power

He would be more than happy to pay a dollar for that small can of coke than say, a quarter for the unbranded. Ask him why and he will say that he likes coke because it is the most widely consumed soft drink in the world; everybody drinks it and likes it. Cut this... he drinks it because every other drinks it knowing fully well that it has nothing special to offer. That is what I call the power of the brand. 

There is no point in talking about how powerful coke's brand is; everyone knows it. But I wonder why it should be the way it has been. Here's an unhealthy drink: soda is bad, sugar is very bad, flavor is no good, and the combination is one of the most powerful brands in the world. How ironic; how irrational.

 

The sugary soda business

I am not a fan of any carbonated drinks, leave alone coke. All I want to know is from the perspective of an investor in coca-cola as a company. Is it any good to be an investor in this company? With hindsight, the answer is simple: growing brand power, reduced prices, higher earnings. The coke has been a runaway winner over a very long period of time. Here is the proof:

However, the stock performance during the last decade has not been great. Take a look (2000-2013):

S&P-500 has barely moved, coke up about 75% and pepsi has doubled. Is this good enough for a long term investor in a consumer business, that too in one of the most powerful brands? 10-year treasury bond has yielded annual compounded rate of 5.31% during 2002-2012. Coke has lagged this and pepsi has managed, just barely. If you consider the stock performance from 2000-2011, the result is even worse: 3.67% pa for coke, 5.07% pa for pepsi. What has caused this?

 

Financial performance of coke for the last 5 years:

 

The market value has increased from $118 b in mid-2008 to $189 b now. Diluted earnings have increased at a pretty decent rate of about 12% pa. We know that markets always over or under react to situations. Ignoring their short term frenzy, we are pretty cool on long term story of a good business. Coke has passed this test over a very long period. Should it have?

 

Good or bad business

As my personal strategy has been not to get into a business which causes injuries to health in general, I would never invest in coke or pepsi, or any tobacco company for instance. That's my game. It's not been the opinion of the investors at large for the past several decades. Hence, these companies have performed enormously well.

 

There have been several concerns regarding health caused by carbonated drinks which have been to the courts and come out of the courts, not causing much of a damage to the financial health of these businesses. But will this continue? While more people are becoming coke consumers, there are several who are talking about health and freshness. There are too many alternatives to these soft drinks available now in the market: canned juices (is it any good?), fresh juices, etc.

 

Will any sense prevail?

Is it a matter of when, rather than will, people start to abandon carbonated water? I don't know about you, but I personally think so. It's amazing, it's so stupid, that people are crazy about a product which has nothing but soda and sugar to offer, and they create a brand out of it. It's not even the kick as in alcohol or a cigarette. You have to give it to coke for this, for managing to let people get cheated happily and willingly.

 

There isn't one rational reason why these businesses should make money: no product differentiation other than the brand. These businesses should have had failure written everywhere just like fast food businesses such as McDonalds and KFC. But hey, my opinion doesn't matter one bit.

 

It will take some time (or long) for good sense (the rational one) to prevail upon the people of the world and those marginal investors who set prices for the stocks. Until then, happy soda and sugar.