The Coca-Cola Company (KO) has a unique business model that has served it well since the first bottling in 1894. Coca-Cola sells syrup to bottling companies that do the hard work of manufacturing and distributing the product to consumers; it refers to this portion of its business as "concentrate operations." The company also generates revenue from the sale of finished beverages to retailers, distributors, and wholesalers.
John Stith Pemberton, a pharmacist living in Atlanta, created the flagship soda Coca-Cola in 1886. The company was incorporated in 1892, having operated under a franchise distribution model since 1889. Today, Coca-Cola has risen to global prominence and is currently the largest nonalcoholic beverage company in the world. Besides the original Coca-Cola product and a host of related beverages, the Coca-Cola Company now produces roughly 500 beverages grouped into categories such as sparkling soft drinks, sports drinks, juices, energy drinks, and tea and coffee.
Coca-Cola released its 2018 annual report in Feb. 2019. The beverage distributor and manufacturer reported net operating revenues of nearly $31.9 billion for the year 2018, compared to $35.4 billion over the same period last year. As of July 9, 2019, the company's market capitalization is just under $224 billion.
The Coca-Cola Company primarily produces syrup concentrates, which are then sold to affiliated bottling companies around the world.
The Coca-Cola Company's Business Model
In 1894, Mississippi businessman Joseph Biedenharn installed bottling machinery behind his soda fountain store. The idea was to make Coca-Cola portable. Five years later, three entrepreneurs in Tennessee purchased the exclusive rights to bottle and sell Coca-Cola for $1. The number of Coca-Cola bottlers soon exploded to over 1,000 plants. This posed many problems for the company from imitations by competitors and the need for consistency across the product line. In 1916, Coca-Cola bottlers agreed to the famous contour design bottle that still remains iconic today. As of Nov. 2015, the company had over 900 bottling and manufacturing facilities located around the globe. Those facilities are owned by over 250 independent franchises and Coca-Cola.
Coca-Cola reports its net revenue in two segments: concentrate operations and finished product operations.
- The Coca-Cola Company generates revenue by selling concentrates and syrups to bottling facilities around the world, and by selling finished products to retailers and other distributors.
- Unlike many other beverage companies, Coca-Cola does not complete and bottle the majority of its products.
- Coca-Cola owns four of the five top nonalcoholic sparkling soft drink brands: Coca-Cola, Diet Coke, Fanta, and Sprite.
The Coca-Cola Company's Concentrate Business
Coca-Cola manufactures and sells syrup to authorized bottlers to make finished Coca-Cola products, and to manufacture fountain syrups. This revenue is reported under the company's concentrate operations.
Coca-Cola has supported the consolidation occurring among its bottlers. Having too many small independent bottlers created several challenges for the company. Challenges can stem from micro- to macroeconomic factors and they vary around the globe. When faced with economic challenges, some smaller, independent bottlers lacked the financial assets to continue operations and fund necessary investments. When bottlers face financial problems, it creates logistical and image issues for Coca-Cola.
To solve this problem, Coca-Cola created the Bottling Investments Group (BIG). The goal of BIG is to identify and help bottling franchises that need financial and institutional support. BIG targets struggling franchises and provides them with the resources they need to remain a part of the Coca-Cola franchise network. Coca-Cola then sends in teams of experts and resources to drive growth and return the franchise to profitability. Once profitability and stability in the local market is achieved, the company finds a qualified bottler to assume operations.
The BIG program operates in dozens of countries and is responsible for managing over 25% of the total system bottling volume. Combined, the BIG program is the largest global bottler in the company. In 2004, bottlers in the BIG program took in $11 billion in revenue. In Q3 2018, Coca-Cola completed refranchising company-owned bottling operations in North America, which cost $275 million.
The Coca-Cola Company's Finished Product Business
The company also manufactures its own fountain syrups, manages several bottling operations, and collects revenue on finished products. This revenue is reported under the finished product operations.
In 2018, 36% of Coca-Cola's business was categorized as finished product operations, while 64% was classified as concentrate operations. This was significantly more biased toward concentrates over 2017, when the division was 51% concentrate operations and 49% finished product.
Of the roughly 61 billion servings of all beverages consumed worldwide on a daily basis, close to two billion are Coca-Cola products.
The unique franchise bottling system developed over 100 years ago continues to be a valuable asset for Coca-Cola. A long-term company goal is to end the BIG program by having zero need and further consolidate its bottlers. Ideally, bottlers should be profitable and possess the financial assets to fund investments and help drive growth for the parent company.
A Greener Coca-Cola
As global revenue in sugary soft drinks falls, it will be important to ensure bottlers have the financial means to transition with consumer tastes. Coca-Cola has set several sustainability goals to achieve by 2020 that will require commitments from bottlers. These goals include a reduction in carbon emissions, recycling 75% of the bottles and cans used in developed markets, improving water efficiency, and returning the equivalent of 100% of the water used in bottling to communities and nature.
One of the Coca-Cola Company's biggest challenges is the obesity epidemic and corresponding shifts in public taste away from sugary beverages. The company must focus its product development and other efforts on matching customer tastes as they change. Additionally, the nonalcoholic beverage industry is a highly competitive one. Although Coca-Cola enjoys brand recognition that is essentially unrivaled on a global scale, the company must nonetheless be vigilant in ensuring that it continues to connect with potential customers.
Water Cycle Worries
Because nearly every Coca-Cola product is made using water, issues with water supplies and quality could also impact the business. Finally, because Coca-Cola relies on retail distribution to ensure that it is able to deliver its products to consumers worldwide, disruptions to or transformations of the retail landscape could introduce new challenges as well.