Coca-Cola Europacific Partners

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Coca-Cola Europacific Partners is a leading bottler and distributor of non-alcoholic beverages, primarily operating under the Coca-Cola brand and its diverse portfolio, serving a wide range of customers across Europe, Australia, and parts of Asia.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

CCEP operates as a bottler and distributor, meaning it doesn’t produce the concentrate for the drinks, but instead purchases it from The Coca-Cola Company and then bottles and distributes the finished products. This makes understanding CCEP’s business model somewhat different from traditional Consumer Goods businesses.

Business Overview:

  • Revenue Distribution: CCEP’s revenue streams are diversified across various geographic regions, but its main revenue drivers are the volume of product sales, selling price, and channel mix. They operate in core European markets such as Great Britain, Germany, and Spain, while also expanding into the Asia-Pacific region, notably Australia, New Zealand, and Indonesia, making it a very diverse global company.
  • Industry Trends: The non-alcoholic beverage industry is highly competitive and is influenced by several key trends. First, a growing emphasis on healthier beverage options and low-sugar or zero-sugar alternatives. Consumer preferences are shifting toward beverages with natural ingredients, low-calorie, and reduced sugar content. Secondly, demand for energy drinks and functional beverages continue to rise and become a bigger part of the overall beverage market. Finally, there is also a growing concern around packaging waste and recyclability is driving investment in more eco-friendly packaging solutions.
  • Margins: CCEP’s profitability is tied to its ability to manage costs efficiently and maintain pricing power. The gross profit margin will fluctuate because of raw materials costs, mostly driven by the price of sugar and aluminum (key ingredients for its drinks and packaging). The operating margin can vary based on logistics and operational costs, as the company tries to leverage economies of scale.
  • Competitive Landscape: The non-alcoholic beverage market is highly competitive and includes Coca-Cola Company itself, rival bottlers (e.g., Arca Continental, FEMSA), PepsiCo, and other large national/local beverage manufacturers. The market is often dominated by few large players in the global scale and lots of small players on the local scale (like craft beers), that can have limited competition due to local tastes and regulation. CCEP needs to be efficient, innovative, and focused on market growth to defend its market share against those competitors.
  • What makes CCEP different? CCEP distinguishes itself through its focus on large geographic areas and building scale on those particular regions, focusing on large customer accounts (such as distributors and restaurants), while also making efforts to offer alternatives to sugary drinks. These moves are different from those of Coca-Cola Company itself, that is a global player, not a specialized regional player.

CCEP operates at a significant scale and has a distribution network that rivals some of its competitors. They are also working on developing and rolling out more low-sugar or no-sugar drinks, to adapt to consumer preferences.

Moat Assessment:

  • Brand Loyalty and Strength: CCEP benefits greatly from the established brand recognition of Coca-Cola. Coca-Cola is one of the most recognized brands in the world, providing brand equity and customer loyalty. A strong brand, as said, translates into pricing power and consistent demand. While this is good and a valuable asset for CCEP, most of the brand equity and the marketing responsibility falls on The Coca-Cola Company and its partners. That translates into CCEP as a franchised business, rather than one which controls brand identity (like a traditional Consumer Goods business).
  • Distribution Network: CCEP has a highly developed and large distribution network which can be hard for new entrants to replicate. These networks have great density and include the infrastructure and expertise to deliver products efficiently to millions of customers. That translates into a form of switching costs for the company’s customers.
  • Economies of Scale: As a major bottler, CCEP benefits from scale in procurement, production, and distribution. Lower production and distribution costs (compared to smaller companies) allow them to maintain profitability and offer competitive pricing. However, this may not be enough because its big competitors have the same advantages.
  • Intangible Assets: CCEP benefits from the value of its strong bottling franchise agreements, but does not own them. They provide a degree of exclusivity for bottling and distribution of some key products, but, in exchange, require CCEP to be tied to The Coca-Cola Company and follow its guidelines. That may have an impact on the way the management acts.
  • Switching Costs: CCEP’s main source of switching costs comes from having integration into its customers operations, making switching costs for its customers significant. While consumers may be willing to switch between Coke and Pepsi, it is way harder to switch between providers. In the same fashion, the specialized infrastructure and relationship-based interactions make it hard for CCEP to change clients and operate with other bottlers.
  • Moat Rating: I give CCEP a moat rating of 3/5. CCEP possesses valuable moats such as brand recognition and distribution networks. However, some of those moats, such as the brand, are owned and driven by The Coca-Cola Company and, while they are a big advantage for CCEP, they have to pay for it (by buying concentrate from Coca-Cola). That makes its moat narrower and more fragile when compared to a traditional Consumer Goods company that is responsible for the full supply chain and all the branding related with it.

Because it depends on Coca-Cola Company for its operations, there is also a risk of a potential shift in business strategy of The Coca-Cola Company. New agreements, contracts, or strategic shifts in the Coca-Cola company can quickly harm CCEP’s business operations and have an impact on the stock’s overall performance. Risks to the Moat & Business Resilience

  • Commodity Costs: CCEP’s profitability is sensitive to fluctuations in raw material costs, especially sugar, aluminum, and plastic. Sharp and unexpected cost increases in those ingredients can reduce their profitability and cause lower margins.
  • Changing Consumer Preferences: The non-alcoholic beverage sector faces changes in consumer preferences, notably a shift toward healthier and low-sugar options. CCEP needs to adapt or risk losing market share to companies that can serve those changing needs.
  • Competitive Pressures: The beverage market is intensely competitive, with major players engaged in price and promotional wars. These price wars could erode CCEP’s profitability and profitability growth.
  • Regulation: Governments increasingly impose taxes on sugary drinks and regulations on packaging, which could affect CCEP’s profitability and require additional capital investments in R&D and the logistics chain. This also exposes their business to regulatory and legal risks.
  • Economic Downturns: Economic downturns or recessions can lead to changes in consumer spending habits and a reduction in consumption of “luxury” goods, that usually include energy drinks and other non-essential drinks. This can cause drops in sales that may create big losses.
  • Supply Chain Challenges: Supply chain disruptions caused by geopolitical instability, labor disputes, transportation issues and other disruptions, may increase costs and diminish the ability of CCEP to produce and deliver its products.

Business Financials:

  • Revenue: CCEP has a very large revenue base, close to 17B euros (2023). This is the biggest non-alcoholic beverage bottler in the world, with operations in key regions. This makes them a company very sensitive to world trends and crises (like Covid, Ukraine war and the current inflation environment). While that could be interpreted as a bad thing, this diversified geographical profile gives CCEP a strong basis for growth and to mitigate the risk of losses from one or few particular markets.
  • Profitability: CCEP’s profitability, measured by its EBIT and net margin, has recently faced problems and margin pressures in 2022-2023 caused by high energy and aluminum prices, that could not be readily transferred to final consumers. That resulted in a decline in the company’s results and share prices. But as those costs started to come down, CCEP’s margins had a very rapid and important recovery, leading to an overall better net income in 2023 compared to 2022.
  • Cash Flow: CCEP’s cash flow from operations is good (close to 2B euro in 2023), meaning the company can easily reinvest in the business and distribute money to its shareholders. However, there has been a trend of high level of debt, caused by a high level of investment in new operations, which will be further analyzed in the Balance Sheet section.
  • Debt: CCEP has a high debt level, partially due to acquisitions in new markets, new facilities, and the need for increased capital to keep up with demand. They have a clear interest in diminishing that debt to protect the company from potential interest rate hikes and financial turmoil.
  • CAPEX: CCEP has high capital expenditures to renew and grow their facilities. Although those high investments are usually a sign of a well-established company with growth prospects, that may negatively affect the company’s ability to freely distribute cash to its shareholders in the short term.
  • Recent Results: The most recent data from the 3Q23 report shows continued growth and an important rebound on both revenues and profitability compared to the previous year. That shows resilience and the importance of the brand’s strength in a challenging environment. However, the company still faces economic pressure (like the current inflation environment) that may affect its ability to grow and retain profits.
  • Other notable metrics: The dividend yield of the company is around 3.7% (as of early Dec-2024) which, given the current environment, it’s a relatively good return (and reflects a mature company that is returning a portion of its profits to shareholders). Their free cash flow is high (1.8B+ for 2023), supporting the high debt levels.

The new CCEP CEO, Damian Gammell, took over the command of the company in early 2024, with an intention to create value on a long-term basis and continue the growth of the company. The latest earnings calls also signal a shift toward more pricing power for the company and the use of “price, mix and volume” management to grow both revenues and profits.

Understandability Rating: I give CCEP an understandability rating of 2/5. While the basics of its business are clear, as a franchised business that has a dependency from The Coca-Cola Company and its operational complexity, make understanding all its details very difficult for a casual investor. The large geographical distribution and the fact that its financials depend on multiple currencies and different accounting rules also makes it far from a simple business to analyze.

Balance Sheet Health Rating: I give CCEP a balance sheet health rating of 4/5. Although the company has a high level of debt, its recurring cash flow makes that debt manageable. It also has a low debt-to-capital ratio and is taking clear steps to reduce its debt. Its ability to produce free cash flow and manage interest expenses indicates a resilient and safe business in financial terms.