Coca-Cola Consolidated

Moat: 4/5

Understandability: 2/5

Balance Sheet Health: 4/5

Coca-Cola Consolidated is the largest bottler of Coca-Cola products in the United States, distributing a vast array of beverages primarily through direct store delivery.

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.

Business Overview: Coca-Cola Consolidated (COKE) operates as an independent bottler, distributor, and marketer of Coca-Cola products. Their business model is inherently a low-cost manufacturing and distribution model focused on a very mature business with high scale. The company’s product portfolio includes sparkling beverages, still beverages, energy products, and more, with the core Coca-Cola branded products making the largest contribution. The Company is part of the overall Coca-Cola System, which also includes the company with the concentrate recipes and the brand, The Coca-Cola Company (TCCC). The Coca-Cola Company gives COKE the right to manufacture, market, and distribute Coca-Cola’s products in a specifically assigned territory.

  • Revenue Distribution: COKE’s revenues are split between two segments, bottled beverages and beverage concentrates, and they also do earn some revenues from promotional incentives. The majority of revenues come from the sale of sparkling beverages.
    • The company is also diversifying its product lines into still beverages, energy products, water and juices/sports drinks.
  • Trends in the Industry: The beverage industry is experiencing changes including a shift toward healthier options, increased demand for low-sugar drinks, and a move toward variety in packaging and flavors. The overall soda market is not expected to grow, with more of the demand transitioning to other forms of beverages. The company’s strategy is to remain innovative in its core product lines, while capturing a growing share in emerging categories. It is also important to note that the beverage industry is relatively recession-proof, since consumers don’t tend to reduce beverage consumption much, even in bad economic times.
  • Margins: COKE has shown fairly consistent growth in its gross and operating profit margins. Gross margin has trended consistently around 36-37% in 2022-2023. The operating profit margin, on the other hand, fluctuates a bit depending on factors like inflation, operating leverage and product mix, among others. In general, its operating margin has remained in the range of 10 to 12%.
  • Competitive Landscape: The beverage industry is intensely competitive, with large players such as Pepsi, and many other specialized beverage providers. Barriers to entry, however, aren’t incredibly high. The industry also consists of a large number of small independent distributors, and competition is prevalent in those sectors as well. To compete in this kind of environment, scale is very important, so big players who own distribution networks have more power, than regional ones.
  • What makes COKE different?: What makes COKE stand out is that its distribution business is focused on a strong and mature brand—Coca-Cola. Even with their products being virtually commodified, its position in the value chain makes COKE a more profitable distributor of Coca-Cola beverages. The company’s size in its markets gives it some scale advantages that its competitors may not have, particularly for the distribution of such a heavy product like bottled beverages. This advantage, coupled with a high-quality distribution model, has made COKE’s business to be considered reasonably high quality within its sector.
    • However, since they are a bottler, the value created by COKE can be directly attributable to the demand for Coca-Cola’s products, not necessarily to the inherent efficiency of the company as a whole.

Financial Analysis: Here’s a breakdown of COKE’s financials from its recent reports, specifically the 10-Q for the period ending September 27th, 2024, and the year-end 2022 10K and its reports from previous quarters.

  • Income Statement: COKE has seen a decent, if not impressive, growth in revenue over the past few years.
    • Total sales increased from $1.58 billion in Q3 2023 to $1.76 billion in Q3 2024 (an increase of 11.1%). In the first nine months of 2023, total sales were 4.6 billion compared to $4.9 billion in the first nine months of 2024, reflecting a 6% rise. While this is notable revenue growth, it’s important to recognize the effect of price increases in this number, and not simply organic growth.
  • This increase is also helped by a significant increase in volume, as the number of units increased by roughly 6.5-7.5% year over year during both the first and second quarter, but did dip down slightly to around 1.5% in the third.
    • Net income for Q3 2024 came in at $115.6 million, compared to $92.1 million in Q3 2023. Net income for the first nine months of 2024 was $332.5 million, compared to $312.4 million for the same period in 2023 (an increase of 6.5%)
    • Diluted EPS grew from 9.52 in the first three quarters of 2023 to 13.06 in the first three quarters of 2024. This growth was slightly offset by dilution.
    • Operating margins have seen slight but steady improvements, from 11.6% in Q3 2023 to 12.3% in Q3 2024.
    • Cost of sales also saw an increase year over year from roughly $1.04 billion to $1.15 billion.
    • Selling, Delivery, and Administrative Expenses have increased by ~250 million dollars, from $388 million to $638 million, from 9M 2023 to 9M 2024.

Balance Sheet: COKE has a relatively healthy balance sheet.

  • Total assets grew from $3.85 billion at year-end 2022, to 4.29 billion as of the end of September 2024.
  • On the liability side, long-term debt has decreased significantly, from $600.9 million at the end of 2022 to $500 million on the balance sheet at the end of the most recent quarter. This is an encouraging sign for the company’s financial health. Overall, the company’s capital structure looks relatively conservative.
  • Inventory saw an increase from $321 million to $347 million.
  • Retained earnings have increased by $200 million since the end of 2022.
  • Overall, its book value of equity is still quite significant, and has seen an increase over the past few years. This shows long-term stability.
  • COKE has a low amount of short-term liabilities compared to current assets and current liability ratios of over 1.6 - it demonstrates the company’s ability to pay off short-term debts.

Moat Analysis:

  • COKE possesses a narrow moat based on a combination of switching costs with its clients and distribution efficiencies. Its established distribution network and relationships with retailers in its geography limit competition. Customers may have an incentive to not make a change, and since the company provides a high quality service, this strengthens the relationship.
  • However, this is an inherently competitive industry with relatively low barriers to entry, so I couldn’t rate it as a wide moat business.
  • They are also heavily dependent on the success of the overall Coca-Cola brand which they do not own, which also limits moat durability.
  • Despite a narrow moat rating, it’s important to note that it still has the potential to be relatively durable, unless a change in the distribution system is undertaken.

Risks to the Moat and Business:

  • Changing consumer preferences: A long-term move away from sugary drinks may significantly impact COKE’s business. Although, they are actively trying to expand their product base to other beverages to mitigate this. But they are at heart a carbonated sugary beverage distribution company.
  • Rising Competition: New entrants in the beverage market and an increase in competition among existing players could lead to declining profit margins, especially within the Coca-Cola System.
  • Pricing Power: COKE must have the ability to raise prices or maintain its pricing advantage compared to its peers in order to create true shareholder value. If COKE cannot do that, its high revenues are for naught, as it will translate into lower profitability.
  • Economic Downturn: A major economic downturn could lead consumers to change their consumption behavior and possibly limit the demand for its products.
  • Concentration of Customers: While Coca-Cola has an incredible amount of distribution points, they also rely heavily on a relatively small amount of big retailers for the bulk of their revenues, making the company vulnerable to their buying power.
  • Bottler relationships: Although COKE is a bottler with a significant geographic footprint, they are also heavily reliant on the Coca-Cola company’s brand and recipes. Any change in this relationship could negatively impact their returns.
  • Debt: The company’s debt profile is something that must be continually watched, because even though debt is valuable for the company (as it reduces taxes and has the potential to make the company more profitable) too much debt can cause problems with the ability to operate.

Business Resilience: COKE has several advantages that may allow them to be resilient through rough economic times.

  • They have a relatively recession-resistant business, because beverages are not often things that consumers cut down on during economic downturns.
  • They have some scale advantages and a good relationship with the main brand that they distribute which allows them to maintain a reasonable cost advantage.
  • Although the company is not directly innovation or technology-driven, they do try to maintain an innovative business through better distribution methods and new forms of packaging.

Understandability Rating: 2 / 5 The business model is not that complicated and is relatively easy to grasp. Coca-Cola’s products are a household name, and most people generally know how its beverages are distributed. However, the complex web of relationships between Coca-Cola, other bottlers, and independent retailers may get complex. I gave this a 2 because even with some complexity, it does not require much technical understanding to understand the business.

Balance Sheet Health Rating: 4 / 5 COKE’s balance sheet is relatively strong. The company has a relatively low debt load compared to its total equity, and with a good ratio between current assets and current liabilities, the company is able to fulfill short-term obligations and has some good flexibility to take on debt opportunities. For that reason, it’s a healthily financed company. The recent decrease in debt is also a positive indicator of managerial efficiency. I give this a 4 because they should continue to improve their debt metrics.

Recent Problems: The company’s most recent struggles involved their gross profit margins, as they were hampered by inflation and increased input costs in both 2022 and early 2023. The company was also involved in a few acquisitions and joint ventures which will require attention over the next few quarters. However, over the course of 2023, the company was able to slowly mitigate these issues, and it seems to be back on track. The company also has to ensure that their agreements with Coca-Cola and other related distributors are stable and profitable. Lastly, they have to ensure they maintain a strong connection with their consumers to counteract changes in beverage preferences.