We have all heard about Coca-Cola.
But do you know what exactly they sell? Are they a manufacturing company, or are they a brand-building engine?
Here’s the business breakdown:
John Pemberton created this drink in 1886. In 1887 he sold it to Asa Candler for $238.98 (~$45,000 in 2021 after adjusting for inflation).
Coca-Cola has been in business for 100+ years, has a presence in 200+ countries, and sells products through 200+ brands.
The company segments its business into four categories:
- Soft drinks
- Water and hydration drinks
- Juices, dairy, and plant-based beverages
- Coffee and Tea
They own and operate brands like Coca-Cola, Sprite, Fanta, Diet Coke, Minute Maid, and Schweppes.
What about revenue?
The company primarily generates revenue through two businesses:
Concentrate business - Concentrate is a syrup or, as the company puts it, it is the magic formula that is the core of Coca-Cola.
Finished product (bottle) business - They sell the end bottled product to distributors/retailers.
In 2021, the company generated 56% of its operating revenue by selling concentrate and 44% by selling finished bottles.
In contrast, in 2011, the company generated only 39% of its operating revenue by selling concentrate and 61% by selling finished bottles.
So the question is, why did Coca-Cola start selling more concentrate?
They sell concentrate to bottlers.
Bottlers are companies that purchase the concentrate from Coca-Cola, produce the final product (bottle), and then ship the bottles to distributors/retailers.
But why do bottlers buy concentrate from Coca-Cola?
The bottling business is a stable one, but with low margins. Bottlers want to associate with a solid brand.
A solid brand means stable demand from the market, and thus predictable profits.
And why does Coca-Cola like selling more concentrate?
Bottle manufacturing was suppressing their net margins. Coca-Cola is outsourcing manufacturing and instead focusing on distribution and marketing.
Distribution is a moat for Coca-Cola.
Today, Coca-Cola sells 83% of its total cases through bottlers. The rest is bottled in-house by them.
This shift towards outsourcing manufacturing has had a direct impact on the company’s overall margins:
Essentially, Coca-Cola is turning its manufacturing business into a franchise business where the franchisees are independent bottlers, and the brand is Coca-Cola.
The franchisee gets a stable business while the brand gets to expand margins