Once the brand has been successfully entrenched into a market domestic competition and governments have found it very difficult to place restrictions on their growth or to motivate change in consumer perceptions.

In recent years public initiatives have been created to restrict the sale and distribution of Coca-Cola and PepsiCo products within schools citing the concern for the recent and significant increases in obesity of young children. Some municipalities, school boards or governments have successfully implemented bans on dispensing machines in schools, but others have found strong resistance from school boards who receive lucrative donations to their sports teams, social programs or for new equipment as part of a negotiated partnership with one of the large corporations. The focus here, ethics aside, for the companies is their clear interest in funding social programs for brand development with the initiative to create lifelong loyalty to their brands and products by impressionable youth and create habit forming behaviours.

There are also a high number of serious economic, technological and social threats to the growth and profitability of KO. Each of the following items I’ve cited as a major concern for the company and are being handled adequately using a variety of methods by management:

• The increasing trends in health awareness are here to stay and KO has been proactive with increased product development and advertising of brands such as Diet Coke and Fanta as well as the recent successful launch of their Zero products (Coke Zero, Sprite Zero).
• Fresh water continues to be a concern as availability; prices and resources come under increased pressure in developing economies and markets. The health of consumers is a top concern of the company when they examine a market and spend considerable expense securing and treating water used in their products either directly or indirectly in the manufacturing process.
• With the global economy likely to contract into 2009 growth and expansion into emerging markets may be more difficult than the company had previously targeted. This may put pressure on marketing budgets, but will likely lead to consolidation in the industry as smaller companies with high quality brands don’t have access to credit/financing or aren’t able to service high levels of internal debt.
• Foreign currency and interest rates are major factors in the profitability of the company. Management balances the risk of operating in so many countries by hedging their exposure with derivatives. KO hedges operations up to 36 months in advance with most derivative instruments expiring within 24 months or less of their creation. While financial derivatives have been a toxic element to many businesses in the recent credit environment hedges held by the company help buffer cashflow from international operations from the significant volatility in the valuation of foreign currencies.
• Unions and collective bargaining agreements (CBA) will always be a concern in any unionized environment. With 75% of sales outside of North America the company is well positioned to balance disruptions to operations in domestic markets. One part of owning equity stakes in bottling operations is to ensure that KO has a vested interest in how employees are treated to avoid such conflicts.

In May of 2007 Coca-Cola successfully acquired Energy Brands (Glaceau) for $4.1B in cash to increase its product portfolio of enhanced water drinks adding vitamin water to its list of health conscious brands. On September 3rd of 2008 Coca-Cola announced another strategic offer to purchase China Huiyuan Juice Group Limited for $2.4B in cash. KO has operated in China since 1979 and was a major sponsor of the recent summer Olympic Games held in Beijing. Still beverages have been a focus in the Chinese market in recent years and the acquisition of the Huiyuan Juice brands diversifies the product portfolio of KO in China. One strategic element that comes from this acquisition is the proposed expansion of their distribution network within the country. Costs and operations can be now streamlined with sales, distribution, manufacturing, product development and marketing benefiting from the merger of the two companies.

While we think of juice in North America as a product not associated with large-scale sales; juice products in China are an established and fast growing segment of the beverage market. Juice is actually a more profitable product from a margin perspective and the Minute Maid brand is a key complimentary product to the established Huiyuan brands in the Chinese market. KO has been looking for growth vehicles to support stronger domestic growth in China and local bottling partners between the two companies make a strategic fit. The deal is anticipated to close in early 2009 and be accretive to earnings within three years. The obvious threat to this deal is that it is conditional of Chinese regulatory approval but currently no problems with that process have been publicized or speculated upon.

While conducting additional research on the company I found a Virtual Vending Machine that was fun to gain a sense of the Coca-Cola brands offered globally by the company. With a supply chain valued at over $50B US it’s easy to gain a sense of just how global this company is in all aspects of their businesses.

One key concern I always maintain with any company is a keen evaluation of their management. Executives are not only responsible for the daily operations of a company, but also establishing the corporate culture and expectations of how an organization expects to do business. No company grows to the size and scale of operations that Coca-Cola has without an extraordinary vision of where the company is going, how it will get there and a group of effective leaders to pave the way. In my evaluation of management, which I encourage all investors to do on their own, I’ve found very clear objectives and strategic priorities from management on where they expect the business to grow, operate and execute. The core competencies of the company are defined as consumer marketing, commercial leadership and franchise leadership which is clearly evident when you evaluate the company from a number of perspectives.

There was a recent transition in leadership at the company when Neville Isdell stepped down as CEO and Muhtar Kent assumed the role as new CEO. Muhtar Kent has been with the company since 1978, comes from a strong background in marketing and has a strong history of participating in the global operations of the company in many capacities. The transition between the two managers was smooth and without incidence which is something I always carry as a litmus test for preserving corporate culture and maintaining a pulse on the business.Whenever I look through the operating numbers of a company I’m looking to evaluate three main items:

• A consistent theme of performance
• Conservative fiscal management
• Emerging trends that hold the potential to influence the company either positively or negatively in the future

A portion of my analysis always focuses on vital criteria such as EPS, dividends, cashflows, debt/equity ratios, book value growth and other important metrics but running a successful business is more than just keeping those numbers in check.