Profile of The Coca-Cola Company - 1997
The Coca-Cola Company capped off another very successful year in 1997 of 9% unit case volume growth and a 19% increase in EPS. Entering 1998, Coke had incredible 10 year CAGRs in revenue of 9.4% and EPS of 18.5%.
The Coca-Cola Phenomenon:
“Coke” was the second-best known word in the world after OK. There had never been a single product with such global appeal that could be found in remotest of villages in far flung corners of every continent. Mexico’s very high per capita Coca-Cola consumption proved that such an affordable product was relatively unconstrained in its growth potential around the world. It could be just as big a success in a lower/middle income country as a wealthy one. And nearly half the world’s population lived in countries where the per capita consumption of Coke was increasing rapidly but was at only 2% of the United States’ level. These were markets Coke was now exploiting since the fall of the iron curtain. As the recently departed legendary CEO Goizueta had often remarked, only 2 ounces of the 64 ounces of liquid consumption that an average human requires for sustenance was made up of Coca-Cola Company offerings.
It had become one of the 5 most valuable public companies in the world, but the future was still clearly very bright.
The company was capital light, had instant brand recognition, untapped pricing power, and its cola had been a phenomenon of a product that had been growing at high rates for more than a 100 years. In fact, within less than 10 years of its invention in 1886, Coca-Cola was drunk in every single state in the United States. As both Buffett and Coke’s legendary CEO Goizueta both liked to point out, citing a Fortune Magazine article from 1938, investors had always thought it was “too late” to invest in Coca-Cola but that nearly 100 years of history had shown it was never too late.1
Coca-Cola had shown an ability to bounce back stronger from challenges such as the “New Coke” fiasco in the 80s or from serious competitive pressures in the early 90s in Japan. Unsweetened teas, fermented milk drinks (first released by a competitor in 1991 to great success) and generic colas started to reduce the growth of the Japanese soft drink market and Coca-Cola’s share in it. Coke utilized its massive marketing and distribution muscle (it controlled 870K of the 2M drink vending machines in the country) to release new teas and milk drinks that were able to gain market share and beat back the ankle biters. Its market share in soft drinks crept up from a low of 78% (!) back to 85% in 1996/97 as the generic cola craze died out and consumers returned to the consistency of the brand they knew and loved.
The weight of such long-lasting success created a feeling of inevitability. Munger’s 1996 thought experiment of how one could ensure having $2 trillion by 2034, given a 150 year runway, led to the conclusion that one must start/own the Coca-Cola Company in the late 1800s to meet such a goal.2
Buffett in 1996 called Coca-Cola one of “The Inevitables”
The stock traded at ~40X trailing earnings, with the expectation of continued expected EPS growth, as guided by management, of 17%-20% per year.
Munger’s 1996 Thought Experiment: “Even so, the real Coca-Cola company followed so much of the plan given to Glotz that it is now worth about $125 billion and will have to increase its value at only 8 percent per year until 2034 to reach a value of $2 trillion. And it can hit an annual physical volume target of 2.92 trillion servings if servings grow until 2034 at only 6 percent per year, a result consistent with much past experience and leaving plenty of plain-water ingestion for Coca-Cola to replace after 2034.”