Coca Cola Competitive Advantage Case Study

How does Coca-Cola integrate sustainability into their operations? For several years its facility in Brampton, Ontario, one of its largest in North America, has been transforming its manufacturing and distribution to save energy, reduce carbon footprint, water usage, and material usage. In this case study we look at the goals, implementation, and progress of the programs put in place by this $20 billion food and beverage giant.

Coca-Cola‘s 600,000 square foot facility in Brampton houses the plant, management team, and warehouse. It has three plastic bottling lines, including a Dasani line; one bag-in-box line producing syrup for national accounts; one pre-mix line for the restaurant business, and one canning line. There are 650 plant operators, sales and equipment service representatives, truck drivers, warehouse employees, management and staff.

Located within the eco-business zone around Toronto Pearson International Airport, Coca-Cola in Brampton joins the local community of businesses to collaborate on green projects. Under the stewardship of Partners in Project Green, businesses participate in programs to reduce energy and resource costs, uncover new business opportunities, and address everyday operational challenges in a green and cost-effective manner. Other companies in this program include Xerox, Unilever, FedEx, Hewlett-Packard, Walmart, Kraft, and LoyaltyOne.

Social and environmental risks are now one of seven business risk categories and are formally embedded into Coca-Cola’s enterprise risk management process. This in turn guides the business processes, including annual planning, three-year business planning, and internal audit planning. As a result, sustainability decisions are becoming an integral part of the business decision making, commercialization and capital management processes, the three-year business planning process, and customer and supplier relationships. Highlighted here are some of their goals, implementation, and progress.

Energy Conservation and Climate Change

The goal is to reduce the overall carbon footprint of our business operations by 15 percent by 2020, as compared to the 2007 baseline.

The Brampton operation converted to an energy efficient lighting system that uses 50% less energy and provides 50% more light. These new fixtures also operate on motion sensors for even greater savings.

In the distribution channels, the company has installed 2000 EMS-55 energy management devices in vending machines. These devices activate lights and adjust cooling based on use, leading to improved energy efficiency by up to 35 percent.

In addition, the company installed 1,400 climate-friendly coolers at the 2010 Olympic Games to reduce greenhouse gas emissions by approximately 5,600 metric tons, the equivalent of taking about 1,200 cars off the road for an entire year.

Finally, 37 heavy-duty hybrid delivery trucks and tractors were introduced to the Canadian fleet in 2008 and 2009. These vehicles improve fuel consumption and reduce emissions by about one third and create less noise and emissions when stopped in traffic.

Water Usage

The goal is to establish a water-sustainable operation to minimize water use and have a water-neutral impact on the local communities by safely returning the amount of water used in the beverages to the local communities and environment.

A 20% reduction in water use, accompanied by an efficiency ratio of 1.62 litres was achieved between 2005 and 2007. Plant teams focused on: 1) reducing the water use ratio; and 2) recycling the water used in operations (wastewater treatment).

To help reach its water usage goals the company developed and used a water conservation toolkit to identify actions that would conserve water. It implemented recycle and reclaim water loops through the plant’s membrane water treatment system. And it installed a new osmotic water recovery system designed to reclaim nearly 11 million litres of water for production. In addition water based container rinsers were replaced with ionized air rinsers and the lubrication system on all production lines was retrofitted to discontinue water use, saving approximately 28 million litres of water annually.

Sustainable Packaging and Recycling

The goals are to: (1) avoid the use of 100,000 metric tons of packaging materials between 2007 and 2010, (2) recycle or recover more than 90% of waste materials at production facilities by 2010, (3) increase recycled content in plastic (PET) bottles to an average of 10% by 2010.

For goal (1), Dasani PET bottle weight was reduced by 30%, saving 493 metric tons of PET. Plastic twist-off closures were designed 24% lighter, saving 235 metric tons of resin. Also, lighter fibreboard was developed for Minute Maid products saving 124 metric tons of fiberboard annually. The company also launched the PlantBottle, a 100% recyclable packaging made with up to 30% plant-based waste materials.

Goal (2) was achieved in 2009, ahead of schedule. The team also implemented a centralized recycling initiative that captures broken, damaged or expired product packaging from satellite facilities to be baled and sold to an industrial recycler.

Investments were made to achieve green innovations in recycling technologies, renewable packaging materials, vending and cooling equipment controls and design, and hybrid trucks.

Among the tools used was a proprietary packaging database to identify opportunities for future packaging material reductions and to benchmark performance against the global Coca-Cola system. See here for more on sustainable packaging.

The Coca-Cola operation in Brampton has shown that there are advantages to thinking “outside the box”. By respecting the finite nature of the earth’s water and resources the operation is implementing innovative business practices and contributing to the sustainability of communities while meeting the expectations of its stakeholders.

Derek Wong is a Toronto based sustainability consultant. See contact info and more posts like this at Carbon49.com. This case study is based in part on material provided by Partners in Project Green. Photos courtesy of Partners in Project Green.

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Categories Guest ColumnTags Carbon Footprint, carbon49, coca-cola, coke, Sustainable Packaging & Paper, Sustainable Strategy & Leadership, Water Use

Derek Wong

Derek Wong is a Toronto based climate change and sustainability consultant. Contact him through his blog Carbon49.com.

 

Researchers have shown it is very hard to pick companies that will outperform the broader market. One area that I believe to still be fertile hunting ground, to acquire cash flows at below market prices, is the far future.

If you are able to adopt a 10+ year view and select companies with sustainable competitive advantages, you have a recipe for sweet returns. Picking companies that will still be around after 10+ years or preferably longer is not easy. However some of them are hiding in plain view, like the world's largest nonalcoholic beverage company The Coca-Cola Coompany (NYSE:KO). Insiders know this as they have increased their stakes by 24% over the past year.

Coca-Cola sells a variety of sparkling and still beverages. It generates 60% of its revenue and about 80% of its operating profit from outside the United States. So it also helps to diversify your portfolio. Coke's core brands include Coca-Cola, Sprite, Dasani, Powerade, and Minute Maid.

Distribution Network

Coca-Cola's owns a unrivalled distribution network that spans over 200 countries. An infrastructure that is extremely difficult and costly for new entrants to acquire. If it were just costly it wouldn't be a sustainable competitive advantage but this distribution network is the basis for an economy of scale advantage that makes it very hard to get your foot in between the door.

The Brand

If you occasionally read my articles you might be aware that I have very little faith in company's basing their competitive advantage on a brand. You can always build a brand given enough capital or at least encroach upon its territory. Even a firmly positioned brand already in place requires investment to keep it valuable. These costs drive excess returns down. If they don't, it becomes feasible for competitors to start building similar brands. You see it happening all the time.

In the end, the brand drives little additional return. However if you can buy into a built up brand at prices far below what it would cost to build it, you still have an interesting proposition. I think right now, the Coca-Cola brand can be considered, temporarily discounted.

2020 Vision

Tell me, how many companies do you know that have a 2020 vision in place? Coca-Cola does and this shows the long term view management is taking. Perhaps having Berkshire Hathaway Inc. (NYSE:BRK.A) as a long term shareholder influenced company culture. No matter how it was developed, this increases my confidence the company is focused on the right things.

The system priorities that are of vital importance

In the 2020 vision there are a few system priorities that are of vital importance. I'm very happy Coca-Cola has put so much emphasis on these and think this will take them a long way to stay dominant.

  1. Focus on creating a competitive cost advantage across the entire supply chain
  2. Focus on operating the lowest cost manufacturing and logistics business in every market while maintaining quality standards
  3. In addition the company realizes its size of operations is crucial to create these economies of scale


When management focuses on what is important it doesn't matter what the food and drink trends are. If a certain drink is a hit with consumers, like Innocent (read the earlier article for all details), Coca-Cola can just buy it and roll it out through its unrivalled distribution network with its economies of scale.

This will make economic sense for the acquired company and for Coca-Cola. Creating value for shareholders of both parties. The ones left holding the wrong end of the stick will be the competition. However it needs to be said that main rival Pepsico Inc. (NYSE:PEP) is a strong competitor that lacks the same scale but can get close and keeps the pressure on Coca-Cola. Smaller firms can't match the scale of Coca-Cola's distribution network and Monster Beverage Corp (NASDAQ:MNST) even distributes through Coca-Cola's channels.

Valuation

On May 28 I wrote an article called 5 reasons to overweight Coca-Cola. Since that day the price of a share has come down from $42. Coca-Cola reported some numbers that were a disappointment to the market.

But Coca-Cola outperformed the market over the last 10 years and even though the gap has been narrowed,it is a favorite to repeat this feat over the next 10 years in my book. In 2024 analysts on Seeking Alpha and elsewhere will still be writing about Coca-Cola and its competitive advantage.

Discounted Cash Flow

In line with my current habit of evaluating companies with a DCF calculation, I've run the numbers on Coca-Cola. Because of Coca-Cola's significant competitive advantage, I've modeled cash flow as far as 10 years into the future. Counting on its ability to stay competitive over a long period of time.

To determine a realistic rate of return; I've also examined the past ten years of data on earnings growth and net income growth. In addition I gave weight to the company's history of return on equity and returns on invested capital. The latter records are truly outstanding.

After weighing these factors I've arrived at a net present value of ~$45 dollar per share. A premium of 12.5% over today's share price.

Conclusion

At ~$40 a share Coca-Cola is discounted as much as 12.5%. With a P/E of 20, a history of growing earnings by an average of 10% a year while returning large amounts of money to shareholders through buybacks and a dividend of 2.8%, I view Coca-Cola as a great investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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