Wells Fargo Analyst Sees Beverage Alcohol In Coca-Cola’s Future
Source: Forbes
Thomas Pellechia
November 18th
Coca-Cola CEO James Quincey has not ruled out the company getting into the alcohol industry.
Quincey dropped that mini bombshell to CNBC’s Squawk on the Street headquartered on the floor of the New York Stock Exchange. His comment was in response to Wells Fargo analyst Bonnie Herzog’s brief speculation concerning Coca-Cola’s potential future growth.
Quincey said philosophically he believes in a never-say-never approach . But he also said Coca-Cola is so strong it makes little sense for the company to jump into alcohol right now, elaborating that it makes more sense to stay within a company’s capabilities, not to mention its corporate culture and systems.
Perhaps Quincey is knowledgeable about the last time Coca-Cola made a major foray into the wine business, a move that started out strong but lasted only about five years.
The move took place in the late 1970s, following the now famous 1976 Paris wine tasting that pitted France against Calfornia. Thanks to new interest in American wine from Baby Boomers, it was a period of massive wine industry growth, and many large companies wanted in. By the time Coca-Cola decided to get in the game the venerable California wine companies had already been taken.
After buying up Sterling and Monterey Vineyards, Coca-Cola settled on taking over New York’s Taylor Wine Company in 1977/78 and creating a group called The Wine Spectrum. It was a good move. Taylor had reached about sixth in domestic wine production and it had built an innovative and highly efficient national distribution system. Under Coca-Cola, the newly established Taylor California Cellars went from zero to 8 million cases in about three years.
Alas, in short order the powerful soft drink company learned that the combination of agriculture, energetic competition and fickle consumerism made forecasting the future for wine sales an acrobatic feat. More important, Coca-Cola learned that the margin on water and sugar is a great deal better than the margin on wine . Facing an expected single digit percent margin in the early 1980s, Coca-Cola sold its wine interests to Seagram.
Today, one of Coca-Cola’s bottlers in the Asia-Pacific region, Coca-Cola Amatil (CCA), owns a share in Yenda craft beer and Pressman’s cider. Last month CCA bought a stake in Feral Brewing. In addition, CCA brews and distributes Coors Light and Blue Moon in the region. CCA distributes other alcohol products, mainly spirits. In all, it’s estimated to hold about a 29 percent stake in the alcohol industry.
Of course, being a Coca-Cola licensed bottling company CCA is not the $199.6 billion market valued Coca-Cola Company, the world’s largest non-alcoholic beverage producer. Instead of alcohol the company recently invested in energy drinks like Monster and Keurig Green Mountain, Inc.
The Wells Fargo analyst claimed Coca-Cola can support roughly 5 to 6 percent organic revenue growth over the next several years and that its corporate culture and systems has the company poised for new growth .
Coincidentally, over the twelve months between October 2016 and 2017, U.S. domestic wine sales rose by 4 percent-a little lower than the Wells Fargo revenue growth expected for Coca-Cola, but close.
Still, as CEO Quincey must know, margin growth does not exactly follow revenue growth. Then again, the U.S. Senate tax bill proposes lowering alcohol taxes, one of the many reasons behind low margins.