Why Coca-Cola Is Finally Getting Into the Booze Business
Source: http://fortune.com/
By DAVID MEYER
March 7, 2018
The Coca-Cola Company sells a lot of different beverage types, from water and milk to iced tea and many, many permutations of flavored sugar-water. However, alcohol has never been on that list-until now.
The company is going to start selling an alcopop, or Chu-Hi, exclusively in the Japanese market. The low-alcohol drink, also known as Chuhai, is essentially a watered-down mix of the shochu spirit plus flavoring.
But those outside the Japanese market shouldn’t get too excited about seeing alcoholic Coke products on their shelves. According to an interview with the company’s Japan president, Jorge Garduño-actually published a couple weeks back on Coca-Cola’s corporate site, though no-one seems to have noticed until now-this is very specifically a Japanese thing.
“The Chu-Hi category is found almost exclusively in Japan,” Garduño said. “Globally, it’s not uncommon for non-alcoholic beverages to be sold in the same system as alcoholic beverages. It makes sense to give this a try in our market. But I don’t think people around the world should expect to see this kind of thing from Coca-Cola.”
Coke’s Japanese business is unusually experimental, trying out 100 new products on average each year. Along with the new Chu-Hi, the firm will this year also launch the excitingly-named “THE TANSAN,” which Garduño said “features the strongest carbonation ever in our products in this country, to reach health conscious adult sparkling lovers.”
Last year, it launched a version of Coke with added fiber, called Coca-Cola Plus, with Japan’s ageing population in mind.
“While many markets are becoming more like Japan, I think the culture here is still very unique and special, so many products that are born here will stay here,” Garduño noted.
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Coca-Cola (KO): So You Want to Start an “Evolution”? KO Launching Alcoholic Drink in Japan
Source: Jefferies International Limited
March 7, 2018
Rating HOLD
Price Target $49.00
Price $43.93
Bloomberg NYSE: KO
Key Takeaway
KO plans on introducing a sparkling alcoholic beverage in Japan. While noteworthy given it marks KO’s first foray into the alcohol space, we view it as more evolutionary than revolutionary, consistent with KO’s openness to emerging categories outside of its core. We see limited impact on KO/Euro brewers/bottlers for now, but see the news as supportive of our positive view on FEVR. We like the moves afoot at KO, but see valuation as full at 25x EV/ULFCF.
KO Japan to introduce an alcoholic drink, the first in the co.’s history: The WSJ reported that KO plans on experimenting with a canned drink that contains alcohol in Japan. The article noted that the offering will compete in a category called chu-hai, where a distilled grain-based alcohol is mixed with flavored carbonated water. KO has historically focused exclusively on non-alcoholic beverages w/ the news emblematic of KO’s greater openness to risk-taking w/its portfolio strategy under CEO James Quincey. The article notes both strong competition (Suntory/Kirin) and fast growth in the chu-hai category (+9% in 2017) in Japan, w/ volumes of 183M cases, vs. >29B cases for KO and >1B cases for KO Japan.
More evolutionary than revolutionary: While certainly noteworthy, we do not view KO’s experimentation in a sparkling alcohol category in one geography as revolutionary, but consistent w/ its evolving portfolio strategy. Mgmt noted on its 1Q17 call that in the US and Japan KO has “a broader portfolio, and [the co.] continu(es) to invest and expand across categories and even within categories.” CEO James Quincey would not rule out entering alcohol categories when asked in November; however, despite KO’s openness to explore categories outside its core, we believe it would be a misplaced view to suggest that this morning’s news indicates a meaningful pivot for KO into the alcohol space more broadly.
Implications for European brewers under coverage: Whilst KO’s entry into alcoholic drinks would seem to pose a direct threat to brewers given its strong distribution network, we view the potential impact as limited to Japan for now. Per Mr. Garduno (KO Japan president), “I don’t think people around the world should expect to see this kind of thing from Coca-Cola.. many products that are born here will stay here”. Note that European brewers exposure to Japan is <1% of profits for ABI, Heineken and Carlsberg.
Bottlers’ appetite to expand into growing segments, including premiumization and adult sparkling: With KO’s openness to adjacent categories increasing, we would also highlight CCE’s effort to reposition Schweppes as a premium mixer as reflective of the attractive dynamics in “adult soft drinks”. CCE’s mgmt recently noted KO’s efforts to bring in new brands and innovations for growth, with mixers offering attractive trade-up potential. In our view, the Fever Tree portfolio would strengthen a soft drink co.’s portfolio offering within the premium mixer sub-category.
Fever Tree (BUY) investment thesis: FEVR is a unique asset that offers a leveraged play on premiumization trends in spirits in a sub-category where there is a disconnect between premium spirits and an increasingly commoditized mixers category. We see growth in tonics driving a standalone value per share of 2500p and bake in a further 500p on a 20% probability FEVR can capitalize on the non-tonic mixers category. While our Buy case is not predicated on FEVR as a take-out candidate, this opportunity could provide support for the shares. We note a potential dis-synergy in the UK, where the market leading bottler (CCEP) has ownership of the brand rights to Schweppes. Therefore, any potential acquisition should be considered within the context of widening sales of FEVR internationally.
KO (HOLD) investment thesis: We maintain a positive bias on CEO James Quincey’s vision to make KO a more nimble, leaner, and consumer-centric co. focused on accelerating growth. The co.’s global leadership is talented and its shared vision for KO’s path forward apparent. A lot to like here and Quincey is clearly the right leader at the right time for KO; however, at 25x EV/ULFCF (~10% prem. to peers) KO’s valuation looks full.