Coca-Cola (NYSE:KO)’s Sales Are Declining Due To Changing Trends

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By Hanson So on December 12, 2014 Consumer Staples

The phrase “economic moat” signifies a company’s competitive advantage in terms of the pricing power, brand strength and other assets that give an edge to a company over its rivals. One company that holds an economic moat is Coca-Cola (NYSE:KO). The example of the company is often used for economic moat.

The Coco-Cola (NYSE:KO) brand is worth $81.6 billion. This is close to half of the market capitalization of the company. This makes the brand the third most valuable in the world. Two years ago it was on the top of the list of valuable brands. This brand strength allows Coca-Cola (NYSE:KO) to have big profit margins. The profit margins are over 17%. The huge distribution network of Coca-Cola (NYSE:KO) is another advantage to the company. This geographical footprint allows the company opportunity when it acquires other brands of beverages.

The economic moat that made Coca-Cola (NYSE:KO) successful now represents a risk. Over the past decade, the people of U.S.’s tastes have changed and health concerns have increased. As a result, the sales of carbonated drinks have seen decline over these past few years. The core markets, Europe and Mexico, have also seen decline. This decline in fizzy drinks has been compensated by the company in the form of acquisition of Monster Beverage, Keurig Green Mountain. The decreasing sales of the world-leading beverage brands – Coca-Cola and Diet Coke – will pose problems for Coca-Cola (NYSE:KO).

As powerful as an economic moat is, it has big disadvantages. Economic moat only gives a company an edge within own industry. In the event of a disruptive innovation or a huge change in the people’s tastes, the companies with huge economic moats will suffer the most. These companies are the biggest in their industries and will be tied to the old models.

Eastman Kodak had an impressive economic moat some time ago. In 1991, the company reached its peak at $25 billion revenue. The company was a leader in the camera film that was very profitable and built on the blade model. By the fiscal 2012, the company’s revenue had fallen to $4 billion. Eventually, they declared bankruptcy. The company’s huge success in the industry of camera films was the reason why it found it so difficult to move to digital. This success meant that the company had a lot to lose. As digital photography came out into the public, the need for camera film was eliminated.

A decade ago, the video-rental business was at its peak with $5.9 billion Today, there are no revenues or stores for the business. Coca-Cola (NYSE:KO) is facing a threat because of the changing consumption habits of the people. The volumes of Diet Coke and Coca-Cola are also declining. This presents concerns to investors of the company. Coke can use smaller brands for growth outlets but they wont be able to acquire the weight of Coke or even Diet Coke. Cracks are emerging in the armor of Coca-Cola (NYSE:KO). Hoowever, it will be long before the company goes out of business.