1 Pandemic’s Impact on Coca-Cola A Financial Statement Analysis Case The Situation The year 2020 will always be remembered as the year when an unexpected pandemic immobilized the world

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1 Pandemic’s Impact on Coca-Cola A Financial Statement Analysis Case The Situation The year 2020 will always be remembered as the year when an unexpected pandemic immobilized the world. The COVID-19 pandemic is an infectious disease that is exceedingly contagious (Centers for Disease Control, 2021). COVID-19 was first found in Wuhan, China, at the end of 2019, and in the next few months, it had already spread worldwide. The World Health Organization (WHO) officially declared COVID-19 a pandemic on March 11, 2020 (World Health Organization, 2021). Since then, there has been a total of over 53 million cases and 820 thousand deaths in the United States alone (Centers for Disease Control, 2021b). In response to the pandemic, there has been a worldwide shutdown that impacted all areas of life. The U.S. Bureau of Labor Statistics reported that the Pandemic shutdown caused about 56% of businesses to face reduced demand for their products or services (Bureau of Labor Statistics, 2021). The Coca-Cola Company is a global beverage business that distributes its product in multiple ways, including grocery stores, restaurants, movie theaters, and amusement parks (The Coca-Cola Company, 2022c). Many of these channels were closed due to Covid-19. The Stock Price for Coca-Cola fell sharply at the beginning of the Pandemic as seen in Figure 1. Figure 1: Coca-Cola Stock Price Source: Yahoo!Finance Coca-Cola's current Chief Executive Officer and Chairman of the board, James Quincey, would like to know how the company faired financially (The Coca-Cola Company, 2022a). Prepare a report of the COVID-19 pandemic's impact on Coca-Cola and any recommendations on facing some common challenges plaguing many beverage companies. 0 10 20 30 40 50 60 70 1/2/2018 3/2/2018 5/2/2018 7/2/2018 9/2/2018 11/2/2018 1/2/2019 3/2/2019 5/2/2019 7/2/2019 9/2/2019 11/2/2019 1/2/2020 3/2/2020 5/2/2020 7/2/2020 9/2/2020 11/2/2020 Stock Price in USD Date 2 Introduction to Coca Cola The first Coca-Cola was sold back on May 8, 1886, by Dr. John Pemberton in his Pharmacy, Jacobs's Pharmacy, for five cents a glass (The Coca-Cola Company, 2022b). Originally, Coca-Cola was made using coca leaf and kola nut, which inspired the name (Britannica, 2021). Pemberton marketed his drink as a remedy for common illnesses. Before passing away, Pemberton sold a majority of his business to another pharmacist Asa Candler, who then incorporated Coca-Cola in 1892. When Coca-Cola was first invented, about nine glasses were sold per day; by 1900 Coca Cola extended to every state (The Coca-Cola Company, 2022d). While distribution was done through fountain drinks only, in 1899, Coca-Cola negotiated with a bottling company which helped increase popularity and distribution. Coca-Cola's mission statement "is to craft the brands and choice of drinks that people love, to refresh them in body & spirit. And done in ways that create a more sustainable business and better-shared future that makes a difference in people's lives, communities, and our planet (The Coca-Cola Company, 2022e)." Today, the Coca-Cola Company has about 200 different brands sold in over 200 countries with more than 1.9 billion servings a day. Other than their flagship brand, Coca-Cola, they also sell other Sparkling flavors (such as Sprite and Fanta); Nutrition, Juice, Dairy and Plant drinks (such as the Simply brand and Minute Maid); and Hydration, Sports, Tea, and Coffee drinks (such as SmartWater, Powerade, FuzeTea, and Costa Coffee). They are ever-changing and growing their beverage portfolio by discontinuing brands that are not in demand and identifying product opportunities to fill in the gap. For example, in 2020, they launched their new product AHA, sparkling water with eight different flavors. They have also Beverage Industry Coca-Cola belongs to the non-alcoholic beverage industry, including carbonated and noncarbonated soft drinks, bottled water, and ice (First Research, 2021). In the Non-Alcoholic beverage, most of the revenue comes from soft drink sales (86%), as shown in Figure 2. Soft drinks are not only carbonated soft drinks (CSD) but also include sports and energy drinks, carbonated water, tea, and coffee drinks. Figure 2: Revenue of Non-Alcoholic Beverage by segment, 2019 Source(s): First Research Industry Profile Soft Drinks 86% Bottled Water 12% Ice 2% 3 First Research classifies the non-alcoholic beverage industry with low growth ratings because of the many challenges that limit its growth. Since geographical regions and different demographics vary in consumer taste, providing a product with high demand can prove challenging. Beverage companies also have significant expenses; the average soft drink manufacturers have a gross margin of about 30% of net revenue. Beverage companies have a high cost for manufacturing their product. Many material costs are expansive and can vary from time to time. High marketing spending is also required to promote the brand and product. Another challenge that the beverage industry faces, specifically the soft drink industry, is health and obesity concerns. Many health groups blame soda companies like Coca-Cola for contributing to the "obesity pandemic" in the United States. There have been calls to remove products in the school cafeteria in order to limit children's high sugar and calorie intake. Even sales for diet sodas have taken a hit. Even bottled water companies receive backlash from environmentalists and face lawsuits for their overuse of many communities' natural spring water. According to Statista (2021), in 2020, the non-alcoholic beverage industry earned a revenue of 1.038 trillion U.S. dollars, as shown in Figure 3. The industry receives its most significant share of revenue from the United States. It is estimated that the U.S. consumes about 145 billion liters of non-alcoholic beverages. Although this was a drop of 7.7% from the previous year, sales are expected to recover and continue to increase in the upcoming years. Figure 3: Worldwide non-alcoholic beverage market revenue from 2012 to 2025 (in million U.S. dollars) Source(s): Statista; Statista Consumer Market Outlook In terms of volume growth by different segments, there is an immediate rebound in 2021 after the pandemic, as seen in Figure 4. In the upcoming years, there seems to be a positive average growth of 2% across beverage segments. This positive outlook on the non-alcoholic beverage industry may be due to the number of opportunities presented to companies to innovate on their product. 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Sales in million U.S. dollars 4 Figure 4: Non-Alcoholic Beverage Market Volume Growth Worldwide from 2013 to 2026, by segment Source(s): Statista; Statista Consumer Market Outlook First Research (2021) has identified opportunities such as ready-to-drink tea and coffees, creating healthy alternatives, taking advantage of emerging markets like Latin America, and Ecommerce sales. Many companies are already tackling some of the challenges and accusations they face. They are veering towards more healthy drinking options such as sparkling water and using all-natural sweeteners. Many brands promote business sustainability and packaging their product in more environmentally friendly, recyclable material. In terms of sales, Anheuser-Busch is the leading beverage company with about 46 billion U.S. dollars in sales, as shown in figure 5 (Statista, 2021). With multiple mergers and acquisitions, Anheuser-Busch's portfolio holds over 405 of the beer market in the United States. Figure 5: Leading Beverage Companies Worldwide in 2020, based on sales Source(s): Statista; Beverage Industry Magazine -6% -4% -2% 0% 2% 4% 6% 8% 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Volume change Bottled Water Soft Drinks Juices 0 10000 20000 30000 40000 50000 Anheuser-Busch InBev Nestlé SA The Coca-Cola Co. PepsiCo Inc. Heineken N.V. Suntory Holdings Ltd. Starbucks Corp. Diageo PLC Keurig Dr Pepper Molson Coors Brewing Co. Beverage Companies Sales 5 Although Coca-Cola sits in third place of leading beverage companies with a sale of over 33 billion U.S. dollars, they are first for brand value in the non-alcoholic beverage brand industry. According to Statista, Coca-Cola's brand value is over 33 billion. This by far surpasses their next competitor Pepsico who has a brand value of 18 billion. Coca-Cola also outspends Pepsico in advertising its product. Coca-Cola has a majority share of the United States CSD market with about 45 percent, while PepsiCo has about 26 percent and Keurig Dr. Pepper about 21 percent. Figure 6: Most Valuable Non-Alcoholic beverage brands of 2020 (in million U.S. dollars) Source(s): Statista, Brand Finance Coca-Cola’s response to COVID-19 The COVID-19 Pandemic affected most businesses around the world, including Coca-Cola. Coca-Cola responded by supporting their stakeholders in the following ways: • Protect employees by allowing office employees to work from home and install all necessary and recommended safeguards in the production and distribution facilities. • Working with suppliers to make sure demands were met. They also accelerated 1billion dollars in payment to aid suppliers during the crisis. • Helping customers receive their product with limited contact delivery and boosting up ecommerce. They also rolled out their innovative touch-free fountain dispenser, allowing consumers to choose which Coca-Cola product they wished without contact. • Support communities by making large donations and producing hand sanitizer and personal protective equipment for first responders and healthcare workers. Discussion Questions Financial statement is provided in Exhibits 1 and 2 for the last 3 years. The industry averages can be found in Exhibit 3. Provide a summary of the issue that Coca-Cola face. Prepare a 3-5-page report that analyzes the financial condition of Coca-Cola. Included in the memo should be a section describing the 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 Coca-Cola Pepsi Red Bull Nescafé Monster Sprite Gatorade Dr. Pepper Mountain Dew Lipton 6 company’s liquidity, asset management, debt management, profitability, market value and your recommendations to Coca-Cola. Make sure that you include the heading of each section in your report. Also include the following financial exhibits in excel: o Vertical (common size) analysis of income statement and balance sheet o Horizontal (percent-change) analysis of income statement and balance sheet o Complete Ratio Analysis (for all 3 years) and Industry comparison. For each area, the students need to determine if the pandemic and strategic changes made have resulted in an improved and worsening financial position for the company. ? company’s liquidity, ? asset management, ? debt management, ? profitability ? market value Include any recommendation you can think of for this Coca-Cola going forward, especially in reference to the challenges they face. 7 KO Income Statement (In Millions) 2020 2019 2018 Sales 33,014 37,266 34,300 Cost of goods sold 13,433 14,619 13,067 Gross Profit 19,581 22,647 21,233 Selling, and administrative expenses 9,731 12,103 11,002 Other operating expenses 853 458 1,079 Operating Income (EBIT) 8,997 10,086 9,152 Non-operating income (loss) 2,189 1,646 23 Interest Expense 1,437 946 950 Earnings before taxes (taxable income) 9,749 10,786 8,225 Income Taxes 1,981 1,801 1,749 Net income 7,768 8,985 6,476 Additional Information Price 49.95 50.83 45.41 Shares Outstanding 4,295 4,276 4,259 Dividends 7,047 6,845 6644 DPS 1.64 1.60 1.56 Exhibit 1: Income Statement 8 Coca-Cola's Balance Sheet In million Assets 2020 2019 2018 Cash and cash equivalents 6,795 6,480 9,077 Short-term investment 4,119 4,695 7,038 Accounts receivable 3,144 3,971 3,685 Inventories 3,266 3,379 3,071 Prepaid expanses and other current assets 1,916 1,886 2,059 Total Current Assets 19,240 20,411 24,930 Gross plant and equipment 19,700 18,921 17,611 Less accumulated depreication 8,923 8,083 8,013 Net plant and equipment 10,777 10,838 9,598 Goodwill and other intangible assets 28,550 26,766 21,587 Other Assets 28,729 28,366 27,101 Total Assets 87,296 86,381 83,216 Liabilities and Equity 2020 2019 2018 Accounts Payable 3,517 3,804 2,719 Accrued Liabilities 609 1,021 1,280 Short-term Notes 2,990 15,528 18,838 Other Current Liabilities 7,485 6,620 5,945 Total Current liabilities 14,601 26,973 28,782 Long-term Debt 40,125 27,516 25,376 Other Liabilities 9,453 8,510 7,646 Deferred income tax liability 1,833 2,284 2,354 Total Liabilities 66,012 65,283 64,158 Stockholders' Equity: Common Stock 1,760 1,760 1,760 Paid-in capital 17,601 17,154 16,520 Retained earnings 66,555 65,855 63,234 Treasury Stock -52,016 -52,244 -51,719 Other Equity -14,601 -13,544 -12,814 Minority Interest 1,985 2,117 2,077 Total Equity 21,284 21,098 19,058 Total Liabilities and Equity 87,296 86,381 83,216 Exhibit 2: Balance Sheet 9 Ratios Industry Average Current Ratio 1.107 Quick Ratio 0.626 Total Asset Turnover 0.521 Fixed Asset Turnover 3.787 Days Sales Outstanding 32.038 Inventory Turnover 5.708 Liability to Asset Ratio 80.00% Times Interest Earned 5.802 Profit Margin 12.61% ROA 5.70% ROE 11.34% P/E 57.40 M/B 3.43 Exhibit 2: Industry Average 10 Britannica, T. Editors of Encyclopaedia (2021, June 21). The Coca-Cola Company. Encyclopedia Britannica. https://www.britannica.com/topic/The-Coca-Cola-Company Bureau of Labor Statistics (March 22, 2021a). Business response survey to the Coronavirus pandemic. https://www.bls.gov/brs/2020-results.htm Centers for Disease Control. (April 12, 2021a). Frequently asked questions. https://www.cdc.gov/coronavirus/2019-ncov/faq.html Centers for Disease Control. (April 12, 2021b). COVID data tracker. https://covid.cdc.gov/covid-data-tracker/#cases_totalcases First Research Industry Profile. (2021, October 18). Nonalcoholic Beverage Manufacturing. Retrieved from https://www-mergentintellectcom.ezproxy.uhd.edu/index.php/search/companyIndustry/965193472#. Statista. (2021, November). Non-alcoholic beverages worldwide. Retrieved January 6, 2022, from https://www.statista.com/study/10631/nonalcoholic-beverages-and-softdrinks-worldwide-statista-dossier/ The Coca-Cola Company. (2022). James Quincey: Chairman and Chief Executive Officer. https://www.coca-colacompany.com/company/leadership/james-quincey The Coca-Cola Company. (2022). The birth of a refreshing idea: Coca-Cola History. Retrieved January 7, 2022, from https://www.coca-colacompany.com/company/history/the-birth-ofa-refreshing-idea The Coca-Cola Company. (2022). The Coca-Cola System. Retrieved January 7, 2022, from https://www.coca-colacompany.com/company/coca-cola-system The Coca-Cola Company. (2022). The history of the Coca-Cola Contour Bottle – The Creation of a Cultural Icon. Retrieved January 7, 2022, from https://www.cocacolacompany.com/company/history/the-history-of-the-coca-cola-contour-bottle The Coca-Cola Company. (2022). Purpose & Company Vision. Retrieved January 7, 2022, from https://www.coca-colacompany.com/company/purpose-and-vision World Health Organization (March 24, 2021). WHO timeline - COVID-19. https://www.who.int/news/item/27-04-2020-who-timeline---covid-19 Yahoo!Finance (2022). The Coca Cola Company: Historical Data. https://finance.yahoo.com/quote/KO/history?period1=1514764800&period2=1609372800&inter val=1d&filter=history&frequency=1d&includeAdjustedClose=true References