The Coca-Cola Company Value Drivers - Case Study Example

The Coca-Cola Company Comprehensive Case 3: Value Drivers Finance 311 By: Qing Wu Table of Contents I. Executive Summary II. Value Drivers A. Water Reduction B. Capital structure efficiency improvement C. Energy efficiency improvement III. Risk Assessment 1. Market Risk—Foreign Currency Translation 2. Macro-economic risk---channel mix 3. Management Risk—Investment Change IV. Outlook V. Appendix VI. References Executive summary There are several changes that have been made by the Coca Cola Company in the last few years that have added value to the company in the long run. Due to the criticisms leveled against the company for overusing the local water, it has adopted water stewardship programs. In 2012 the company saved 0.58million cubic metres of water by the help of this program (Bodden 75-9). This value adder’s cubic metres were computed from the financials that were from the four quarters in 2012. The total amount of money that was saved by the company is shown by the calculations in the table below. The table shows the amount of cubic metres saved each quarter, the average amount of dollar that is saved per quarter together with the total amount saved for the whole year from the water usage reduction. The second value adder available for the company is the efficiency in capital structure. In 2012 the company saved $42M in interest expense as a result of low borrowing costs and ability to raise funds at low effective costs (Petretti 56-63). The total amount of money that was saved by the company from this value adder is further shown in detail by the respective table. The table shows the metrics saved in the 2010 through to 2013, the average amount of dollar that is saved per year together with the total amount saved on average for the whole year 2012 from the low cost borrowing. The last value adder for the Coca Cola Company is the electricity efficiency improvement, which focuses on how to improve the company’s electricity usage efficiency. A look at the period (2010-2013) shows that the company is saving $ 2.74 for every kilowatt-hour per terabyte. This value adder’s metric was calculated using its financials of the years 2010 to 2014 as well as Atlanta’s commercial user’s electricity cost or price. The table shows the cost of electricity used by the company as well as the effect on shareholders’ value. A thorough and extensive research conducted on the company also revealed some inherent risks that the company needs to address. The Coca Cola Company borrows funds and it is therefore subject to interest rate fluctuations and investment changes. These fluctuations pose a risk on the company and may therefore lead to sudden changes of the Coca Cola expenses. In addition, the company possesses marketing risks that can considerably impact its image. The company needs to address these threats for it to be successful in the future. First Value Driver: Water Reduction The Coca Cola Company adopted water stewardship in 2012. This program has resulted to a considerable reduction in the cubic metres of water usage. The company’s total water consumption in the year 2012 was 8.82million cubic metres. It reduced from 9.4million cubic metres in the year 2011. This represented the lowest water usage ratio ever achieved by the company. The water stewardship program resulted to a much more efficient usage of water thereby saving 0.58million cubic metres of water in 2012. In last year, the consumption was 8.52million cubic metres resulting to a saving of 0.32million cubic metres in 2013(Bodden 75-9). The total cubic metres of water saved is taken and then divided accordingly to determine the savings of cubic metres per quarter. The resulting value is multiplied by the average water price per cubic metres for water in 2012 according to water Webster is $0.53 per cubic metres. Finally, total quarterly savings is calculated and a summation of the total savings is created. The table below demonstrates the savings the Coca Cola saved in the year 2013. The savings leads to an increase in value as a result of more efficient asset usage and cost reduction from the water stewardship. See appendix A. Value Driver A). 1st quarter 2nd quarter 3rd quarter 4th quarter Cubic metres saved 80000 80000 80000 80000 Mᶟ*average price $42400 $ 42400 $ 42400 $ 42400 Gross profit margin Increases Increases Increases Increases Operating expenses Reduces Reduces Reduces Reduces Earnings per share Increases Increases Increases Increases Effect on shareholders’ value The value increases The value increases The value increases The value increases Total savings in 2013 $ 169600 *Appendix A. Value Driver A By adopting the water stewardship, the company saves $ 169600. As a result of this initiative, there is value addition to the shareholders. The reduced expenses, on the other hand, increase the gross profit. Second value driver: Capital structure efficiency improvement The company’s capital structure intends to optimize their cost of capital. The Coca Cola’s strong capital position enables it to get access to key financial markets thereby making it able to get funds at low effective cost. They are also able to get finance at low borrowing cost. The low borrowing cost, low effective cost and strong capital position provides them with a competitive advantage (Fernando 45-7). The company’s cash flow therefore increases as a result of low interest expense from low borrowing and effective cost consequently, adding value to the stockholders. The effect of low interest expense is shown in the table below. 2010 2011 2012 2013 Decrease in interest expense $24 $182M $42M $13M Gross profit margin Increase Increase Increase Increase Earnings per share Increase Increase Increase Increase Effect on Stockholder Value The value increases The value increases The value increases The value increases *Appendix A. Value Driver B Third value driver: Energy efficiency improvement This is the company’s last value driver. In order to improve efficiency in energy consumption by the company, environmental performance of its coolers and vending machines has been improved. The company has also developed energy management devices that have also helped in the reduction of electricity usage by up to 35%. To achieve this, usage patterns are monitored and the lights and temperature are adjusted in order to maximize efficiency. The company retrofitted ENERGY STAR standards with more than 10,000 pieces of equipment by the year 2010(Cohen, pg. 70-75). The company also employs LEDs and Energy Management System (EMS). When compared with convectional fluorescent tube lighting, the LEDs last longer and use less energy. The EMS is energy saving devices that are fitted to machines and reduces energy consumption by 30%. The company has fitted well over 5000 EMS units up to date. 2010 2011 2012 2013 Kilowatt hour/Terabyte 64.746 52.647 51.666 47.742 Avg. price/ kilowatt hour 4.87 cents 5.23 cents 5.26 cents 5.64 cents Value in dollars $3.15 $2.75 $2.71 $2.69 Sales, general, administration expenses Decrease Decrease Decrease Decrease Gross profit margin Increase Increase Increase Increase Earnings per share Increase Increase Increase Increase Effect on shareholder values The value increases The value increases The value increases The value increases *Appendix A. Value Driver C The company is capable of saving more money through the energy system that it has adopted. From 2010 to 2013 the electricity prices have increased from 4.87 cents per kilowatt-hour to 5.64 cents per kilowatt-hour. In the year 2010, the energy efficiency for the company was 64.746-kilowatt hour per terabyte that translates to $6.84. In 2013, even though the electricity price increased to 5.64 cents, the company only used 47.742-kilowatt hour per terabyte, which translates to $2.69 in dollar value. Sales, General, Administration expenses. The significant decrease in the cost of kilowatt-hour per terabyte makes the company to save their sales, general and administration expenses (Bodden &Valerie, pg. 123) Gross Profit Margin The decreasing COGS increases the company’s Gross Profit Margin year by year. Earnings per Share The increase in gross profit margin results to an increase in Earnings per share. Effect on Stockholder Value (adding value) The increase in Earning per Share adds the stockholder’s value. Potential risks Marketing Risk – Foreign Currency Translation Even though the Coca Cola Company expends high marketing efforts, it still has several marketing risks such as fluctuations in foreign currency exchange rate, impacts of changes in interest rates, changes in corporate tax rate and changes in commodity prices, equity and investment. Due to the company’s international business, the most important risk is the foreign currency translation. The primary translation exposure of the Coca Cola Company was to Japanese Yen, the Euro, the British Pound Sterling, the Indian Rupee and the Australian Dollar. The company therefore entered into cross currency swaps in the following currencies so that its sales can be maintained or even increased. The company also fixed a future principal payment and interest in U.S. dollars. This interest rate fluctuation basically affects a company’s profit considerably. This therefore means that the company must employ appropriate strategies to translate foreign currency and also to adjust fluctuation in exchange rates so that its performance in the market can be maintained (Reuvid 176). Macro-economic risks: channel mix The company basically depends on independent wholesalers and retailers to distribute their products in certain countries. The increase in their concentration can therefore harm their ability to compete and lower their profitability. Further, the consumers increasingly switch to at-home consumption thereby subjecting the company’s immediate consumption channel to undue pressure. In 2012, the trend continued thereby forcing many restaurants, café and hotels segments to go out of business. In a bid to curb this situation, the company has increased its presence in the discounting and in addition, it is working closely with its customers so that they can identify an opportunity for join value creation. This will help keep the company in business Management Risk- Investment Changes In order to implement the above named strategies so that the inherent risks can be gotten rid of, the company has a risk management team. The company has several investments in assets all over the country. The company has set aside a special management team charged with the responsibility of ensuring that the inherent risks are taken care of. Outlook/Assessment of company as a whole The company should identify ways to decrease their long term borrowing due to the exposure to the risks of investment change and interest rate change (Albrecht et al 116-8). This will reduce their worry about the fluctuations in the rate of interest. The above listed value drivers helps decrease sales, general, and administration expense due to reduced electricity cost, interest rate expense and capital structure efficiency. The value drivers can better help the coca cola company to meet its long-term debt. The company’s return is also increased from its investments in the public equity market. Appendix A Value Driver A Formulas 320000/4= 80000 cubic metres saved 80000*0.53= $ 42400 Value driver B Difference in interest expense 2010 2011 2012 2013 349=610=$ 261M increase 610-428=$182m decrease 428-386= $42m decrease 386-373=$13m decrease Value driver C 1. The Georgia’s commercial electricity price from 2010 to 2013: 2010 2011 2012 2013 Commercial price(Cents per kilowatt hour) 4.87 5.23 5.26 5.64 2. Value in dollar: kilowatt/ terabyte * commercial price 2010 2011 2012 2013 Formula 64.746*4.87 52.647*5.23 51.666*5.36 47.742*5.64 Value in dollar $3.15 $2.75 $ 2.71 $2.69 3. Gross Profit Margin↑ = Revenue→ – COGS↓ Revenue → *Electricity is used into everywhere including the products storing which is one of expense under COGS. 4. Earnings per Share EPS ↑= Profit ↑/ Weighted average common shares Works cited Albrecht, W S, Earl K. Stice, and James D. Stice. Financial Accounting. Mason, OH: Thomson/South-Western, 2007. Print. Bodden, Valerie. The Story of Coca-Cola. Mankato, MN: Creative Education, 2009. Print. Fernando, A C. Business Ethics and Corporate Governance. Delhi: Dorling Kindersley (India), licensees of Pearson Education in South Asia, 2010. Print. Petretti, Allan. Petrettis Coca-Cola Collectibles Price Guide: The Encyclopedia of Coca-Cola Collectibles. Cincinnati: F+W Media, 2011. Internet resource. Reuvid, Jonathan. Managing Business Risk: A Practical Guide to Protecting Your Business. London: Kogan Page, 2013. Print. Cohen, Nevin. Green Business: An A-to-Z Guide. Los Angeles: Sage Publications, 2011. Print. Read More