Coca Cola Abstract

Topic Abstract: Coca-Cola in Emerging Markets

1

September 5, 2015 Dear Delegates and Moderators, Welcome to the Coca-Cola in Emerging Markets committee! In a few short months, delegates will join other members of the Coca-Cola in Emerging Markets committee to discuss and respond to the issues facing one of the most popular and recognizable brands in the world. The document included here is a ‘topic abstract’ for the Coca-Cola in Emerging Markets committee at NAIMUN LIII. Here, you will find information and avenues for further research on the topics we will be discussing during the conference. The intent of this abstract is so that you may begin research and have an understanding of the material that will be discussed in this committee before a full background guide is released. Use these abstracts to help you focus on understanding the issues at play in each topic and the ways in which they may interact with the programs and goals of this committee. We hope to assist you in any way possible in the lead-up to NAIMUN, so if you have any questions, comments, or concerns, please contact the Chair or CM– Aaron Lewis and Gus Campbell– directly at [email protected] and [email protected]. Best, Aaron and Arnosh Aaron Wen Secretary General Arnosh Keswani Director General


2

The Topics

The Effects of Currency Exchange Rates in Emerging Markets Since the summer of 2014, the United States Dollar (USD) has been “gaining in strength” relative to other currencies, most notably the Euro. After approaching $1.40 US per €1.00, the Euro has plummeted relative to the USD, with the exchange at approximately $1.10 US per €1.00 as of this writing. While this may sound like a net positive for U.S. consumers, and it very well might be – especially for those traveling to Europe – there is a varying effect for businesses that operate globally, including Coca-Cola, which does more than half of its business abroad. With the strength of the United States Dollar seeming to grow daily, businesses are more inclined to sell to U.S. consumers. This trend necessarily does not affect businesses that operate purely in the domestic sphere, but for those businesses that conduct some percentage of its business abroad, there can be large consequences. If a business has a majority of its sales abroad, margins will tighten as the cost to do business abroad grows. Due to this situation, corporations may be less inclined to invest capital abroad. Coca-Cola recently reported earnings for the second quarter of 2015 (2Q15) and currency headwinds had an 11% impact on operating income and 6% on earnings per share (EPS). Including the impact of currency fluctuations, Coca-Cola’s revenue increased 4% in 2Q15, but including the impact of the fluctuations, revenue actually decreased 3.3% from the comparable quarter of the year prior. Clearly, currency movement is having a massive impact on the corporation. According to company management, currency fluctuations in Europe, as well as in emerging markets, will continue to have a large impact on the firm for the rest of the year. Competing in the Face of Health-Related Scrutiny and Increasing Regulations The Coca-Cola Company is awash in questions over health concerns brought on by their products. In both the United States and global markets, the drink maker’s primary products are facing challenges when the topic of health is brought up. Soda sales have been in decline for the past ten years in the United States, pushed down largely on health concerns. This decline has spread outside the United States, as fear over sweeteners used in the cola giant’s flagship products worry consumers. When compared to another soda giant, Pepsi Co, Coca-Cola derives much more of its revenues abroad directly from soda beverages, at 75%. With so much of their business abroad being vulnerable to health concerns, changes seem appropriate. Still beverages such as iced tea and water are growing in popularity at a much


3

faster rate than their soda counterparts, and both consumers and the scientific community are accelerating that shift. This problem is obviously severe, and finding a solution is an equally serious topic. Whether it is research, product changes, or investments in diversifying beverage options, each possible solution to health-related concerns has its own host of problems. Most recently Coca-Cola came under a large amount of scrutiny for funding controversial research by the Global Energy Balance Network. This non-profit pushes the idea that activity levels, and not caloric intake, are the primary contributor to obesity levels. This kind of unwanted negative media attention only serves to amplify the question of how unhealthy soda beverages may be. Along with concerns over sugar and caloric intake, the Coca-Cola Company’s use of alternative sweeteners such as aspartame and stevia also raises questions. Although these two sweeteners have largely been cleared for use across the globe, they face historic and consumer-based questions. Stevia, a sugar substitute extracted from the leaves of a plant native to South America, was only accepted for use as an additive in the European Union as of 2011. In the past two years, Coca-Cola has been pushing a new product named Coke Life, with a focus on the use of natural sweeteners and reduced calories. This may be in response to other health concerns around artificial sweeteners used in Diet Coke and other diet sodas. Diet Coke, which is sweetened with aspartame, had previous held the title for the second most popular soda in the United States since 2010, but it was overtaken by Pepsi this year. The diet cola’s decline in the US was mirrored abroad, as total global Diet Coke sales dropped by seven percent in the second quarter of this year. Additional Considerations The two topics on the docket for debate, while both increasingly important for Coca-Cola moving forward, are but a small slice of the challenges that the company faces quarter-to-quarter. It is our expectation that delegates of this committee will come in with a diverse background of experience about not just Coca-Cola, but also about the global marketplace, about Coca-Cola’s peers (i.e. Pepsi Co., Snapple Dr. Pepper, amongst others), and fiscal policy in the United States and abroad. Important topics to take note of nationally include Federal Reserve rate policy, stock market movements, currency strength, and health policy. Important topics to consider internationally include banking policies in nations and regions including, but not limited to, Latin America, India, and China; health concerns related to


4

sugared beverages in the aforementioned regions, and the relative popularity of Coca-Cola in these markets relative to other brands.


5

Resources for Further Research

Understanding The Coca-Cola Company • Coca-Cola Company. A Short History of the Coca-Cola Company, 2011.

http://assets.coca-colacompany.com/7b/46/e5be4e7d43488c2ef43ca1120a15/TCCC_125Years_Booklet_Spreads_Hi.pdf

Understanding the Overall Business Climate • O’Reilly, Lara. “The end of the Coke era.” Business Insider, April 8, 2015.

http://www.businessinsider.com/what-is-the-future-for-the-coca-cola-brand-soda-sales-decline-2015-4

Understanding Quarterly Reporting • Investing Answers. “Quarterly Report.” Investing Answers,

http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/quarterly-report-2475

Understanding Currency Fluctuations • Lessard, Donald, and John Lightstone. "Volatile Exchange Rates Can Put

Operations at Risk." Harvard Business Review, 1986. Accessed July 27, 2015. http://hbr.org/1986/07/volatile-exchange-rates-can-put-operations-at-risk.

• Athavaley, Anjali. “Coca-Cola Announces Growth Plan as Profit Falls 14 Percent.” Reuters, October 21, 2014. http://www.reuters.com/article/2014/10/21/us-coca-cola-results-idUSKCN0IA19T20141021.

Modern Media Sources

• The Wall Street Journal is the preeminent American daily on business movements. • The New York Times offers extensive coverage of the global public markets, especially

through the Business section, DealBook • The Financial Times will provide you with business news focused on the foreign

markets. • Other resources include:

o The Economist o Bloomberg Businessweek o Barron’s


6

o Fortune o Time Magazine

Documents

Coca Cola Abstract