It’s no secret that The Coca-Cola Co (NYSE:KO) is desperately looking for ways to grow — or at least not stagnate and wither like an untended flower. Consumers — especially U.S. consumers — are increasingly shunning soda as anti-obesity campaigns take hold and a certain degree of health-consciousness has entered the zeitgeist.
Arch-rival PepsiCo, Inc. (NYSE:PEP) has felt the pain, too. Neither company has grown sales by more than 3% annually since fiscal 2011.
Both KO stock and PEP stock have wildly underperformed the S&P 500 Index over the last five years. KO stock is up 40% since the start of 2011; PEP stock’s up 67%. The S&P 500? How’s a cool 82% return sound?
Traditional soda sales in North America, the single largest market for both Coca-Cola and Pepsi, just aren’t cutting it anymore. So KO and PEP are increasingly looking to new product lines and geographies for growth.
And Coca-Cola made a recent acquisition that achieves both goals, giving KO more exposure to the world’s second-largest economy and diversifying into a type of product it’s not widely known for: healthy drinks.
Coke and China Culiangwang: A Match Made in the Board Room
KO reached terms on Friday to acquire the beverage business of China Culiangwang, an Asian company that makes “multigrain drinks” with obscure flavors like red bean and walnut and oats, at an enterprise value of $400 million.
With sales volumes down 3% in China in the fourth quarter, KO stock could use a boost from the country with the fastest-growing middle class in the world. At the end of the day, China Culiangwang has one core attribute that the iconic Coca-Cola does not: growth. Earnings from China Culiangwang’s multigrain business were up 17% in 2014.
Coca-Cola is trying to remedy its recent slump by adapting to shifting consumer tastes on its own: In November, the company launched Coca-Cola Life, a low-calorie cola sweetened naturally with stevia leaf extract, a departure from the traditional artificial sweeteners typically used in diet drinks.
But increasingly the $177 billion company is forced to grow through acquisitions. Last year, KO entered into a cash-and-swap deal that transferred $2.15 billion and Coca-Cola’s energy drink brands to Monster Beverage Corp (NASDAQ:MNST) in exchange for a 16.7% stake in MNST stock and global distribution rights to Monster’s portfolio.
Since then, rumors have swirled that KO may actually acquire the rest of MNST stock in an M&A deal, as Monster’s sizable share of the growing energy drink market makes it an attractive buyout target.
As for the move by KO to acquire a small-time Chinese health drinks business, it won’t immediately move the needle on the KO stock price. But it’s likely indicative of Coca-Cola’s broader growth strategy: Find out where growth exists, then buy its way in.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
