Along the way, Coca-Cola stock has attracted the attention of a particularly noteworthy investor, billionaire Warren Buffett, whose Berkshire Hathaway began purchasing Coke shares in 1988. Today, after additional purchases and stock buybacks, Buffett's company controls 9.3% of Coca-Cola's outstanding shares, making it the largest shareholder in the beverage powerhouse. More broadly, Buffett's interest in Coke speaks to the powerful economics of its business model.
Coke's business model involves producing the syrups for its various beverages, selling those ingredients to its bottling partners, and heavily marketing their products to consumers. As you might imagine, making and selling some of the most coveted syrups on Earth is a fantastically lucrative business. Case in point, Coke's operating margins and return on equity consistently hover above 20%, at times substantially besting that figure. However, the beverage world has changed to a certain degree in recent years, which has created some questions about Coca-Cola stock's long-term prospects.
Image source: Coca-Cola.
Coca-Cola stock today
To be sure, Coca-Cola's economics remain absolutely fantastic. However, the company must find ways to address the likely continued decline of soda consumption, which recently hit a 30-year low in the U.S. The reasons behind this are complex and not unique to Coke.
With obesity affecting over one-third of the adult population in the U.S., fast-food and soft-drink companies have become targets of criticism from public-health experts. In fact, Coca-Cola cites "obesity concerns may reduce demand for some of our products" as the first risk factor in its annual reports. As should be expected, though, Coke isn't sitting idly by as the ground shifts underneath it. The soft-drink giant is hard at work implementing a plan it hopes will allow it to not just survive, but actually thrive in our increasingly health-conscious world.
No single, clean solution exists to fix Coke's problems, just several smaller ones. In 2007, Coke launched its "venturing and emerging brands" group, which has invested in or helped acquire a number of smaller, healthier brands like Honest Tea and Zico coconut water. The company has also decreased its portion sizes in some products, renegotiated contracts with its bottlers to help adjust for the changes in portion sizing, and initiated a $1 billion marketing program to help "reintroduce Coke into today's more health conscious marketplace."
Though Coke's reinvention plans are seemingly workable on paper, the analyst community isn't necessarily sold. The 22 sell-side analysts covering Coke see the company's sales falling, on average, 6% this year and a further 14.5% next year.
To be sure, it will likely take years for Coca-Cola to fully reorient its business; turning headwinds into tailwinds takes plenty of adjustment. However, thanks to its unbelievable brand strength, its dominant distribution network, and its exquisitely profitable products, Coke should have the resources necessary to adapt to changing consumer preferences and to continue to drive returns for its investors for years to come.
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Andrew Tonner has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
