With the introduction of a reformulated Sprite, Coca-Cola (NYSE:KO) is taking a risk with one of its important brands to find new ways to retain customers more sensitive than ever about the adverse health effects of sugar and sweeteners. Artificial sweeteners make up a significant portion of the soft drink market, and both Coke’s and PepsiCo’s (NYSE:PEP) last earnings reports revealed stagnant growth in major markets while emerging market growth is still proceeding apace. The need to find ways to stimulate demand in the US and Europe is becoming acute, and the drive toward higher perceived food quality is one vector to turn around shrinking margins.
Stevia, unlike aspartame, saccharin, or sucralose is an extract from a plant, and therefore carries the connotation of being natural, which is becoming more and more important in today’s food and beverage market. Ben & Jerry’s, a division of Unilever (NYSE:UL), made headlines recently with its pledge to eschew the use of GMO foods in its ice cream’s supply chain by 2015.
It is going to be cheaper to get a sip of Starbucks (SBUX) coffee in India than in any other neighboring countries in South-East Asia, including ones with stronger currencies like Singapore or Malaysia. The reason behind this is its local sourcing arrangement with Tata Coffee. India is the only country where Starbucks will not have to import a majority of its beans for its local stores. And the company assures customers that the taste will be the same as it is worldwide.
McDonald’s (MCD) and other U.S. chains promise the same things but it is rarely the case. The menu and coffee blends will be tailored to local tastes in order to be successful. Moreover, India is a place where price sensitivity is far higher than it is in other places. Add to that the extreme worry over opening up foreign retailers’ ability to compete locally and this local sourcing scheme kills a number of birds both political and organizational. I’m sure Starbucks looked at the regional backlash against Wal-Mart’s (WMT) potential entry into India after the relaxation of foreign ownership rules for retailers and made the prudent decision to integrate itself into the local supply chain rather than forge a completely new one.
Last year, when Starbucks (SBUX) announced its plans to expand into Vietnam by opening its first store in Ho Chi Minh City in February, it was part of its grander strategy to expand into emerging markets. In fact, Starbucks now predicts that within a couple of years, China will replace Canada as the company’s second biggest market after the U.S. The Vietnam expansion was welcomed by analysts because, unlike India, Vietnam is already a coffee loving nation and is the world’s second biggest coffee exporter – though mostly of Robusta which Starbucks does not normally serve. Yum Brands (YUM) is already operating in the country and has made expansion in emerging markets a focus of its growth strategy. The country now has also gotten the attention of Dunkin’ Donuts, owned by Dunkin’ Brands (DNKN), which has signed a franchise deal with Vietnam Food and Beverage Co. to open its first café in Ho Chi Minh City.
With the Dow Jones Industrials setting a record earlier in the week, I want to dip back in time a bit and look at one of its true bellwether stocks, Coca-Cola (NYSE:KO) who posted a 13% increase in profits this past quarter beating estimates by $0.01 but disappointed slightly on sales with its revenues increasing by just 3.8% to $11.46 billion. Investors should be concerned with Coke’s gross profit margin falling below the 60% threshold after staying above for more than two years. This may be a harbinger of a short lived rally for the Dow.
McDonald’s Corp (NYSE:$MCD), the world’s largest fast food chain, recently reported its results for the fourth quarter beating analysts’ estimates. Profit rose very slightly from $1.38 billion in 2011 to $1.4 billion in 2012. Quarterly earnings per share rose to $1.38 as net margins improved slightly on increased non U.S. margins. However, sales in the Japanese and European markets were soft, as would be expected with both areas in recession. Global comparable sales were essentially flat at +0.1%, which is statistical noise.
Peter Pham is an author, international fund manager, and a registered financial director by the Cayman Monetary Authority (CIMA). In 2013 he published his first book entitled, The Big Trade: Simple Strategies for Maximum Market Returns. He currently manages the portfolio of a global hedge fund and runs an asset management company, Phoenix Capital. (read more)
The Big Trade: Simple Strategies for Maximum Market Returns
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