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Integrated Company Analysis
Wisconsin School of Business
University of Wisconsin - Madison
December 14, 2009



Group A6
Peter Robbins
Alan Shepard
April West
Ryan Wilson
Kemllen Lee

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Academic Integrity Personal Statement



On our honor, we have neither given nor received unauthorized aid in completing this academic work.
Date: December 14, 2009


Peter Robbins: _____________________________________

Alan Shepard: _____________________________________

April West: _____________________________________

Ryan Wilson: _____________________________________

Kemllen Lee: _____________________________________



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Table of Contents
I. Executive Summary 4
II. Financial and Accounting Analysis 4
Financial Statement highlights 4
Valuation 5
III. Marketing Analysis 6
Competitive Analysis 6
Positioning and Needs Hierarchy 6
Customer Analysis and Segmentation 7
IV. Analysis of Recommendations 8
1. Increase and leverage Vitaminwaters innovative promotional techniques 8
2. Increase frequency of consumption 8
3. Expand Vitaminwaters portfolio of products to include functional foods 9
4. Continue Expanding Vitaminwaters presence in the Global Market 10
V. Conclusion 13
VI. Appendices 14
VII. Works Cited and Sources 39








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I. Executive Summary
Coca-Cola was founded in 1886 and is the largest global manufacturer, distributor, and marketer of non-alcoholic
beverages. The company purchased Energy Brands Inc., the parent company of Vitaminwater, for $4.1 billion in 2007 in
order to expand into the functional drinks industry, which includes beverages fortified with nutrients that provide additional
health benefits. The worldwide recession has not had an appreciable effect on the companys finances and we are very
optimistic for the companys future prospects, both with Vitaminwater and the firms overall growth.
Our purpose in this presentation is to give an overview of Coca-Cola's financial position and to provide
recommendations for Vitaminwater to increase its worldwide footprint. Expansion by acquisition is a relatively new
component of Coca-Colas strategy, and the company anticipates a high growth rate for the brand as a return on its
investment. As such, our following recommendations are geared towards promoting and expanding the brand toachieve this
goal:
Intensify the innovative promotional techniques that the Vitaminwater brand was founded upon
Increase the frequency of consumption among Vitaminwater consumers
Broaden Vitaminwaters portfolio of products to include functional foods
Continue expanding Vitaminwaters presence in the Global Market

II. Financial and Accounting Analysis
Financial Statement Highlights:
Coca-Cola is one of the worlds premier companies, and its financial statements reflect this position. The company
has a strong capital structure, with a relatively low level of debt (debt/equity ratio is 0.4) and a strengthening and growing
balance sheet over time. Operationally, the company has margins with both EBIT and EBITDA that are approximately ten
points above those of Pepsi, its closest competitor. Coca-Colas earnings strength is returned to shareholders via dividends (5
year average growth of 11.8%) and share buy-backs, with treasury stock increasing by over $10 billion since 2001.
(Appendix AA) Despite the recent macroeconomic turmoil, Coca-Cola has responded with strong financial performance,
incenting our positive outlook of the company over the next few years.
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Coca-Cola utilizes FIFO or average cost to value its inventories. The company does not have any off-balance sheet
financing vehicles. Its liquidity is considerable, and currently has approximately $9 billion of cash and cash equivalents. This
level has nearly doubled in the past year, indicating that the company may be preparing for future acquisitions or establishing
a strong buffer against any future financial difficulties. Advertising enhances and maintains the overall brand position, and
averages approximately 10% of revenues. Coca-Cola does not disclose its R&D expenses in its financial statements. In
general the degree of disclosure on specific financial issues, such as the performance of groups within the company, is not as
comprehensive as it is for competitors such as Pepsi. Coca-Cola does not break out financial results for Vitaminwater.
Coca-Cola acquired Vitaminwater in 2007 through its purchase of Energy Brands Inc. (also known as Glacau) for $4.1
billion in cash, increasing goodwill by $2 billion. Notably, goodwill in 2006 was only $1.4 billion; therefore, the purchase of
Vitaminwater represents an apparent shift in Coca-Colas strategic thinking with a move toward growth through acquisitions.
2009 US sales of Vitaminwater are estimated to be $531 million. We project Coca-Colas income statement for the
upcoming six years in (Appendix X).
Appendix F shows a breakdown of the selling price of a single bottle of Vitaminwater. Profit to resellers is on average
20%, and net income to the producer is 18.5%. The balance is split between cost of goods sold (33%, representing a higher
margin than Coca-Colas average of 36%), SG&A (38%), and taxes (6%). An average national selling price of $1.22 per
bottle indicates that pricing power by retailers is limited. There are occasions where retailers will have specials for $0.99 per
bottle, but this is effectively a loss leader. Supermarkets and mass merchandisers have lower margins than other retailers
(such as Walgreens and convenience stores), but sell approximately 90% of the product.
Valuation- Discounted Cash Flow Analysis:
We completed a six-year discounted cash flow analysis of Coca-Cola, which utilizes a regression model between
company revenues and US GDP at its foundation (Appendix EE). We determined that there are two areas of very strong
correlation: 1994-2006 and 2006-09, with 2006 being an inflection point (adjusted R-squared of 0.925 and 0.99 respectively
(Appendix U). We conducted a sensitivity analysis of baseline, bull, and bear scenarios using estimates of US GDP growth
from the Congressional Budget Office (CBO) in order to adjust for the varying degrees of economic recovery from the
current recession; the bull scenario represents a quicker recovery than expected whereas a bear scenario forecasts the
opposite. Projections of Capital Expenditures, Depreciation/Amortization, and Working Capital were based on various
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assumptions (Appendix BB). The long term average EV/EBITDA multiple is 15.9, so a conservative midpoint of 15.0 was
used for analysis, with sensitivity conducted on a range from 11 to 19. We also conducted a sensitivity analysis using various
discount rates (6-8%) based upon our calculated weighted average cost of capital of 6.96%. In arriving at that rate, we
determined the stock beta to be 0.56 following a regression analysis of the five-year weekly returns of Coca-Cola versus the
S&P Index (Appendix CC). This approach yielded a median valuation of $64.71, compared to the current price of $59.11.
Thus, we conclude with a buy recommendation for Coca-Cola.
III. Marketing Analysis
Competitive Analysis
Considering the Industrial Organization Framework suggested by Michael E. Porter, Vitaminwaters competitors
should be evaluated on different levels (Cite 5; Appendix A). Its primary industry competitors are Sobe Life Water, Snapple
Antioxidant Water, Function, and Propel. These products compete directly in the enhanced water market offering
comparable consumer attributes, including: high nutritional content, health and immunity boosters, and varying flavor profiles
(Appendix Q). Among their competitors, Vitaminwater rivals in price, but excels on taste, flavor variety, overall nutritional
content, and perceived health benefits (Appendix A, B, H, D respectively and M, J). Furthermore, taste has been found to be
the most important attribute in consumer purchasing decisions (11). Although Snapple is a fierce competitor on taste, it does
not signal comparable health benefits to consumers (Appendix D, J).
In addition to Vitaminwaters primary competitors, there are four categories of secondary competitors: close
substitutes including soda, water and sports drinks, suppliers with private labels, customers themselves making similar
products in their home, and new entrants to the market. Private label offers a serious point of concern for Vitaminwater
moving forward as some of Vitaminwaters primary retailers have their own private label products, which they have
strategically placed and promoted at shelf (Appendix O). Another major concern is the ever-present threat of new entrants to
the enhanced water market. Given the evolving tastes and preferences of consumers, there is a credible risk of new products
entering the market and capturing market share. Vitaminwater can continue to grow in this competitive environment by
targeting consumers from these secondary competitors and signaling that Vitaminwater is a tasty, healthier alternative.


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Positioning and Needs Hierarchy
In the enhanced beverage industry, Vitaminwater is currently positioned as a trendy drink that hydrates consumers
while providing essential nutrients missing in typical diets. This positioning has proven extremely successful and we
recommend leaving it unchanged. We do recommend investing further in the communication of this positioning to increase
the strong brand equity Coca-Cola has established with the Vitaminwater brand.
In addition to maintaining the successful positioning, it is important that Vitaminwater moves up the needs hierarchy
in the minds of the consumer (Appendix G). Vitaminwater must maintain a positive relationship with its consumers so that
the brand represents something more than just nutrient-enriched water. Ultimately, the consumer needs to move to the top of
the needs hierarchy and know that they are a better and healthier person because they have experienced the Vitaminwater
brand. Once consumers have reached this state, it will be extremely challenging for competitors to compete with
Vitaminwater.
Customer Analysis and Segmentation
The primary target market for Vitaminwater has largely consisted of young, trendy consumers between the ages of
15-34 and has proven extremely successful thus far. Mintels market research data corroborated the 18-24 year-old consumer
segment as an optimal target by finding that this age group was twice as likely to use functional beverages as those 65 years
and older (11). As a result, it is essential for the Vitaminwater brand to continue to direct its primary marketing efforts to
these young trendsetters.
In analyzing potential secondary markets for Vitaminwater, parents and the Hispanic market appear to be the most
favorable. According to Mintel, households with children have a 12% greater likelihood of enhanced water product
purchases than those without (11). By targeting parents, the key decision makers of their childrens daily food and beverage
consumption, Coca-Cola can indirectly reach consumers below their primary target. These younger consumers will be
exposed to the products at an early age and may ultimately become brand loyal in the future. Finally, the Hispanic market is
expected to grow more than any other in the next five years and also represents the highest percentage of functional beverage
consumption within the ethnic groups (60% of Hispanics consumed a functional beverage within 3 months).


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IV. Analysis of Recommendations
1. Intensify the innovative promotional techniques that the Vitaminwater brand was founded upon
Vitaminwater continuously reinvents itself with ever-changing commercials and a relentless promotional reach. A
Vitaminwater advertisement can range anywhere from a Kobe Bryant versus Lebron James challenge to 50-Cent directing an
orchestra. These offbeat messages have been tremendously successful in creating a high level of brand awareness. Perhaps
the most consistent aspect of the companys promotional message is that it is constantly transforming through different
methods and mediums. Vitaminwater has recently begun advertising through social networking sites, including Facebook and
Myspace. The Facebook page has been an extremely successful contact point that lists over 1 million fans. Facebook is
also partnering with Vitaminwater on a flavorcreator contest and is serving as the host for Vitaminwater advertisements for
the new Twilight movie New Moon (Appendix E). These diverse advertising strategies have effectively connected with the
15-34 year-old target market. To date, Vitaminwater has performed exceptionally well in adapting to the ephemeral winds of
popular trends that influence its target demographic; but the company must rise to meet this constant challenge if it hopes to
maintain a strong presence within this consumer segment.
As such, we recommend that Vitaminwater increase its 2008 $50 million advertising expenditures and continue
promoting the Vitaminwater brand (Appendix L). In 2009, a number of smaller competitors are expected to withdraw
advertising and consumer promotions spending following a decrease in the enhanced water category (11). Vitaminwater
should exploit this opportunity by increasing the breadth of their longstanding innovative messaging to consumers throughout
all outlets.
2. Increase the frequency of consumption among Vitaminwater consumers
Vitaminwater is currently the market leader in the enhanced beverage category; however, there are great
opportunities to increase the frequency of consumption. Only 33% of consumers in the functional beverage category
presently consume these products on a daily basis (11). 60% of consumers in the functional beverage category indicate that
they would consume these products more frequently if the product were less expensive. (11). If improvements were made to
the current packaging of Vitaminwater, there is a strong chance that an increase in consumption frequency would ensue
(Appendix N).
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By increasing the availability of larger Vitaminwater packing sizes at mass-merchandisers and grocery stores, the
company could elevate the frequency of consumption as consumers would have larger quantities of Vitaminwater products
available at discounted prices. Additionally, by bottling 12-ounce drinks in the standard 6, 12, and 24 packing sizes of the
soda industry, Vitaminwater may be able to convert more soda consumers from the higher sugar and calorie content to
healthier beverage choices. Moreover, smaller bottling sizes are ideal for daily lunches, which could further position
Vitaminwater as the healthy alternative for parents to trust. A final advantage for packaging more Vitaminwater into larger
sizes results from the decrease in price per ounce, ultimately providing a value incentive to the consumer.
Another option to enhance daily consumption is to strategically increase product placement. In particular,
Vitaminwater could leverage its Vitaminwater10 product line through strategically placed vending machines. Recently, new
vending machine laws have been adopted in some states that prohibit the sale of sugary beverages in school vending
machines (4). Vitaminwater could take advantage of this opportunity and create partnerships with schools offering vending
machines with the Vitaminwater10 product.
3. Broaden Vitaminwaters portfolio of products to include functional foods
The ongoing obesity crisis in America has led to an increased awareness of health and wellness. In fact, the
American Heart Association found that in 2006, 66.7% of the adult population was overweight or obese, resulting in 54% of
adults are watching their diet (11). Ultimately, the crisis has shifted consumer-buying patterns towards purchasing healthier
products and focusing on nutritional value. In order to maintain revenues, many beverage companies that traditionally relied
upon soda and sugary drinks are carving out new drink categories and diversifying their product ranges (12). While Coca-
Cola successfully established a position in the enhanced water market with its Vitaminwater product line, consumers were
concerned with Vitaminwaters sugar content (2; 11). To combat this criticism, the company released the Vitaminwater10
product, which has proven to be a great alternative for consumers interested in lower sugar content. In order to continue
growth within this consumer market, Coca-Cola should focus on expanding their portfolio of products to include other
products that consumers will value as healthy options or alternatives, in particular functional foods, which contain increased
nutritional value (Appendix P).
Mintel examined the consumer buying relationship between functional beverages and foods finding that 92% of
functional beverage consumers also consumed functional foods, while 84% of functional food consumers consumed
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functional beverages (Appendix C). Coca-Cola could leverage its health and wellness Vitaminwater brand to launch new
functional food products under the Vitaminwater label. To support a new product line, Coca-Cola could utilize its current
food production facilities involved in producing Odwalla. In particular, Coca-Cola could develop functional foods such as
vitamin-enhanced snacks, or Vitaminsnacks, to add to its current product portfolio. Vitamin-enhanced fruit snacks would
likely be a product line extension from the Vitaminwater brand, further signaling health benefits to consumers. This is
especially true considering the products current reliance on fruit flavors to support product variety.
There is an array of different products that Coca-Cola could add to its portfolio of products, but in order to properly
leverage the Vitaminwater brand, Coca-Cola needs to ensure that the product line extension is consistent with the positioning
of Vitaminwater. New products should be designed to focus on adding healthy attributes to traditional snack foods and
positioned in the same manner as Vitaminwater. The healthy attributes of the new products should replicate at least some of
the other attributes in which consumers found value within the original Vitaminwater product line, such as great taste, added
vitamin and mineral content, and an extensive product assortment. In alignment with our recommendation to increase daily
consumption while carving out a substantial piece of market share, Vitaminsnacks should be priced competitively, packaged
to enhance daily use, and placed in locations where snack purchases are highest.
A potential issue that Coca-Cola might face in expanding its portfolio to include functional foods might be whether
the Vitaminwater brand can actually support the new Vitaminsnacks products. However, due to the high correlation in
consumer buying habits of functional beverages and foods, as well as the recent health shift in consumer buying patterns,
Vitaminwater should be capable of supporting these additional products. A potential distortion in the Vitaminwater brand is
an important issue to consider. Nevertheless, by utilizing the same attributes that originally differentiated Vitaminwater and
by promoting these new products to the same target segment, Coca-Cola can avoid distorting the brands equity.
4. Continue expanding Vitaminwaters presence in the global market
Vitaminwaters unique characteristics as enhanced water have the ability to boost Coca-Colas share in the global
market. The global bottled water market is split into several segments (Appendix R) and the functional water segment
captures 2.4% of the $77.6 billion global water market. Presently, Coca-Colas market share in the bottled water industry is
7.20% (Appendix S) against competitors such as Nestle (16.00%) and Groupe Danone (9.70%). The global bottled water
industry has a projected value of $106.4 billion in 2013, an increase of 32.7% since 2008. In addition, the market volume
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relating to consumption of bottled water products is forecasted to increase from 132.6 billion liters per year to 181.2 billion
liters per year (Appendix T). Vitaminwaters brand combined with Coca-Colas current infrastructure could be the perfect
recipe for expansion in the global marketplace. In most developing countries, bottled water is regarded as a safer alternative to
tap water and consumers are drawn to alternatives that afford the functional attributes of water while also providing additional
nutrients and a portfolio of flavors. As such, we recommend that Vitaminwater use Brazil and Thailand as entry points to
subsequently further extend its brand into South America and Southeast Asia.
To start, Brazil is a country in love with fruit and colour. (9). Vitaminwater can benefit from this cultural mindset
and while utilizing the bounty of natural resources available within the country to produce Vitaminwater with local flavor
profiles. In Brazil, the juice concentrate business holds a prominent place in the non-alcoholic beverage market; however,
this secondary competitor is experiencing a decline in sales as consumers, who now have greater disposal income, move
towards ready-made beverages. Vitaminwater can leverage its functional attributes as both a hydrating source and as a
nutritionally enhanced product to capitalize on this movement and further capture market share within the global bottled
water industry.
The functional beverage category has seen an influx of global competitors in Brazil such as AmBev (Brazils Pepsi
bottler), which launched the low-calorie functional beverage, H2OH! Although this product has a first entrant advantage in
this category, it is under legal scrutiny. (10) Although these lawsuits seem problematic for functional water in Brazil, they
have actually created greater recognition for the category, resulting in sales increases. Moreover, due to the increased level of
awareness coupled with the future 2016 Olympic Games in Rio de Janeiro, Vitaminwater could position itself as Brazils
leading functional water. Given Coca-Colas operational capacity, distribution partners, and economies of scale, this is an
opportunity to create barriers to entry for other multinational corporations who may consider moving into the South American
functional water market.
This global expansion is not only limited to the Americas but also represents an opportunity for continued growth in
Asia, more specifically Thailand and Vietnam. The per capita consumption of soft drinks in major Asian countries continues
to grow and both Vietnam and Thailand are among the top 10 markets in liters consumed perhead (6). Additionally, the
value sales growth of functional beverages is set to exceed the 2013 forecasts due to the continued trend of healthy, conscious
products that create larger margins (12). Vitaminwater could maximize this opportunity and expand from its initial launch in
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Shanghai to become a major player in the Asian functional beverage market against its global competitors. By leveraging its
expansive distribution network within, Vitaminwater can explore how best to capture the diverse palettes in these regions and
respond with playful and fruity flavor profiles.
Both the Americas and the Asia-Pacific region can present several challenges within the category of functional
beverages. Issues such as sourcing, bottling facilities, and distribution channels can have financial and public relations
implications. With Latin America moving towards a more sustainable agricultural model, Brazil has an abundance of secure
and clean water sources that will continue to remain stable and dependable; whereas in Thailand and Vietnam, the
opportunity lies in developing stronger distribution channels and securing access to safe water systems. Both Vietnam and
Thailands population centers are becoming urbanized and yet are still close to large water resources. With favorable
government policies actively supporting the development of value-added production and manufacturing, the distribution
channels are more easily accessible. The strong consumer interest in healthy beverages throughout these countries and the
addition of research and development support from China, Vitaminwater is poised to be a strong performer on the global
stage.
V. Conclusion
We believe that our recommendations will form the basis for strong continued growth for Vitaminwater and will
substantially contribute to the future financial success of Coca-Cola. Successful execution of these strategies will have a
long-term effect of validating Coca-Cola's decision to increase its market presence via the purchase of Vitaminwater.
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varlable AssumpLlons:
8evenue CrowLh -
1) 8ased on uS Cu esLlmaLes from Lhe Congresslonal 8udgeL Cfflce (C8C).
2) Plgh growLh relaLlonshlp from 2006-09 regresslon ls assumed Lo conLlnue unLll 2012. 1he moderaLe growLh
relaLlonshlp from Lhe 1994-2006 regresslon ls assumed Lo resume afLer 2012.
3) 8asellne case dlrecLly uses C8C pro[ecLlons.
4) 8ull case assumes growLh of 23 greaLer Lhan C8C pro[ecLlons for 2010 - 2012.
3) 8ear case assumes growLh of 23 less Lhan C8C pro[ecLlons for 2010 - 2012.

CaplLal LxpendlLures -
8ased on 6.2 of revenues. 1hls changes based on dlfferenL scenarlos.
uepreclaLlon and AmorLlzaLlon (u&A) CrowLh -
8ased on a precedlng 3 year rolllng average of neL &L, wlLh LoLal u&A per year seL aL 13.3 of Lhe average.
llxed AssumpLlons (L8l1 Margln, Changes Lo Worklng CaplLal) -
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33


Append|x CC
kegress|on Ana|ys|s - Coca-Co|a vs. S& S00

Append|x DD
WACC Ana|ys|s

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