It is the world’s largest beverage company, Warren Buffett’s most famous investment (and refreshment), and one of the most valuable and well-known consumer brands in the entire world.

It is a brand that has existed for over 125 years, with an illustrious history that has built equity with generations of consumers.

It is a brand that is recognized the world over as an American icon, sold and consumed in all but 2 countries.

We’re talking, of course, about Coca-Cola (KO), and what better company to investigate further for consumer brands month?.

It’s undoubtedly a world-class company, but is it also a world-class investment? It has been in the past, with a compound annual stock price increase of nearly 13% per year since 1962 (including dividends). But that has moderated substantially since the turn of the century, with the stock returning just 5.4% annually since 2000, which slightly trails the S&P 500’s 5.8%.

In this article, we will take a look at the company’s (possibly) surprising core business model, discuss the strength of its competitive advantages, and determine if the shares are worth owning today. Then wrap it up with our recently added Business Model Diligence rating. Let’s go!

The Company and Its Business

Invented by pharmacist John Pemberton in 1886 and commercialized by Asa Candler in the 1890’s, Coca-Cola is one of the oldest and most venerable of American consumer brands. It is the world’s largest beverage company by consumption, with nearly 2 billion servings consumed worldwide, every day. Coke products are sold in nearly every country in the world – indeed, over 80% of the firm’s revenues originate from outside its home of the United States! Without question, it is one of the (if not THE) most recognized brands in the world.

Coca-Cola’s revolutionary business model developed almost by accident. Candler didn’t believe bottling his drink had a big future, so he sold the bottling rights in perpetuity (with resale rights) to Ben Thomas and Joseph Whitehead in 1899. It was a smashing success, and Thomas and Whitehead sold portions of their rights to independent businessmen, and soon hundreds of bottling plants were springing up all over the U.S. All of them bought concentrates from Candler’s Coca-Cola Company, and Candler didn’t have to invest a penny in the expensive bottling and distribution operations!

Today, The Coca-Cola Company maintains a very similar business. About 40% of sales, 76% of unit volume, and over 100% of operating profits are from concentrate sales to independent bottlers. The concentrate business has a fantastic profit margin nearing 50%. Over time, the company has purchased some of its bottlers and brought them in-house to improve operations. In-house bottling today accounts for over half of sales, although they are only run at break-even profitability. From time to time, Coca-Cola has sought ways to re-franchise their in-house bottling operations and focus instead on the core business.