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Why Buffett Likes The Coca-Cola Company (KO)… and Not Just the Drink

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A friend of mine was recently telling me about his investment in The Coca-Cola Company (NYSE:KO). Then, he went on to say that he knows investors who match nearly every one of Warren Buffett’s investment decisions; after all, my friend said, Buffett is a legend. Our conversation prompted a question: why does Buffett chose some firms over seemingly worthy competitors? After some analysis, I now know some of the reasons why The Coca-Cola Company (NYSE:KO) is a Buffett classic.

Warren Buffett

The types of companies Buffett likes

Through his holding company Berkshire Hathaway Inc. (NYSE:BRK.A) -A)-B), Buffett champions companies with sustainable competitive advantages that provide long-term value to investors and consumers. As the world’s largest beverage company and leading manufacturer and distributor of non-alcoholic beverages, The Coca-Cola Company (NYSE:KO) fits the bill. In fact, it comprises about 18.5% of Berkshire Hathaway Inc. (NYSE:BRK.A)’s $88 billion enterprise.

A sustainable enterprise

According to its 2012 annual report, The Coca-Cola Company (NYSE:KO) boasts the largest global distribution system of any company in the world. Of the estimated 57 billion beverage servings consumed daily across the globe, 1.8 billion servings bear trademarks owned by or licensed to The Coca-Cola Company (NYSE:KO). The Coca-Cola Company (NYSE:KO)’s reach covers over 3% of all liquids consumed, including water, soda, energy beverages, alcohol, and other Dr Pepper Snapple Group Inc. (NYSE:DPS) inks. It is everywhere.

Interestingly, as described in its annual report, some beverage companies depend on Coke and rival PepsiCo, Inc. (NYSE:PEP) to distribute their products. For example, in 2010 Coke paid Dr Pepper Snapple Group Inc. (NYSE:DPS) $715 million to obtain the distribution rights (in this case, the ability to sell the products) of its Dr Pepper Snapple Group Inc. (NYSE:DPS) and Canada Dry brands throughout the U.S. and Canada. The contract lasts for 20 years and includes renewal options for Coke. Overall, Dr Pepper Snapple Group Inc. (NYSE:DPS) relies on Coke and PepsiCo, Inc. (NYSE:PEP) to distribute more than 50% of its product volume annually. This is significant because Dr. Pepper Snapple Group’s success depends, in part, on Coke and PepsiCo, Inc. (NYSE:PEP).

Coke is also efficient. For example, it used to follow an outsourcing model where it sold its syrups to independent bottling companies that would produce, bottle, and distribute the end products. However, after seeing PepsiCo purchase bottling companies in 2009, Coke followed suit. By fully integrating their business processes, both firms streamlined their manufacturing, distribution, and marketing systems, which resulted in greater economies of scale and cost reductions.

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