Coke's Muhtar Kent says acqusitions needed for growth - is he right?

Posted May 14th 2008 1:05PM by Steven Mallas
Filed under: Coca-Cola (KO), PepsiCo (PEP)

According to an article on Reuters, Coca-Cola (NYSE: KO) is feeling the pressures of the flat domestic marketplace. COO Muhtar Kent, who will soon become the CEO, said in comments at a speaking event in Japan that Coke will be evaluating an acquisition strategy to grow the long-term prospects of its beverage business.

Now, this doesn't mean that a large purchase or merger is on the horizon, but it does mean that shareholders can expect, according to Kent, small, targeted asset buys. He did, however, specifically state that the company isn't giving up on organic growth, either, in its quest to expand its presence in beverages and beat back the ongoing threat of enemy number one, PepsiCo (NYSE: PEP).

He better not be giving up on it. Coke's stock recently retreated from its 52-week high of $65.59 to a price, as of noon today, of $56.37. The stock has done well over the last year, and this could be considered a normal consolidation. However, there has been a lot of buzz lately about Coke's domestic weakness.

I wrote a piece back in February on the issue. What concerns me most is that Coke might give in to temptation to either make a large purchase or too many small ones. I continue to be behind the rationale that brought Glaceau and Vitamin Water to Coke's portfolio, but I, as a shareholder, am none too keen on any acquisition even remotely approaching that multibillion-dollar scale. I don't think this will happen, but I want Kent's mantra to center on organic, rather than inorganic, expansion of sales. The Glaceau buy is still young, and it will be many years before that company's brands are fully leveraged to Coke's maximum benefit, so Kent might as well concentrate on that recently-acquired asset.

It all comes back to marketing. Put more resources into ad campaigns, viral initiatives on the web, and new packaging designs. Don't give up on trademark Coca-Cola. Yes, the company will need to continue expanding into coffee, waters, and juices, oftentimes at the expense of an acquisition or a joint venture, but look to organic growth of carbonated sodas via intense advertising programs. It'll be tough, but the Coke brand is still tops in the eyes of many, and that is a great advantage.

Disclosure: I own shares in Coca-Cola; positions can change at any time.

Tags: Beverage industry, BeverageIndustry, Coca-Cola, Coke, Glaceau, inthenews, KO, Muhtar Kent, MuhtarKent, PEP, PepsiCo, Vitamin Water, VitaminWater