Warren Watch: Coke challenged to retain fizz amid changing consumer tastes

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Posted: Sunday, July 21, 2013 12:00 am

Coca-Cola Co. is one of Berkshire Hathaway Inc.'s longtime investments, but changing tastes and concern about soft drinks contributing to obesity may signal a decline in its market, the Globe and Mail of Canada reported.

Coke blamed unusually wet weather in North America in June and sluggish growth in China and Europe for disappointing earnings in the latest quarter. Coca-Cola's second-quarter profit was down 4 percent, and its revenue was down 2.6 percent.

“Especially in the United States, it must deal with growing concern that sugary beverages may be a factor in obesity,” wrote Brenda Bouw for the Globe and Mail. “Outside of the U.S., where 80 percent of Coca-Cola's products are sold, sales are flattening.”

Berkshire owns about 400 million shares of Coca-Cola stock. The share price hit an all-time high on May 16 at $43.09, making Berkshire's 8.9 percent of Coca-Cola worth $17.2 billion. Every dollar change in the price means a $400 million swing in the market value of Berkshire's Coke stock.

Since then, the price has been as low as $39.13, on June 20, but was back above $40 last week.

Coke has diversified into tea and lower-calorie drinks in response to consumers' tastes. CEO Muhtar Kent said the company was “not happy” with its performance but called the second-quarter results an anomaly and not a trend.

Berkshire CEO Warren Buffett attended Coca-Cola's annual meeting in the spring and said, “I wouldn't think of selling a share” of the stock. In an on-stage discussion at the meeting, Kent asked Buffett about the factors that make businesses succeed or fail.

“The biggest thing that kills them is complacency,” Buffett said. “You want a restlessness, a feeling that somebody's always after you, that you're going to stay ahead of them. You always want to be on the move.

“And when you've got a great business like Coca-Cola ... the danger would always be that you rest on your laurels. And I see none of that, obviously, at Coca-Cola.”

After the latest earnings report, Paul Gardner, a partner and portfolio manager at Avenue Investment Management in Toronto, said Coca-Cola's value must grow if the company expects investors to pay prices that are relatively high in relation to its profits and dividends.

Longtime shareholders like Berkshire may have benefited in the past, he said, but “you have to go forward and the world is evolving out of carbonated drinks. What's the next 20 years going to be like? It's going to be very challenging.”

But analyst Thomas Mullarkey of Morningstar wrote that Coke's “long-term prospects look bright, and we view the current market price as an attractive entry point.”

BYD to supply electric shuttles

BYD Inc., the Chinese company 10 percent owned by Berkshire, is touting a contract it won last week to supply 35 electric buses to shuttle airport passengers at the Amsterdam Schiphol.

The buses, which use iron-phosphate batteries, go on duty in about a year and are intended to give the airport a new emission-free image, reduce maintenance costs and improve air quality.

BYD said the winning bid indicates it can compete for electric vehicle business in Europe, where airports are turning to electric taxis and buses to reduce pollution. BYD's European headquarters is in Rotterdam, Netherlands.

The 39-foot-long buses can travel about 150 miles on a charge, and about 200 of them are in use in Shenzhen, China. Earlier this year, BYD was certified to sell the buses in Europe.

India insurance business ends

Berkshire's office in India has stopped online auto insurance offered by Bajaj Allianz General Insurance.

Bajaj Allianz, a venture by India's Bajaj Finserv and Germany's Allianz SE, did not give a reason, but Indian Express cited an unidentified source as saying the online insurance business had failed to take off with customers.

That means Berkshire is essentially closing its insurance business in India, the Daily Business of India reported, even though India is trying to attract foreign investments to boost its economy.

Buffett visited India in 2011, partly to acquaint business leaders there with Berkshire. Berkshire India opened its insurance agency to sell Bajaj Allianz policies later that year.

Other recent foreign pullouts from India include two steel makers who dropped plans for new plants.

The Omaha World-Herald Co. is owned by Berkshire Hathaway Inc.

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