Coca-Cola Company

The Coca Cola Company, (NYSE: KO), based in Atlanta, GA, is the world’s largest multinational beverage company, with over 90,000 employees worldwide. Coca-Cola is the foremost producer of nonalcoholic beverage syrups and concentrates and has sales in over 200 countries. Additionally they own non-controlling interests in dedicated bottling companies and distributors worldwide, such as Coca-Cola Enterprises, which purchase solely Coca-Cola syrups and concentrates, and account for a significant portion of their revenues. Due to their wide global operations, Coca-Cola currently trades in over 70 functional currencies, with weaknesses in some currency markets offsetting strengths in others to effectively hedge to some degree against overall loss of revenue. Generally, currency exchange poses both opportunities and risks for the Coca-Cola Company, with their exposure in multiple markets offering a great deal of protection against naturally occurring fluctuations in currency in normal market conditions.

Coca-Cola earns revenues, pays assets, incurs debts, and owns capital operations in these different currencies, with 74% of their net operating revenues arising from operations outside of the United States, (Coca-Cola, 2009). Coca-Cola revenue is therefore heavily dependent upon foreign exchange markets with the exchange value of the U.S. dollar affecting their overall net operating profits, though they consolidate most of their foreign currency exposures which allows them to net certain currency risks and take advantage of natural offsets between currencies. Even so, in 2009 their net operating revenues were down 5% predominantly due to currency fluctuations. The strength of the U.S. dollar against the Euro, the British Pound, the Mexican Real, the Australian Dollar, the South African Rand, and the Brazilian Real negatively affected Coca-Cola’s 2009 earnings in Europe, Eurasia, Latin America, and in Africa, with the only substantial gain in their net operating revenues witnessed in their North American market, (in the Pacific the weakness of the dollar against the Japanese Yen and their hedging activities somewhat mitigated their foreign exchange exposure and some gain was realized), (Coca-Cola Company, 2009).

The euro was strongest against the U.S. dollar in February of 2009 with an average of € .78 to $1.00, the euro engaged in a gradual decline in the intervening months ending with November 2009 being the weakest month at € .67 to $1.00, and showed only a relatively minor increase in December at € .68 to $1.00, (OANDA). As the dollar increased in value last year, the rest of the world basically followed the same model with the few exceptions. As such, not only were Coca-Cola’s European revenues were severely affected as the dollar value of net operating revenues that were denominated originally as Euros decreased, but so were their net operating revenues decreased in most other foreign markets. As there profits are particularly dependent upon their chief bottler and distributor, Coca-Cola Enterprises, CCE, which operates globally and experienced the same foreign exchange scenarios, their net operating profits were affected by CCE’s decreases as well. As a result, The Coca Cola Company’s 2009 net operating revenues were $30,990 million, while their 2008 net operating revenues were $31,944 million, indicating a decrease of $1,004 million, or roughly 5%, (Coca-Cola Company, 2009). In the first four months of 2010 the euro is rallying against the dollar, though it still has not reached the February 2009 exchange rate, it has climbed from an average of € .70 to $1.00 in January to its current average for April of € .74 to $1.00. This continued appreciation of the euro against the U.S. dollar would be beneficial for Coca-Cola in 2010 in the European market as we would witness the reverse phenomena; the value of Coca-Cola’s profits in euros would increase. If in fact this phenomenon holds for the rest of the global economy then Coca-Cola should see substantial increases in net operating revenues from their global operations in 2010.
The company regularly enters into forward exchange and currency options to some degree, principally against the Japanese Yen, and the Euro, to hedge against currency fluctuations and these transactions mitigated their currency exchange losses to some extent. However, considering the strength of the U.S. dollars performance in virtually every global market, these forward exchanges, currency options, and other hedging practices were not adequate to protect their net income and earnings per share in 2009.









References:

Average Exchange Rates. (n.d.). OANDA Corporation. Retrieved from http://www.oanda.com/currency/average

Coca-Cola Company. (2009). 10-K Annual Report 2009. Retrieved from SEC EDGAR website http://www.sec.gov/edgar.shtml