The multinational enterprise, Coca-Cola, is the largest producers of non-alcoholic carbonated drinks globally and focuses on manufacturing beverage concentrates and selling different types of soft drinks like diet coke, Fanta, Sprite, Minute Maid, Del Valle, and Powerade made from the company’s concentrates. The company has also ventured into selling other drinks like Dasani water and Gold Peak tea and coffee. Coca-Cola’s headquarter is located in the United States. Coca-Cola is renowned for its strategic marketing strategies that have promoted its progress and commitment to meeting the demands of its customers. Like other multinational companies and enterprises, Coca-Cola also faces challenges affecting international businesses and strives to develop strategies to counteract factors like inflation, foreign exchange rates, and operation laws and policies in foreign nations. Coca-Cola protects itself from factors such as varying values of the dollar in different countries by sourcing most of its products locally, a strategy that also protects the company against exchange rate risks.
Pricing of Revenues and Costs
Coca-Cola concentrates on obtaining its raw materials from local suppliers across their operating territories an effort that promotes effective price control despite its focus on operation areas that are spread out in different counties with varying currencies. The company relies on the availability of agricultural ingredients from local farmers. Some of the key ingredients sourced by the company from local producers include natural sweeteners like cane sugar, beet sugar, high-fructose corn syrup, and stevia, fruit juices like apple, mangoes, and grapes, coffee beans, tea, soybeans, and dairy products, wood-based fiber packaging. The company has expanded its use of local ingredients thereby reducing the need to source raw materials from other countries, a strategy, which promotes its ability to control the revenues and costs of its products. The use of locally available products also eliminates the additional importation costs linked to sourcing raw materials from other countries (Coca-Cola Company, 2019). Coca-Cola’s use of local products is the main strategy applied in controlling prices of revenues and costs in the company.
Regarding currency denominations, aside from the use of raw materials sourced locally, the company also adheres to local authorities that regulate the percentage of taxes obtained from revenues and the costs linked to the company’s products. The prices of some of the raw materials in some countries are driven by local availability, importation duties, restrictions applied to trading activities conducted by multinational enterprises, market prices, and foreign exchange rate fluctuations. The national treasuries and the company’s procurement departments are jointly responsible for applying the relevant taxation policies and importation charges directed towards multinational companies. The company’s sales prices are denominated in the local currencies where their branches are located, while the costs of plastics used for packaging some of their beverages and aluminum cans are determined by or paid for using the U.S. dollar for reference (Coca-Cola Company, 2019; Witte & Ventura, 2014). As such, rises in the value of the U.S dollar against the currency of the other countries may lead to increases in the revenues and costs of raw materials incurred by the company.
Operations and Their Contributions
The Coca-Cola enterprise has different operations such as the Asia Pacific and Latin America operations that contribute to its financial income and profits. For instance, the operating income for the Latin America segment for the year that ended in 2018 and 2017 was $2,321 million and $2,218 million respectively while that of Asia Pacific for 2018 and 2017 was $2,278 and $2147 respectively (The Coca-Cola Company, 2018). In Latin America, the growth in the operating income reflected favorable market conditions for the company, growth in concentrate sales volumes of 1%, and increased product mix. This suggested that there was increased consumption of the company’s products in Latin America, which promoted the company’s profit margins. Similarly, in the Asia Pacific operation, the operating income between 2017 and 2018 significantly increased, which reflected the rise of concentration sales volume by 4% (The Coca-Cola Company, 2018). The rise in the operating income and the revenues obtained from the operations contributed to the consolidated profits of the multinational enterprise.
Exchange Rate Risks
Considering the widespread nature of the operations conducted by the company, Coca-Cola is exposed to a significant amount of foreign exchange risks and utilizes different hedging approaches to protect itself from the exchange rate risks. The main hedging approach used by the company to protect itself from foreign exchange rates entails using the company’s treasury policy, which applies a twelve-month forecasted transactional exposure within a defined coverage level of 25% to 80% coverage (Coca-Cola Company, 2019). In cases where the company utilizes forward exchange contracts that go beyond the twelve months, they can extend their contract to cover a certain minimum coverage period especially when the forecasted outcomes have a higher likelihood of happening. The company also focuses on localizing their operations to reduce the additional costs related to importing raw materials from other countries, which also functions as an effective hedging approach for avoiding additional foreign exchange rate risks (Coca-Cola Company, 2019; Oxelheim, Alviniussen, & Jankensgard, 2020). Where available the company also uses derivative financial instruments to reduce its net exposure to currency fluctuations.
Dollar’s Exchange Value
The increase or decrease in the dollar exchange value could affect the firm’s profitability. The foreign exchange rates affecting the company arise from adverse fluctuations in exchange rates between the euro, the US dollar, and the other non-euro countries where Coca-Cola Company’s branches are located. The company also faces transactional foreign currency exposures arising from alterations in the prices of raw materials obtained from different sources. Additionally, the company earns its revenues, pays expenses, incurs liabilities such as rent, and owns assets in countries that use different currencies such as the Yen and Mexican Peso. Decreases in the value of the dollar lower the purchasing power of the US dollar in other countries, which could negatively affect the profitability of the company (Jacque, 2013). On the other hand, increases in the value of the dollar promote its purchasing power, thereby increasing the profitability of the company especially in areas where the value of the currency is below that of the US dollar (The Coca-Cola Company, 2018). Fluctuations in the exchange rate currency have a significant effect on the company’s revenue and profits.
Increases and decreases in the dollar’s exchange value also affect the company’s profitability in cases where hedging measures have not been implemented or the coverage duration for the hedging contract has ended. In such cases, the company relies on market-based exchange rates to convert its funds to US dollars. For instance, in 2018, the company used seventy-two different currencies in addition to the US dollar and obtained an operating revenue of $20.5 billion from operations located outside the US. Since the company’s combined financial statements are usually presented in US dollars, the company had to translate the revenues, incomes, and expenses at exchange rates that affected their net operating revenues and value of different items denominated in foreign currencies in the balance sheet (The Coca-Cola Company, 2018; Kuchin, Elkina, & Draven, 2019). The effects of the fluctuations in the currency exchange rates were felt in the company in 2017 after the company experienced a 15% decrease in the operation revenues, which equated to $6,453 million. The effects of changes in the foreign exchange rates also led to a 10% or $3,554 million drop in company net operating revenues in 2018 (The Coca-Cola Company, 2018). The tables below illustrate the estimated impact of currency fluctuations on Coca-Cola’s consolidated revenues.
Table 1: Consolidated Net Operations for 2017 verses 2016
(The Coca-Cola Company, 2018).
Table 2: Consolidated Net Operating Revenues for 2018 verses 2017
(The Coca-Cola Company, 2018).
The Coca-Cola Company obtains its profits from its wide range of products and its extensive operations in different countries. As a multinational enterprise, the Coca-Cola Company faces numerous financial risks linked to the fluctuations of foreign exchange rates. The company uses different approaches such as forward exchange contracts, maximizing the use of local resources, and other options for hedging underlying exposures to the exchange rates of different countries. Since the companies headquarter is located in the US, the consolidated reports are usually presented in US dollars suggesting that the net operating revenues and profits are affected significantly by the variations in the foreign exchange rates. The success of the Coca-Cola multinational enterprise can be attributed to its use of effective hedging strategies.
References
Coca-Cola Company. (2019). Financing strategy. Coca-Cola Hellenic Bottling Company. https://coca-colahellenic.com/en/investors/debt-investors/financing-strategy/
Coca-Cola Company. (2019). Sustainable agricultural ingredients- The Coca-Cola Company. Coca-Cola Company. https://www.coca-colacompany.com/content/dam/journey/us/en/policies/pdf/sustainability/sustainable-ingredients-policy.pdf
Jacque, L. L. (2013). Management and control of foreign exchange risk. Springer Science & Business Media.
Kuchin, I., Elkina, M., & Draven, Y. (2019). The impact of currency risk on the value of firms in emerging countries. Journal of Corporate Finance Research, 13(1), 7-27. https://www.researchgate.net/publication/332814392_The_Impact_of_Currency_Risk_on_the_Value_of_Firms_in_Emerging_Countries.
Oxelheim, L., Alviniussen, A., & Jankensgard, H. (2020). Corporate foreign exchange risk management. John Wiley & Sons.
The Coca-Cola Company. (2018, December 31). United States securities and exchange commission form 10-K: Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934. The Coca-Cola Company. https://www.annualreports.com/HostedData/AnnualReportArchive/c/NYSE_KO_2018.pdf
Witte, M. D., & Ventura, L. (2014). An empirical examination of the currency denomination of trade. International Economic Journal, 30(1), 87-107. https://www.tandfonline.com/doi/abs/10.1080/10168737.2015.1103771.