November 15, 2020 - 10:25pm EST by
2020 2021
Price: 258.47 EPS 0 0
Shares Out. (in M): 9 P/E 0 0
Market Cap (in $M): 2,427 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 3,390 TEV/EBIT 0 0
Borrow Cost: General Collateral

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According to Wikipedia, humans appeared around 300,000 years ago in Africa and began to exhibit evidence of behavioral modernity at least by about 100,000–70,000 years ago. For the vast, vast, vast majority of that time, they have systematically gravitated towards consuming food of increasing quality, food that is more easily digestible, with an attitude around food that favors sustainability, availability and longevity. They also rejected, probably quite quickly in most cases, food that made them sick, and indeed educated younger generations to avoid such food.

Until the 20th century, that is.

Around a century ago humans started to systematically consume increasing amounts of unhealthy food and convince each other to consume it (marketing), to the point of creating giant powerful publicly-traded purveyors of what is essentially slow-killing poison.

Around the 1990s a reversal of this trend began. I will argue is this write-up that today, in 2020, because of the health-related ordeal we are currently going through, as well as other factors, that reversal is ripe for acceleration. Furthermore, there are many countries that have not yet begun to reverse (lots of Ems) who will now reverse. I believe COKE is exposed to this trend (and is more vulnerable than KO) and will experience multiple contraction when things turn for the worse. I think COKE will then suffer from various other misfortunes that happen to companies that are shrinking, like good talent leaking away. This short position that can be accumulated over time following market rallies. There is inflation risk so I recommend pairing it with an inflation hedge of your choice. Following the occurrence of important catalysts, COKE’s should reprice closer to the low-end of its EV/revenue range (say to 0.5x – 0.55x) and then decline further. Right now it trades at around 0.68x.


Sugar in our Society

Human consumption of sugar (and refined sugar especially) rose wildly as a function of various advancements in society. In Europe and America this occurred quite a long time ago whereas in places like Papua New Guinea it only exploded in recent decades, as they got exposed to our way of life.

Here are a few passages from Jared Diamond’s The World Until Yesterday to illustrate what we’re talking about:

During those early years in New Guinea I never saw a single obese or even overweight New Guinean”

..all of them resembling slim western body-builders”

The non-communicable diseases that kill most First World citizens today – diabetes, hypertension, stroke… [ ]… were rare or unknown among New Guineans living in rural areas”… [ ] … “even among those who did live into their 60s 70s and 80s”.

Already in 1964 the new killers of First World citizens were beginning to make their appearance in New Guinea.. among those populations that had the longest contact with Europeans and has begun to adopt Western diets and lifestyles”.

Today.. that westernization is in a phase of explosive growth. In cities, towns, and westernized environments, one commonly sees overweight and obese New Guineans. Heart attacks are now reported among city dwellers.”

Of the world’s eight countries with national diabetes prevalences above 15%, every one is either an Arab oil-producer or an affluent island nation”.

Non-communicable diseases associated with the Western lifestyle offer perhaps this book’s most immediately practical example of the lessons that can be extracted from traditional lifestyles”.

That last statement is huge if you consider everything that is contained in the book. And then his section on diabetes is also interesting:

Around the year 1700, sugar intake was only about 4 pounds per year per person in England and the U.S., but it is over 150 pounds per year per person today. A study of U.S. eights-graders showed that 40% of their diet consisted of sugar and sugar-yielding carbohydrates. [Diabetes] is the cause of over $100 billion of American health costs annually (15% of our costs due to all diseases combined).”

Diabetes and its symptoms decline or disappear in populations under starvation conditions, such as French diabetes patients under the severe food rationing imposed during the 1870-1871 siege of Paris”.

Although Yemenite Jews were almost free of diabetes upon reaching Israel, 13% of them became diabetic within two decades”.

So clearly sugar has not been helpful to our health, clearly it has spread all over the planet, and so it probably doesn’t have that much growth ahead.

For the virus we’re dealing with, it is no secret that two types of people are more vulnerable to dangers from the virus: older people, and those with certain preexisting conditions. What are these conditions? Here’s an article:

In the weeks since, a number of studies and anecdotal reports have pointed to obesity being a notable risk factor for COVID-19—and often the primary risk factor for younger patients. This month, Kass and two Hopkins colleagues gathered preliminary findings from six ICU units around the United States, concluding in a Lancet report that "in populations with a high prevalence of obesity, COVID-19 will affect younger populations more than previously reported."

This risk is particularly relevant in the U.S. because the prevalence of obesity is around 40%, compared to a prevalence of about 6% in China and 20% in Italy.

I think the message is that you need to treat obesity seriously as a pre-existing condition that increases your risks for COVID-19. Maybe you didn't consider that because you're young, and thought of this as an old person thing. But no—if you're obese and you're 25, or 35, or 45, you have a risk factor and you should be appropriately careful.

What about from the physician's standpoint?

As physicians, we've become somewhat inured to obesity in our country since there's so many people with BMIs of 35 and up and you start thinking of it almost as normal. But this doesn't take away the medical realities. With COVID-19, it means your patients with high BMIs may need more medical attention, and their symptoms should be taken seriously—maybe they come for in-person care sooner. This patient needs to be considered as you would others with pre-existing risk factors.


Right now all eyes are on a vaccine – this is true among the people and on Wall Street. The world isn’t really talking about prevention and long-term health. But a vaccine won’t necessarily be available soon, nor be efficient for everyone, nor necessarily safe, nor trusted by all, etc’ etc’, and eventually people will have to gravitate towards something additional. I believe it will be long-term health care, self-care and a holistic approach to health care. And eventually this will happen even if there’s a good vaccine.

Why? (i) some doctors are gradually being exposed/labeled as imperfect, potentially biased toward pharmaceutical products or biased toward a certain political direction, so more people will act to get their hands around their own health (ii) there will be increasing amounts of software monitoring our health in the future, including self-monitoring using apps and small devices. There will be health scores. Health insurance premiums will be lower for healthier people, especially if there’s some kind of budget crisis, let alone sovereign debt crisis or entitlement crisis (iii) there is a new focus now on what is ‘essential’, a re-organization of priorities in our lives. Health is for sure a big subject there. For example we’re already seeing many employers tell their employees that they should go for a walk in the middle of the work day, they’re purchase mental health support plans for employees who might be stressed, and more.


Why Focus on Soft Drinks?

There is a lot of literature about junk food and associated diseases available everywhere, as well as a lot of advice about what a proper diet should look like. We all know the issues. So let’s jump the next question: why short soft drinks? Why not play this with a candy or potato chip company?

I’m going to talk about why I prefer this route personally. When I was a kid in the early 90’s, one family member read a monthly health magazine and taught us the ins and outs of what he had read: what is healthy/unhealthy to eat and why. At that age, you remember and apply the information. Since then, I’ve been consuming ever-decreasing amounts of sugar and have always eaten healthier than peers. More importantly, since my teenage years I’ve been observing (and, I won’t deny it, judging..!) other people’s dinner tables and pantry. I think I’ve come to understand trends, tendencies, personal weaknesses etc’. There many models according to which people eat (e.g. consume X every morning; never consume X; consume X when I feel like pigging out; consume X when I’m at a specific place; consume X when I’m in a specific context; consume X but in small quantities; consume X when Y isn’t available...etc’).

There is a category out there that represents the marginal junk food, not only the most vulnerable to being cut out, but also to being cut out for good (i.e. not re-adopted later), and this is true about personal consumption as well as consumption as part of group events. Many people who only cut out one category will often choose that one. And the category I’m referring to is soft drinks.

I personally know (and I’m sure others do too) many people who will not have soft drinks despite eating really bad food otherwise, including: too many meats, low-quality carbs, chips, a diet lacking fruits and vegetables, not enough water, too much alcohol. In fact, I will allow myself to go further: there are people who’ll eat all that junk, plus do drugs and heck, even engage in unsafe sex, yet have dismissed soft drinks from their diet. Furthermore, let us consider baby boomers (or older generations) here: a large number of them are too tired to start optimizing their diet now because it often involves internet research and tedious shopping (for example, changing the types of grains they buy), but a good number of them have nevertheless cut out soft drinks. It wasn’t that many decades ago where a wedding table had wine, water, and also soft drinks; same for business meetings. This has gone out the window in modern society. We no longer institutionally consume soft drinks or juices in sophisticated settings, and this sets the tone. On Instagram, there are no (or almost no..?) influencers pushing soft drinks or even sugary juices, not even Coke Zero. Based on my scuttlebutt, sugary products promoted on social media consist mostly of high-end bakery products. It is important to note also that certain politicians have specifically targeted soft drinks like no other category so on that front too soft drinks are the marginal junk food.

Soft drinks also don’t serve much of a purpose socially. They don’t have a ritual purpose like birthday cakes, or sweets that are rarely bought but that the person has been waiting to consume (i.e. “finally gonna pass by my favorite bakery today”). They are not fun to purchase. They do not come in as interesting as a variety as, say, chocolate. It is rare that it will be purchased for the shared pleasure of 2+ people at once (i.e. let’s get our favorite dessert as share it”). It’s much more of a ‘serious’ individual purchase, kind of like cigarettes, or a ‘faceless’ purchase for a subset of a group without specific anticipation (i.e. you tell the pizza delivery company “sure, I’ll get a Coke with that” but you don’t know/care who among your 10 guests is gonna have some).


The Future of Soft Drinks

Yet a large part of society still consumes soft drinks. My thesis is most of them will drop the habit, at increasing speed. Where are soft drinks or sugary drinks still being consumed? Everywhere, but especially:

- In the third world, as opposed to first world

- As part of a meal at fast food chains, as opposed to restaurants where it is seldom ordered or not on the menu

- At certain ‘old-school’ social events such as religion-based gatherings, as opposed to more modern events

- At the house of some baby boomers, as opposed to Gen X/Y/Z (I know a couple that forbids ANY refined sugar to their kids)

- In warmer temperatures where one might feel desperate for “something refreshing”

The trend away from soft drinks is a one-way trend and the same applies to orange juice and other juices (practically no one today switches from regularly drinking water to cola). Of course, this is known, so the purveyors of these drinks are hedging by selling things like Coke Zero. But what’s the use of Coke Zero? Even these alternative drinks are useless for society and a lot of those who stop drinking sugary drinks simply switch to water, bypassing alternatives. Those who want caffeine have alternatives that are more logical, like coffee, of which the appreciation is still very much in a growth-bull phase. It’s true that in the 1990’s and 2000’s a lot of the Coke quitters switched to Diet Coke (or Coke Zero) but a lot of people (and I argue, more and more) will simply drop all soft drinks. Today’s zeitgeist is: “why should I buy another product from the same company that sold me the crap product that I am quitting?”. The reputation of the company is a prerequisite to any purchase. Today those who will switch to Coke Zero are mostly those who can’t let go of that cola taste. Youngsters are less likely to take on a Cola habit because there’s less social proof. Family members around them don’t buy it so it’s true there’s a mystery factor, but fellow teenagers are rebelling with way more bad-ass things like the Tide Pod Challenge.

Coke has a lot less going for it these days. Let’s compare where we are today to where were on July 20, 1996, the day Charlie Munger gave an informal talk about building a trillion dollar business, demonstrating why creating and selling Coca-Cola is essentially the perfect business:

Here are some quotes with my comments:

- “On average, each of these consumers will be much more prosperous in real terms than the average consumer of 1884.” - we’ve largely reached the peak I think

- “create universal appeal.” - today there is no more universal appeal for Coke. Many people are turned off.

- “it is easy to decide to design our beverage for consumption cold” - fair enough

- “It is also easy to decide to include both sugar and caffeine.” - these days, you’re losing a big chunk of the market due to the sugar. Caffeine: makes sense, but there are alternative ways to consume it.

- “As we expand fast in our new-beverage market, our competitors will face gross disadvantages of scale in buying advertising to create the Pavlovian condition they need.” - today reputation can’t be bought with money as easily as 100, 50 or 20 years ago. People are learning how to figure out for themselves who’s legit. Things like internet reviews and viral posts make a big dent.

- “And we will carbonate our water, making our product seem like champagne, or some other expensive beverage” - today, this has been completely reversed: carbonated water is associated with soft drinks in the first place!

- “Social proof, imitative consumption triggered by mere sight of consumption” - this is now going in reverse because the popularity of these drinks will be declining and people tell each other about how unhealthy it is.

- “for dieters, ability to insert a sugar taste without inserting sugar’s calories. Also, there will be related beverage opportunities we will seize.” - already discussed above. The related opportunities are also not amazing, I think people will eventually go back to core categories: tea, coffee, water, alcohol (but increased quality & breadth in each category)


More on the Catalysts for a Secular Decline

Many of the reasons why unit volumes might undergo a secular decline are available directly in COKE’s 10-K and I want to paste that here because it’s useful, even if it partially overlaps with some of what I’ve mentioned:

Changes in public and consumer perception and preferences, including concerns related to obesity, artificial ingredients, product safety and sustainability and brand reputation, could reduce demand for the Company’s products and reduce profitability.

The Company’s business depends substantially on consumer tastes and preferences that change in often unpredictable ways. Over the past several years, consumer preferences have shifted from sugar-sweetened sparkling beverages to diet sparkling beverages, tea, sports drinks, enhanced water and bottled water as a result of certain health and wellness trends. In addition, consumers, public health officials, public health advocates and government officials have become increasingly concerned about the public health consequences associated with obesity. As the Company distributes, markets and manufactures beverage brands owned by others, the success of the Company’s business depends in large measure on working with The Coca‑Cola Company and other beverage companies. The Company is reliant upon the ability of The Coca‑Cola Company and other beverage companies to develop and introduce product innovations to meet the changing preferences of the broad consumer market, and failure to satisfy these consumer preferences could adversely affect the Company’s profitability.

Concerns about perceived negative safety and quality consequences of certain ingredients in the Company’s products, such as non-nutritive sweeteners, may erode consumers’ confidence in the safety and quality of the Company’s products, whether or not justified. The Company’s business is also impacted by changes in consumer concerns or perceptions surrounding the product manufacturing processes and packaging materials, including single-use and other plastic packaging, and the environmental and sustainability impact of such manufacturing processes and packaging. Any of these factors may reduce consumers’ willingness to purchase the Company’s products and any inability on the part of the Company to anticipate or react to such changes could result in reduced demand for the Company’s products or erode the Company’s competitive and financial position and could adversely affect the Company’s business, reputation, financial condition or results of operations.

The Company’s success depends on its ability to maintain consumer confidence in the safety and quality of all of its products. The Company has rigorous product safety and quality standards. However, if beverage products taken to market are or become contaminated or adulterated, the Company may be required to conduct costly product recalls and may become subject to product liability claims and negative publicity, which could cause its business and reputation to suffer.

The Company’s success also depends in large part on its ability and the ability of The Coca‑Cola Company and other beverage companies it works with to maintain the brand image of existing products, build up brand image for new products and brand extensions and maintain its corporate reputation and social license to operate. Engagements by the Company’s executives in social and public policy debates may occasionally be the subject of criticism from advocacy groups that have differing points of view and could result in adverse media and consumer reaction, including product boycotts. Similarly, the Company’s sponsorship relationships and charitable giving program could subject the Company to negative publicity as a result of actual or perceived views of organizations the Company sponsors or supports financially. Likewise, negative postings or comments on social media or networking websites about the Company, The Coca‑Cola Company or one of the products the Company carries, even if inaccurate or malicious, could generate adverse publicity that could damage the reputation of the Company’s brands or the Company.

Changes in government regulations related to nonalcoholic beverages, including regulations related to obesity, public health, artificial ingredients and product safety and sustainability, could reduce demand for the Company’s products and reduce profitability.

The Company’s business and properties are subject to various federal, state and local laws and regulations, including those governing the production, packaging, quality, labeling and distribution of beverage products. Compliance with or changes in existing laws or regulations could require material expenses and negatively affect our financial results through lower sales or higher costs.

The production and marketing of beverages are subject to the rules and regulations of the FDA and other federal, state and local health agencies, and extensive changes in these rules and regulations could increase the Company’s costs or adversely impact its sales. The Company cannot predict whether any such rules or regulations will be enacted or, if enacted, the impact that such rules or regulations could have on its business.

In response to growing health, nutrition and obesity concerns for today’s youth, a number of states and local governments have regulations restricting the sale of soft drinks and other foods in schools, particularly elementary, middle and high schools. Many of these restrictions have existed for several years in connection with subsidized meal programs in schools. Restrictive legislation, if widely enacted, could have an adverse impact on the Company’s products, image and reputation.

Legislation has been proposed in Congress and by certain state and local governments which would prohibit the sale of soft drink products in non-refillable bottles and cans or require a mandatory deposit as a means of encouraging the return of such containers, each in an attempt to reduce solid waste and litter. Similarly, the Company is aware of proposed legislation that would impose fees or taxes on various types of containers used in its business. The Company is not currently impacted by the policies in these types of proposed legislation, but it is possible that similar or more restrictive legal requirements may be proposed or enacted within its distribution territories in the future.

Concerns about perceived negative safety and quality consequences of certain ingredients in the Company’s products, such as non-nutritive sweeteners could result in additional governmental regulations concerning the production, marketing, labeling or availability of the Company’s products or the ingredients in such products, possible new taxes or negative publicity resulting from actual or threatened legal actions against the Company or other companies in the same industry, any of which could damage the reputation of the Company or reduce demand for the Company’s products, which could adversely affect the Company’s profitability.

The FDA occasionally proposes major changes to the nutrition labels required on all packaged foods and beverages, including those for most of the Company’s products, which could require the Company and its competitors to revise nutrition labels to include updated serving sizes, information about total calories in a beverage product container and information about any added sugars or nutrients. Any pervasive nutrition label changes could increase the Company’s costs and could inhibit sales of one or more of the Company’s major products.

Most beverage products sold by the Company are classified as food or food products and are therefore eligible for purchase using SNAP benefits by consumers purchasing them for home consumption. Energy drinks with a nutrition facts label are also classified as food and are eligible for purchase for home consumption using SNAP benefits, whereas energy drinks classified as a supplement by the FDA are not. Regulators may restrict the use of benefit programs, including SNAP, to purchase certain beverages and foods currently classified as food or food products.


The packaging issue could be a big one. I would note also that the trend toward carrying personal bottles around adds another negative for packaged drinks (and/or unhealthy drinks) because people now often carry bottles big enough to hold enough water for their entire outing.

The issues of soft drinks at schools and soft drinks bought with food stamps are also both key to branding/perception. There is a line that has been partially crossed with schools, that, if fully crossed, will effectively make soft drinks cigarette-like. If the negative perception of sugary drinks grows further, QSRs will also want to drop partnerships simply to defend their brand image. That’s not for tomorrow, but it’s certainly the direction we’re going in.

There is also of course an economic question. Soft drinks are more expensive than water. And Coke more than coffee. You can make coffee cheaply at home but you cannot create cola without the syrup. Plus, you can put together various spices, herbs, ginger and lemon and make something much healthier, tastier and cheaper than Sprite or iced tea. And if you really want the bubbles, there’s Sodastream.

The Cola-Cola brand has other challenges too. Many of us grew up with corner stores named “Coca-Cola” or “Belvedere” (the cigarettes). This partnerships are no longer being created. Another point: in the past decade many people have mostly consumed these soft drinks without seeing the logo - when ordering them in a bar: Rum & Coke, Vodka-seven. You don’t know if they’re using Coke or Pepsi or even some other cola. And you probably don’t care either.

To sum things up: in today’s society, who’s going to convince who to consume more cola?


Why Short COKE Specifically

COKE is a bottler. It depends on KO’s brand. It is a weaker company, it cannot easily pivot, it doesn’t have the same economics. It therefore has no significant risk of sudden growth. And management certainly isn’t there to get creative and do something because they’ve been fleecing shareholders.

The dividend yield is 0.44% because they have not raised it since 1994.

The company is dependent on KO but essentially controlled by the Harrison family (J. Frank Harrison, III the great-grandson of the founder, who is the Chairman and CEO, plus others). In 2019 Harrison had salary of $1mm + a bonus of another 1mm+, and in the past 3 years stock awards and long-term equity plans have yielded him another 8mm, for a total of 11m each year, even though he owns lots of stock and should just have been incentivized by those holdings alone. Directors’ compensation is around $160-200k each so they’re happy - paid to keep their mouths shut. Good ol’ boy James Morgan, former Krispy Kreme Chairman, is one of them. There are supervoting shares so outside shareholders are essentially powerless, and there’s family on the board. There are also multiple conflicts of interest (business between COKE and the family).

And also: “Morgan H. Everett, Coke Consolidated’s Senior Vice President and a member of the Board, is the daughter of J. Frank Harrison, III, the Company’s Chairman and CEO. During fiscal 2019, Ms. Everett received total compensation of approximately $446,267.”

I find that all of this is a bit excessive. They have executed a bit of a reconfiguration of logistics in recent years with the territory reorg and everything, but it’s definitely not managed to truly deliver value to the shareholders. Let’s just say there’s no plan in place to turn this into a compounder.

And they don’t have the corporate culture to do well in the next 20 years anyway. I was pretty surprised by their “our purpose” page ( the way needlessly links to a PDF rather than an HTML page):

I don’t have any issue with God at all, in fact it’s nice to have all these values like forgiveness, learning etc’ but (i) I don’t see how this is compatible with where American youth is headed and (ii) selling poison does not constitute doing God’s work, in my view. They talk about “putting others first”. Well.. then just shut down and don’t sell this crap. Besides, if ‘we’ (COKE) put others first, where are shareholders? Are they part of the ‘we’ or the ‘others’?


Shorting the Equity.

The company has a notable amount of long-term debt, which means equity fluctuates a good deal. What I’d look for in a case like this is to make sure we don’t initiate a position at an unattractive point relative to its historic multiple range. Given the recent rally, we now find ourselves at 0.68x EV/sales which is an ok entry point.



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If it rallies further due to sector rotation there may be a great entry point soon, but either way we’re not at the low point now (which would be around 0.55x). Once the zeitgeist turns against soft drinks I’d expect compression to 0.5x and then a gradual decline as a function of the decline in the top line and the amount of debt. I also expect the family will milk this one on the way down. And if it keeps fluctuating due to financial leverage it’ll be a multiple-ride situation.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


- Americans start having serious conversations about "pre-existing conditions" and sugar
- Various societal advancements connect financial incentives with the concept of people eating healthier
- Global consumer starts being careful about diet
- Macro headwinds in terms of health care budget or otherwise
- Continued abuse by management

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