Last week during the Portugal vs Hungary press conference, celebrity football player, Cristiano Ronaldo, managed to spark a sell-off among Coca-Cola (NYSE:KO) investors. A simple gesture of choosing water over Coca-Cola was enough to send the share price tumbling, wiping out around $3.8bn of the company’s market capitalisation in the process. But has the market overreacted?
The crashing Coca-Cola share price
Seeing the simple act of moving two Coca-Cola bottles off-camera appears to have created some uncertainty surrounding the business. After all, Cristiano Ronaldo is a highly influential figure. And his actions may have a tangible impact on beverage sales not only during the Portugal vs Hungary match, at other times. The company did make a statement saying “everyone is entitled to their drink preferences”. But that seems to have done little to calm investors.
However, as shocking as the thought of $3.8bn being wiped out is, it’s important to put it into perspective. Coca Cola is an enormous business with an absurd amount of branding power. In reality, $3.8bn only equates to around a 1.6% negative share price movement — that’s hardly volatile.
But since the initial drop, the Coca-Cola share price has continued its downward decline, albeit at a slower pace. It now trades at around $53.70 per share. By comparison, before this event happened, it was trading at just over $56. So does this represent a buying opportunity?
The power of a brand
I think it’s fair to say that Coca-Cola may be one of the best-known brands in the world. And this recognised status has provided the business with a substantial amount of pricing power. After all, even though there are plenty of cheaper Coca-Cola alternatives available worldwide, the company still manages to sell around 1.8bn bottles per day.
Beyond the obvious advantage of charging a premium to customers, this trait may prove to be essential in the coming months. Due to the impact of the pandemic on labour and logistics, as well as a myriad of bad weather, raw material prices have reached record highs. According to the chief financial officer of Unilever, “we are seeing some of the highest commodity price inflation that we’ve seen in a decade”.
When materials costs increase, profitability suffers. This, in turn, would likely impact the Coca-Cola share price over the long term. That said, the management team and several others from Nestlé, Procter & Gamble and Unilever, have stated their intention to pass these additional costs on to customers. This means the profitability of Coca-Cola should be largely unaffected by the direct impact of the commodity shortage.
The risks of reputational damage
I think the market has overreacted to Cristiano Ronaldo’s choice of beverage. But there’s some reasonable cause for concern regarding reputation. It’s not exactly a secret that many Coca-Cola’s drinks aren’t ‘healthy’. And with many people becoming more health-conscious due to Covid-19, Coca-Cola may start to suffer from reputational damage.
It isn’t easy to measure the extent of this. But over the long term, this may ultimately undercut its pricing power moving forward. And without this essential advantage, the share price could begin to tumble.
But despite these risks, I personally believe the recent drop presents an opportunity for me to snatch up some shares and enjoy a seemingly uncompromised 3% dividend yield. Therefore I would consider adding this business to my portfolio.
