Coca-Cola Dips a Toe Into the Alcohol Market

In this segment of the MarketFoolery podcast, host Chris Hill and Million Dollar Portfolio's Matt Argersinger discuss the news that carbonated and caffeinated king Coca-Cola (NYSE: KO) is taking a tentative step into the bubbly alcohol market.

The guys view this as a smart move, and one that the company should have made earlier. But what does it mean more broadly, and how long will it be before we see Coke trying this here in the U.S.?

A full transcript follows the video.

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This video was recorded on March 7, 2018.

Chris Hill: Let's get to some actual businesses. We'll start with Coca-Cola. I'm no longer a shareholder of Coca-Cola, but this absolutely put a smile on my face, and it's the news that Coca-Cola is going to be launching its first alcoholic beverage in Japan. Do I have that right?

Matt Argersinger: That's right. Limited market.

Hill: Limited market. It's essentially a fizzy alcoholic drink. Probably appropriate that Coca-Cola's first foray into alcoholic beverages is not liquor or wine, it's something with bubbles. I like this move for them.

Argersinger: I like it. I like fizzy alcohol beverages, I'm sure a lot of people do. My first reaction was, what took them so long? I feel like, the last couple of years, we've seen things like hard root beer, or hard sodas. I know Boston Beer, a company we're familiar with, Sam Adams, they came out with a hard seltzer last year that I think has gotten a little popular. There are fizzy alcoholic drinks out there that are available that have hit the market, and it's surprising that Coca-Cola, of course, the king of fizzy drinks, with all the distribution power, all the marketing, has been kind of late to get into this. So, now they are, and I'm sure it'll be successful. We'll see if it rolls out beyond Japan.

Hill: Like you, that was one of my thoughts. What took them so long? I'm always interested in the behind-the-scenes story on how corporate decisions get made. I would love to be the proverbial fly on the wall, because I'm sure at various points in Coca-Cola's history, some executive or another has come up with this type of idea and has probably gotten voted down.

But, I like this move. I like that it's a test outside of the United States. I like that, not only is it not wine or liquor, it's not beer. This is one of those moves where I thought, this makes sense, I like this. If they had come out and said, we're launching, not even a Coca-Cola branded wine, but just, our own type of wine, I don't know, I would be more skeptical of that. You mentioned the distribution. For companies like Coca-Cola, it's all about distribution, and that's why I think this could be a small bet that pays off for them.

Argersinger: Yeah. As you were talking, I thought about, maybe this is a situation where they thought about doing this, but, you think about Coca-Cola, the relationships they have with universities, for example, around the United States. Maybe this was a situation where, "We can't go full bore launching a whole line of alcoholic beverages, just because maybe that doesn't represent well with a lot of our key strategic partners here in the U.S." So, it has to be a limited rollout, see if it works. Do companies who buy a lot of soda from us, if they also know that we offer alcoholic beverages, maybe that was kind of a stumbling point to that. But, I feel like, they were late to the market, they're getting into it, they're probably going to be successful. We'll see.

Hill: What do you think is the next thing that investors should look for to get a sense of how this is going for Coca-Cola? Off the top of my head, I don't expect this to come up in conference calls, that sort of thing. But I'm wondering if the next move here, if this is successful, do you think the next likely move out of Coca-Cola is a similar test in another country? Is it, we're going right to the United States, we're coming out with something U.S.-based?

Argersinger: No. I think it'll be a nascent market for them. The thing they're rolling out in Japan, it's actually kind of a cultural element that's really specific to Japan. So, it would take them going into other places like Brazil or France and figuring out what's going to work in particular in those markets. I don't know if this test in Japan is going to be a litmus test of what can work in the U.S., because I think, what works in Japan, might not work in the U.S. So, I feel like it's going to be a small snowball that's going to roll, and maybe it gets bigger, and maybe in a year or two down the road they launch something bigger that's more specific to the U.S. So, you have to wait and be patient with that, I think.

Chris Hill has no position in any of the stocks mentioned. Matthew Argersinger owns shares of Boston Beer. The Motley Fool owns shares of and recommends Boston Beer. The Motley Fool has a disclosure policy.