Over the past five years, Coca-Cola has been gaining an enormous competitive advantage of its peers. And it does not involve the sale and manufacture of the syrup concentrates for which it is famous. Instead, Coca-Cola has been getting stronger over the past five or so years by entering into distribution arrangements around the world with Dr. Pepper Group, Anheuser-Busch Inbev, Mondelez, and over 300+ regional producers of soda.

It is a story that involves everyone’s favorite topic: asset-intensive business models and the earnings that are reported to investors. Over the past few years, perhaps fueled by the rise of companies like Microsoft and Visa that can grow earnings very quickly due to a fixed-up cost business model that has very little cost for each additional consumer, it seems that every business has been trying to become less asset-intensive than it used to be.

As a consequence, most beverage companies in the world have been trying to outsource the expensive components of the business—driving the last mile to deliver drinks to rural gas stations and the like, and in some cases, the outright manufacture of the beverage. It is a lot easier to make your money by just having some syrup branded with intellectual property that means something as a result of your advertising, and then collecting a profit from the spread that you earn. For these reasons, Coca-Cola has become the manufacturer and distributor for the world’s beverages, doing far more contract work with other beverage companies than its largest competitors Nestle and PepsiCo.

From the perspective of a Coca-Cola shareholder, there are two major implications. The first, which on its face appears to be bad news, is that profits per share have been steadied at around $2 per share for almost half-a-decade because Coca-Cola has taken on much more manufacturing responsibilities (I would argue that is why it fell to around $36 in March 2020, as investors assumed Coca-Cola might have to bail out and take over many of its independent bottlers and have to spend billions adding them to the corporate umbrella).

The second implication is that, although profits have stagnated, the durable competitive advantage of Coca-Cola continues to grow. People complain about the decline of sugary drinks when discussing Coca-Cola, but really, what has happened is that Coke sales have remained steady globally, Diet Coke sales have disintegrated over a twenty-year period due to middle-aged women turning away from the brand due to aspartame (and Coca-Cola rightfully abandoning advertising of the brand globally, thus hastening its decline), and the beverage giant has become a manufacturing and distribution powerhouse that, yes, requires more capital but ultimately gives it strong bargaining power when determining the rates for distributing and manufacturing other beverage brands.

People underappreciate the stability of earnings that often accompanies capital-intensive portions of business. Basically, Coca-Cola has established a market-dominant manufacturing/distribution presence for third-parties that is going to grow earnings at a high single-digit mark while also selling its own beverages that will be growing at a single rate. The earnings have been slow to reflect these changes, and will continue to be slow to reflect these changes in the event Coca-Cola continues to acquire more bottlers.

But make no mistake. The competitive advantage of the firm is growing and so are its annual cash flows. People have complained about the stock stagnating in the $40s for most of the past decade but the consequence is that the investors during the 2020-2030 will be reaping those returns. If a business grows stronger and you don’t profit proportionally, it either means you overpaid or the shareholders will earn excess compounding in the future to capture it. When you look at what Coca-Cola has done to strengthen its competitive position, it will certainly be a $100-$120 stock a decade from now. It has quietly become even more of a distribution powerhouse and the earnings and returns haven’t yet reflected that. But eventually, they will.

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