Using A Can Of Coke To Explain A Currency Lesson

Transcript

DAVID GREENE, HOST:

NPR's Planet Money team taught us a lot about the global economy using a T-shirt. Well, now it is a can of soda and what it can teach us about currency. The U.S. economy has been doing pretty well lately, especially compared to the rest of the world. And that has pushed the value of the U.S. dollar up, which is good news for some companies, bad news for others. Here's Planet Money's Stacey Vanek Smith and her beverage.

STACEY VANEK SMITH, BYLINE: So take a can of Coke - there are a couple parts to a can of Coke. There's the actual Coke and there's the can. So let's take the drink first. This is produced by the Coca-Cola Company. And you may think of Coca-Cola as an American company, but a surprising amount of its sales happen outside the country. John Faucher is a beverage analyst for J.P. Morgan.

JOHN FAUCHER: So Coke right now generates about 75 percent of its operating profit outside of the United States, and it's across the globe.

SMITH: Of course, when a Coke is sold in Mexico, people don't pay in dollars. They pay in pesos. When a Coke is sold in India, people pay in rupees. When a Coke is sold in Azerbaijan, people pay in new manats. Coke is getting paid in all of these different currencies, which are now worth less when it converts them to dollars - a lot less because the dollar is really strong right now. Omar Esiner is a currency analyst with Commonwealth Foreign Exchange.

OMAR ESINER: The dollar's trading at its highest levels right now that we've seen in more than a decade against pretty much most of the major currencies.

SMITH: The upshot of all this, says John Faucher - the strong dollar is actually hurting profits at a company like Coke.

So even if they sell the same number of Cokes around the world, it is as if they had sold less.

FAUCHER: Yeah, so Coke is selling more Cokes and yet the earnings still aren't growing. This is a big deal.

SMITH: So bad news for the people making the stuff inside the can. The can itself is a different story. Cans are made of aluminum, which is mined in places like Russia. The dollar is particularly strong against the Russian ruble. The ruble has not had a good year. And if you're a mining company in Russia, you pay your workers in rubles, but you sell your aluminum on the international market, and the international market for aluminum operates in dollars. Curt Woodworth researches metals for Nomura.

CURT WOODWORTH: Russia, for example - RUSAL just reported earnings - they're one of the world's largest aluminum producers - had all-time record margin this quarter because the aluminum price held up pretty well. And obviously with the ruble going down dramatically they captured all of that value.

SMITH: So they're actually - it's actually good for them that their currency is in terrible shape.

WOODWORTH: It is - it's - it is.

SMITH: So that is the topsy-turvy world of exchange rates. The strong American dollar is bad for the American company that makes the soda, but good for the Russian company that mines the aluminum to make the soda can. Now, you might be wondering what does this is all mean for me, a soda drinker here in the U.S.? I put that question to John Faucher at J.P. Morgan.

I drink a fair amount of Diet Coke. Is that going to affect me at all? Am I going to pay more? Am I going to pay less?

FAUCHER: As the international businesses struggle, you may get a little extra pricing in the U.S. to try and drive overall profitability at these companies.

SMITH: So my Diet Coke might cost more.

FAUCHER: Your Diet Coke will cost more.

SMITH: That he's prediction anyway, that Coke will try to make up the money it's losing overseas. And these days, for making money, there's no place like home. Stacey Vanek Smith, NPR News. Transcript provided by NPR, Copyright NPR.