Coca-Cola Earnings: Emerging Markets And Still Beverages Volumes In Focus

by Trefis Team
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The Coca-Cola Company (NYSE:KO) is set to announce its earnings for the first quarter of 2013 on April 16. We will be focusing on broad-based factors like volume growth in emerging markets as well as specific trends such as the growth of the still beverage category. This is a trend that has been manifesting across the company’s operating regions for the last few years, and it defines the way in which consumer preferences in the Non-Alcoholic Ready to Drink (NARTD) beverage industry are shaping up with time.

Broader macroeconomic conditions in the different regions of the world, marked by uncertainties in the Europe, slower growth in China and the gradually recovering U.S. economy will also impact the company’s Q1 2013 earnings release. Finally, we will also look at the possible impacts of factors specific to the reporting period such as foreign currency fluctuations and the number of operating days.

See our full analysis for Coca-Cola

Emerging Markets To Drive Coca-Cola’s Growth

For the full year of 2012, Coca-Cola saw a 4% volume growth fueled primarily by the emerging markets such as Thailand (up 22%) and India (up 16%), while the developed markets of North America and Japan delivered 2% volume growth y-o-y while unit case volumes declined by 1% in the Europe. Unit volume growth in China slowed down to just 4% during 2012, reflecting the impact of slower GDP growth (down to 7.8%) and lower consumer spending. [1] Coca-Cola benefits from its vast global footprint that covers all but about four countries of the world as the growth from emerging markets has helped it negate the impact of the slump seen in consumer spending in the developed markets, especially in Europe.

While the European markets have been facing austerity measures and economic uncertainties, large fiscal deficit in the U.S. has kept consumer confidence in check there. In such conditions, emerging markets with fast-growing, dynamic middle class and rising GDP per capita, have been acting as primary growth engines for the company. We expect to see double-digit y-o-y growth in volume from India and Russia while China, Brazil and Mexico are expected to grow in the range of high single digits.

Focus On Growth From The Still Beverage Category

There has been a lot of discussion around obesity and other health concerns among consumers regarding the consumption of sparkling beverages, especially in the developed markets such as the U.S., and it has also reflected in the volume-mix of the Coca-Cola company.

As apparent from the table below, compiled using the company’s annual SEC filings, still beverages have been out-growing the sparkling category over the last few years now. It should be noted here that the trend has manifested itself even in times when the contribution of developed markets in the company’s total volume growth has been subdued. We expect the trend to become significant in the coming years as volume growth from the developed markets picks up. We also believe that the company needs a ‘Coca-Cola’ like leading global brand in the category, in order to capture significant value share in the long run. We will be closely looking at the volume growth figures in the still beverage category, specifically in the sports drinks and packaged water categories over the next few quarters.

Year 2012 2011 2010 2009 2008
Total Volume 27.7 26.7 25.5 24.4 23.7
%Sparkling 75% 75% 76% 77% 78%
%Still 25% 25% 24% 23% 22%
Sparkling Volume 20.775 20.025 19.380 18.788 18.486
%Growth in Sparkling 4% 3% 3% 2% NA
Still Volume 6.925 6.675 6.12 5.612 5.214
%Growth in Still 4% 9% 9% 8% NA

Unfavorable Currency, Two Less Operating Days To Account For Tough Comparisons

The devaluation of foreign currencies against the USD has been a drag on Coca-Cola’s revenues in the recent years. In 2012, the unfavourable impact of foreign currency fluctuations lowered the company’s consolidated operating revenues by as much as 3%. During the first quarter of this year, we saw a sharp devaluation of the Venezuelan Bolivar against the USD. [2]

While the company hedges much of the foreign currency risks arising from its operations in some of the key foreign markets such as Mexico, Japan, China and Brazil, such sharp moves in any foreign currency like the Venezuelan Bolivar are likely to have a negative impact on the company’s operating revenues. Furthermore, devaluation loss associated with a monetary asset held by the company in Venezuela is also expected to impact the net income figure negatively. Lastly, two less operating days as compared to the first quarter of 2012 will account for tough y-o-y comparisons across the line items.

We estimate a $37 price for Coca-Cola, which is around 10% below the current market price.

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Notes:
  1. The Coca-Cola Company Reports Full-Year And Fourth Quarter 2012 Results, www.coca-colacompany.com []
  2. Venezuelan Bonds Gain After Bolivar Devaluation, www.bloomberg.com []
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