Coca-Cola Earnings Preview: Growth From China And Low-Calorie Products In Focus

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The Coca-Cola Company (NYSE:KO) is set to announce its earnings results for the second quarter on July 16. We will be closely watching the company’s revenue growth from emerging markets, especially China, where its rival, PepsiCo (NYSE:PEP) has been gaining strength of late. We will also be focusing on the performance of its low-calorie soda variants in the developed markets where soft drink consumption has been steadily declining over the past few years due to health concerns. It will also be interesting to gauge Coca-Cola’s relative performance in several fast-growing beverage categories such as juices, bottled water and energy and sports drinks.

See Our Complete Analysis For Coca-Cola

Emerging Markets To Drive Revenue Growth

Coca-Cola generates almost 60% of its net operating revenues from international markets and relies on carbonated beverages for almost 70% of its global sales volume. [1] Although soda consumption has been declining in the U.S. over the past several years, until 2012, beverage companies had been able to compensate for that through pricing measures. However, with soda revenues starting to decline in the U.S., international markets, emerging markets hold the key to Coca-Cola’s future revenue growth. According to the Wall Street Journal, data collected by the SymphonyIRI Group suggests that carbonated soft drink (CSD) sales declined by 0.6% in the U.S. in 2012 as lower volumes more than offset the increase in prices. [2]

On the other hand, much lower per capita consumption of CSDs and rising income levels in emerging markets are some of the key factors driving growth for beverage companies. Conscious of the fact that its reliance on emerging markets will only grow from here if sales from developed markets such as the U.S. continue to slide, Coca-Cola has been actively expanding its operations in these markets. Recently, the company started local production of its products in Myanmar, a market where it had been inactive for over six decades due to several restrictions. The Coca-Cola Company now operates in all but two countries worldwide.

For More On Coca-Cola’s Myanmar Expansion, Read: Coca-Cola Making Quick Moves In Myanmar To Gain Market Share

Volume Growth From China In Focus

Coca-Cola relies on more than 30% of its global sales volume on four international markets, namely Mexico, China, Brazil and Japan. Of these markets, China holds the biggest growth potential for the company due to its huge consumer base and rapidly growing per capita income. However, its prime competitor, PepsiCo has been gaining market share in China since its collaboration with Tingyi that made the company part-owner of China’s most extensive bottling and distribution network.

Enhanced manufacturing and distributing capability of its archrival in China coupled with negative publicity due to reports of high chlorine content in its flagship brand, slowed Coca-Cola’s growth from the market significantly last year. Even during the first quarter this year, PepsiCo outperformed Coca-Cola by posting 17% volume growth in China while Coca-Cola was able to grow its volumes by just 1%. [3] Although Coca-Cola still holds mid double-digit market share in China, well ahead of PepsiCo, it cannot afford to concede too much ground in that market given its huge growth potential.

Low-Calorie Soft Drinks and Still Beverages Key To Revenue Growth In Developed Markets

As consumers shift away from the CSD category primarily driven by health concerns due to high calorie count and minimal nutritional value in these beverages, low-calorie (diet) variants and still beverages are becoming increasingly important to Coca-Cola’s revenue growth in developed markets. In a bid to revive consumption in the CSD category, the company is increasingly focusing on promoting its low-calorie offerings. Recently, Coca-Cola launched a worldwide campaign against obesity in which the company pledged to expand its low- or no-calorie offerings and labeling calorie count on its products, among a couple of other initiatives. This can be seen as an indirect promotion of its “healthier” line-up to boost sales volumes. More recently, the company also launched a stevia-sweetened variant of its flagship brand in Argentina, Coca-Cola Life, which contains 50% less calories than the regular Coke.

For More On Coca-Cola Life, Read: Will Coca-Cola Life Breathe Life Into The Ailing CSD Category?

Coca-Cola is also strengthening its position in the fast-growing still beverage categories such as juices, bottled water and energy and sports drinks. Its Dasani and Powerade brands have been consistently closing the gap with PepsiCo’s Aquafina and Gatorade. According to our estimates, products from these categories contribute more than 35% to the company’s value, therefore relative performance of these products will also be interesting to note.

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Notes:
  1. Coca-Cola SEC Filings, sec.gov []
  2. Is This the End of the Soft-Drink Era?, wsj.com []
  3. PepsiCo SEC Filings, sec.gov []
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