Coca-Cola Draws Growth From Still Beverages While Currency Translations Play Spoilsport

Macroeconomic volatility and category headwinds in the core cola segment resulted in The Coca-Cola Company‘s (NYSE:KO) fourth quarter earnings falling short of consensus estimates. Net revenues declined by 4% year-on-year in the last quarter and by 2% in the full year to round off a challenging 2013. ^[1] Although global beverage volumes rose by 2%, Coca-Cola’s financials were hit by unfavorable currency translations. As international markets constitute around four-fifths of the company’s business, the strengthening of the U.S. dollar against foreign currencies negatively impacted comparable operating income by 4%. However, Coca-Cola’s diverse non-carbonated beverage (NCB) portfolio delivered strong results propelling rise in overall unit case volumes. The company’s global NCB volumes climbed 5% year-on-year, bolstered by growth in the fast growing segments such as sports drinks, bottled water, ready-to-drink tea and juice drinks.

We estimate a $41.2 price for Coca-Cola, which is around 10% above the current market price.

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Ready-To-Drink Tea Provides Maximum Growth

Coca-Cola’s robust ready-to-drink (RTD) tea portfolio, including brands such as Gold Peak, Honest Tea and Fuze Tea, caused volumes to grow by an impressive 11% for the full year. ^[2] Earlier in 2013, Coca-Cola had estimated that its brand Honest Tea will cross $100 million in annual sales in the domestic market, up 25% from 2012. ^[3] In addition, Gold Peak grew for the 27th consecutive quarter to cap off a strong year for Coca-Cola’s RTD tea brands. Due to the decline in demand for sugary drinks and the healthier perception of tea, which contains antioxidants that boost metabolism, RTD tea is one of the fastest growing segments of the beverage industry. In the U.S., the RTD segment registered a high double-digit percent growth to reach $5.1 billion in sales. This category also contributed to higher margins for the company as tea prices plummeted last year to an all-time low. RTD tea is expected to generate sales of $5.3 billion in 2014 and grow at a CAGR of over 6% till 2018, providing ample growth opportunities to tea making companies. ^[4]

The Company Hopes To Breath Life Back Into Its Trademark Coca-Cola

With traditional colas and their diet variants facing resistance in the domestic market, global sparkling beverages grew by only 1% in the full year. Health and wellness concerns continue to cast a shadow over carbonated soft drinks (CSD), which declined 1.42% by volume in the U.S. convenience stores. ((“CSD sales down 1.4% in c-stores in 2013“, February 2014, cspnet.com)) On the other hand, bitter aftertastes and safety concerns marred sales of diet sodas, which was the most under performing category of the country’s beverage market last year. But amid these discouraging trends in the U.S., Coca-Cola has been able to derive meaningful growth from certain international markets, where the flagship Coca-Cola brand has not lost its fizz as yet.

In Russia, the Coca-Cola drink witnessed a double-digit percent growth last year on the back of increased investments and promotional activities leading up to the ongoing Winter Olympics in Sochi. The company, which leads Russia’s CSDs with 36% market share, is one of the biggest corporate sponsors for the event. As the Olympic events occupy most of February, Coca-Cola’s volumes in the country could further increase in the first quarter of 2014. Elsewhere, the company’s low calorie stevia-sweetened Coca-Cola Life also fueled volume growth in Argentina and Chile. Despite weak economic conditions, beverage volumes rose by 7% in Argentina, primarily driven by sparkling beverages. Coca-Cola plans to introduce Coca-Cola Life in the U.S. this year, which might revive sales of CSDs as stevia is considered a safe artificial sweetener.

Minute Maid Boosts Sales Of Juice Drinks

The juice brands Minute Maid, Simply, Minute Maid Pulpy, Rani and Innocent spurred sales in Coca-Cola’s juice category, which grew by 5% year-on-year in terms of volumes. Beverage volumes increased by 3% in China, rising by 5% in the fourth quarter. Coca-Cola’s Minute Maid is the first billion dollar brand to emerge out of China and leads the country’s juice market with popular offerings such as Minute Maid Pulpy Super Milky. Juice drinks is the largest category of China’s beverage industry and was worth around $13.88 billion in 2013. ^[5] With increasing disposable incomes and a growing middle class, the juice market is expected to continue to grow and reach annual revenues close to $25 billion by 2017. According to Ernst & Young, China’s middle class will surge to 1 billion in 20 years, up from 150 million at present. ^[6] As Coca-Cola aims to make China its biggest market as part of its 2020 vision, the juice market could be crucial for its growth prospects.

In Eurasia and Africa, full year volumes rose by 7% on the back of a double-digit percent increase in volumes in the Middle East and North Africa. This growth was mainly driven by additional volumes brought in by Aujan Industries, one of the largest independent beverage companies in the Middle East. Coca-Cola has a 50% stake in Aujan, which sells the popular juice brand Rani, that generated $600 million in 2012. Coca-Cola reported an increase in market share in the region’s juice market, which means the brand Rani outpaced its competitors in terms of volume growth in 2013.

Currency Headwinds And Low Volume Growth Decrease Margins

In addition to unfavorable currency translations, low comparable volume growth also caused Coca-Cola’s margins to fall by 600 basis points to 21.8%. The company’s volumes grew by only 2% last year, compared to increases of 5% and 4% in 2011 and 2012 respectively. Even ignoring foreign currency impacts, tepid volume growth and unfavorable product mix resulted in flat revenue growth last year. As a company with significant fixed costs and consequently high operating leverage, low sales dragged down operating margins. Coca-Cola expects flat to marginally positive operating leverage in 2014.

Coca-Cola plans to increase investments in marketing to $1 billion by 2016, drawing savings from system standardization, supply-chain optimization, and industrious resource and cost allocation. In line with this productivity savings plan, the company plans to save $550-$660 million this year. This move could benefit Coca-Cola as it not only aims to improve functionality and efficiency of operations, but could boost sales of the company’s beverage portfolio due to increased marketing and promotional activities.

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1. “Coca-Cola 8-k“ [↩]
2. “Coca-Cola full year earnings transcript“ [↩]
3. “Coke owned brand Honest tea predicts $100+ million in 2013“, June 2013, beveragedaily.com [↩]
4. “RTD tea production in the US“, January 2014, prweb.com [↩]
5. “China Juices“, September 2013, datamonitor.com [↩]
6. “Coca-Cola’s enormous potential in China“, May 2013, beta.fool.com [↩]