Coca-Cola Pre-Earnings: Organic Brands and Brazil Investments to Bolster Growth

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KO: The Coca-Cola Company logo
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The Coca-Cola Company

The Coca-Cola Company (NYSE:KO) is scheduled to announce its Q2 results on July 22. Although the earnings are expected to be negatively impacted by the deconsolidation of bottling operations in Brazil and the Philippines last year, and unfavorable currency translations, the beverage manufacturer could gain from the increasing demand for still beverages and higher consumption rates in emerging economies this quarter. In particular, growth for Coca-Cola is expected to come from the company’s robust organic drinks portfolio comprising ready-to-drink (RTD) teas and natural fruit juice, and juice drinks. The company is also set to have added incremental volumes on the back of strong marketing initiatives related to the recently completed FIFA World Cup in Brazil.

However, almost three-fourths of Coca-Cola’s volumes are contributed by carbonated soft drinks (CSD), which continue to face declining unit sales due to widespread obesity, diabetes, and other related health concerns. In 2013, sparkling volumes declined in North America and Europe, while witnessing positive growth in rest of the company’s operating groups. This reflects that contracting CSD volumes is primarily a trend in the developed world, and Coca-Cola’s sodas could gain again this quarter in emerging economies and countries with low current consumption levels. In addition, manufacturer of the world’s most valued cola drink brand, “Coca-Cola,” will also introduce the natural stevia-sweetened low-calorie drink Coca-Coca Life in the U.S. and U.K. this year, in a bid to target the calorie-conscious customers who are shifting to other beverage options.

We estimate a $42 price for Coca-Cola, which is roughly in line with the current market price.

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Organic Brands to Boost Volumes this Quarter

As sodas continue to bear the brunt of growing health concerns, Coca-Cola might depend on its non-sparkling segment to fuel growth in volumes. In the first quarter, North America CSD volumes declined 1% while still volumes rose 3% for the company in the region. [1] The U.S. still beverage segment constituted just over 5.6% of net unit sales for Coca-Cola last year. In particular, Coca-Cola’s organic or all-natural brands such as the juice brand Simply, tea brands Gold Peak and Honest Tea, and the bottled water brand Glaceau Smartwater, could somewhat offset the decline in sparkling volumes in the U.S. this quarter.

  • Simply Volumes to Bolster Growth in Juices

Coca-Cola’s Simply brand of juice and juice drinks grew 7% in North America last year (94% U.S., 6% Canada), despite the 1.9% decline in the overall fruit beverage segment in the domestic market. [2] According to our estimates, fruit beverage volumes could fall by 13% to 1.85 billion gallons by 2018 from 2.133 billion gallons last year. However, even though the high amounts of sugars and calories have dissuaded consumers from juice consumption, especially orange juices, the Simply brand enjoys strong sales as it is marketed as healthier and all-natural, containing no added sugar or preservatives. In fact, Simply Orange overtook PepsiCo’s Tropicana, and even the popular Minute Maid juice brand owned by Coca-Cola, to become the leading orange juice drink in the U.S. last year, with retail sales topping $1 billion in the fiscal year ended August. [3] The orange juice market generated revenues of $3.45 billion in the U.S. in 2013, with Simply Orange holding 21% market share. Simply volumes grew by a double-digit percentage in North America in the first quarter, and could continue to strengthen Coca-Cola’s juice profile in the region this quarter.

  • Demand for RTD Tea as a Healthier Refreshment Rises

As consumers look to shift away from sugar and calorie-fueled beverages, RTD tea has become one of the fastest growing segments of the U.S. liquid refreshment beverage (LRB) market. Apart from acting as an alternative for sodas, tea is a convenient and healthier hydrant containing antioxidants that boost metabolism. Coca-Cola’s RTD tea portfolio including brands such as Gold Peak, Honest Tea and Fuze Tea, grew by 4% through March. This growth was fueled by double-digit rises in Honest Tea and Gold Peak volumes in North America. Due to the growing demand for iced tea as a healthier refreshment drink, coupled with low current penetration levels, the U.S. RTD tea segment is expected to generate sales of $5.3 billion in 2014, up from $5.1 billion last year, and grow at a CAGR of over 6% till 2018. [4]

Sales for Gold Peak reached $135 million last year, representing a small 2.6% of the RTD tea market that is currently dominated by Lipton, Arizona and Snapple, with a combined value share of 43%. ((Sales of RTD tea brands in the U.S., statista.com)) On the other hand, Honest Tea marked its one billionth beverage sale in June, with 888 million sales since Coca-Cola became a partner in 2008. [5] Although representing a small portion of the U.S. RTD tea segment presently, both Gold Peak and Honest Tea could continue to grow this quarter due to the rising demand for tea drinks.

FIFA World Cup Sponsorship to Add Incremental Volumes

Coca-Cola sponsored the 2014 FIFA World Cup held in June-July in Brazil, and will also sponsor the 2016 Summer Olympics in the country. The company’s Brazil volumes grew 4% year-over-year in the first quarter, and could continue to grow in the second quarter due to increasing influx of tourist traffic and marketing campaigns in the country. Brazil is one of the largest markets for Coca-Cola, accounting for around 7% of the beverage giant’s worldwide volumes in 2013. The country’s LRB market was worth nearly $43 billion last year, with volumes of over 11.3 billion gallons. [6] According to our estimates, Coca-Cola has close to 27% market share in the Brazilian beverage industry. Coca-Cola is estimated to have spent around $31 million over the last four years solely for the purpose of the football World Cup, as part of the company’s $7.6 billion investment in the country between 2012-2016. [7] Coca-Cola already boasts a strong brand appeal in Brazil, and increased marketing and promotional activities centered on the World Cup could have attracted more consumers for its soft drinks this quarter, especially tourists.

Coca-Cola Life on its Way to the U.S. And U.K. Markets

Sparkling volumes in North America and Europe together constituted roughly 28% of Coca-Cola’s net volumes last year, by our estimates. The diet CSD category continues to underperform the overall U.S. LRB market. Diet Coke, which accounts for almost one-fourth of the retail sales of diet CSDs in convenience-stores, witnessed a 6% fall in unit sales in the twelve-week period ending April. In contrast, Diet Pepsi’s volumes fell by only 3.3%. [8] Coca-Cola had launched its low calorie stevia-sweetened Coca-Cola Life in Argentina in June last year, and followed it with the launch of the drink in Chile in November. Sold in green colored cans, Coca-Cola Life caused a 7% rise in beverage volumes in Argentina last year, despite weak economic conditions in the country. After months of testing, the company is set to launch the product in the domestic market, in a bid to reverse the fortunes of the ailing diet segment.

The flagship drink Coca-Cola is the largest soft drink brand in the U.S., holding 18% market share in the country last year. [9] In the U.K. as well, the drink leads the beverage market with 15.4% value share in measured grocery and convenience store channels. [10] Great Britain represented only 2% of the net volumes for Coca-Cola last year. [11] As the U.K. recovers from the double-dip recession, consumer spending is expected to improve, and could boost soft drink sales going forward. Coca-Cola Life will join the diet stevia-sweetened U.K. portfolio of the company, presently comprising Sprite and Glaceau Vitaminwater. In fact, rather than adding the low-sugar Sprite to the line-up, Coca-Cola completely replaced the standard Sprite with the version containing stevia in the U.K. Zero calorie drinks already form more than 40% of the current line-up for the beverage maker in the U.K. The company is a signatory to the government’s Responsibility Deal, aimed at improving public health. Coca-Cola has vowed to decrease the average calories per liter in its carbonated drink portfolio by 5% by the end of this year. [12]

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Notes:
  1. Coca-Cola 10-q []
  2. The U.S. liquid refreshment beverage market remained flat in 2013, beveragemarketing.com []
  3. Coke’s simply orange escapes US orange juice squeeze, beveragedaily.com []
  4. RTD tea production in the US“, January 2014, prweb.com []
  5. Honest tea press release []
  6. Brazil-soft drinks“, September 2013, datamonitor.com []
  7. World cup fever! making sponsorship work“, February 2014, rwconnect.esomar.org []
  8. CSD declines worsen, cspnet.com []
  9. U.S. beverage results for 2013, beverage-digest.com []
  10. Leading soft drink brands in the U.K., statista.com []
  11. Coca-Cola annual report []
  12. Coke with fewer calories and less sugar to tackle obesity, June 2014, theguardian.com []