Beverage giant The Coca-Cola Company (NYSE:KO) reported 3% year-over-year growth in worldwide volumes in Q2, with sparkling volumes rising 2%, on July 22. Net revenues fell 1% year-over-year to $12.57 billion, marred by structural changes and unfavorable currency translations.  Structural changes comprised deconsolidation of bottling operations in Brazil and the Philippines last year, contracting sales for Coca-Cola’s bottling investments this quarter. Excluding the impact of restructuring, Q2 sales grew 3% on a comparable currency neutral basis. Operating income also declined 2% for the three months and year-to-date. Sparkling growth was fueled by 1% rises in the brand Coca-Cola’s volumes in both North America and international markets, reflecting strong performance of the company’s flagship soda drink amid headwinds in the carbonated soft drink (CSD) category, particularly in developed markets. With the launch of Coca-Cola Life, a low-calorie stevia-sweetened drink, in the U.S. and U.K., Coca-Cola will aim for further growth in its sparkling portfolio this year.
In addition to sparkling growth, Coca-Cola’s still beverage portfolio comprising sports drinks, bottled water and ready-to-drink (RTD) teas also saw 5% global volume rise this quarter. Non-sparkling segments, especially RTD tea and coffee and sports drinks, have low current penetration levels and a healthier perception that drove volume growth this quarter and could continue to strengthen Coca-Cola’s net volumes going forward. However unit sales for Coca-Cola’s juice and juice drink portfolio fell 1% during this period as consumers looked to avoid high-sugar and calorie fueled juices. In addition, juice volumes also declined as the company increased net prices in North America following the rise in commodity costs, which in turn somewhat hindered consumer demand.
Going forward, the company expects structural changes, including a new provision in Venezuela imposing a maximum threshold for profit margins, to negatively impact the net sales and operating margins by 1-2% and 3% respectively in the latter half of the year. We estimate a $42 price for Coca-Cola, which is roughly 2% above the current market price. However, we are currently in the process of incorporating the latest quarterly results into our forecasts.
Brand Coca-Cola Grows in the Domestic Market
The flagship brand Coca-Cola generated almost $11 billion revenues in 2013, and continued to grow sequentially in the second quarter, with volumes rising 1% year-over-year in North America. This growth defies the industry-wide trend of declining CSD volumes as consumers look to shift from sugary sodas to healthier beverage alternatives. Along with Coca-Cola, other flavored CSDs Fanta and Sprite also rose 4% and 2% respectively to boost Coca-Cola’s volume and value share in the domestic CSD market. Apart from the increase in unit cases, net pricing for Coca-Cola’s North America sparkling unit also rose 3%, while overall net pricing in the region grew 1%. However, as expected, Diet Coke volumes slid in the domestic market amid widespread safety concerns regarding usage of the artificial sweetener aspartame.
Sales of the drink Coca-Cola in the U.S. alone constituted around 10% of the net revenues last year. With the launch of Coca-Cola Life in the country this year, the company will aim to spur sales of its ailing diet portfolio. 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, which could bolster growth in the diet sparkling category this year.
RTD Tea Volumes Continue to Grow Due to Healthier Perception
Coca-Cola’s RTD tea volumes rose 4% globally in the quarter, and by 6% in North America. Growth in North America was led by double-digit percent increases in Gold peak and Honest Tea volumes. 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. 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. 
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.  Although representing a small portion of the U.S. RTD tea segment presently, both Gold Peak and Honest Tea could continue to grow in the following quarters due to the rising demand for tea drinks.
Latin America Sales Decline Due to Brazil and Mexico Slowdown
Coca-Cola’s Latin America volumes remained even in the quarter, with sparkling volumes declining 1% in the region. This decrease in soda volumes was primarily affected by the soda tax imposed by Mexico at the start of 2014. The Mexican government passed a one-peso-per-liter (~8 cents) tax on sugary drinks, in the wake of growing obesity, diabetes and other health concerns. In fact, Mexico has the world’s highest obesity rate at 32.8%. The soda tax was passed onto consumers, thus raising prices of soft drinks. With more than half of the country’s population living below the national poverty line, a price rise dissuaded some price-sensitive customers from soft drink consumption, causing a 3% decline in Coca-Cola’s net Mexico volumes this quarter. . According to our estimates, Mexico accounted for around 13% of Coca-Cola’s overall volumes last year, only second to the 19% volume contribution by the U.S. As Mexico is the largest consumer of Coca-Cola’s beverage offerings, per capita wise, contracting volumes in the country due to price rises could further hinder growth for the company’s CSD portfolio going forward.
On the other hand, Brazil volumes remained flat in Q2, despite the increase in demand due to large-scale investment and marketing activities centered on the recently completed FIFA World Cup held in the country. This was mainly due to weak consumer spending in Brazil amid continued macroeconomic instability in the country this year. Brazil’s economy is slowing owing to higher interest rates put in place to control inflation. These measures have impacted consumer spending, which slightly slowed down this year, as compared to the last quarter of 2013, consequently impacting soft drink sales.  Along with Mexico, Brazil is also one of the largest markets for Coca-Cola, accounting for around 7% of the beverage giant’s worldwide volumes in 2013. Lower sales in both these markets resulted in a 9% decline in the company’s Latin America sales this quarter.Notes: