Is Coca Cola Losing The Battle In Emerging Markets?

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As the consumption of sugary fizzy drinks falls in the U.S., soda makers are looking at emerging markets for growth. However, The Coca-Cola Company (NYSE:KO), whose namesake brand accounts for nearly 25% of its valuation (according to our estimates), seems to be witnessing a slowdown in growth in India. As per its Q2 2016 results, the company recorded only a 3% year-on-year growth in unit case volume in India in the April to June quarter, which is peak summer in the region. According to Nielsen data, juice and juice drinks have pushed fizzy drinks out of the top five highest sold beverages across modern retail chains in India in the first half of 2016. While this data is only for modern trade it indicates that consumer preferences in urban India are shifting towards healthier beverages in line with developed nations. We believe carbonated soft drink companies need to create a diversified beverage mix with healthy alternatives to grow revenues. While PepsiCo has been focusing on healthy drinks and has a profitable snacks segment, Coca Cola needs to increase its efforts on healthier beverages to increase revenues in the long term.

Increasing Focus On Healthier Beverages Critical

As a part of an initiative to augment fruit sales for farmers, Indian regulators are urging soda companies to increase fruit content in aerated beverages and finalizing guidelines for non-cola aerated beverages with fruit juices. Coca Cola’s brand Fanta Green Mango is the only product currently available in India which falls under this category and has 10.4% fruit content. As consumer preferences shift towards fruit juices, this product category can attract more consumers. Coca Cola already has an advantage in this segment with its existing product and is working on developing more products on this platform. However, competition is strong from PepsiCo, which is also developing products in this category and already owns the Tropicana juice and Slice brand in India. Both are now among the top 5 beverages. Innovation in aerated beverages and focus on healthier alternatives is critical for soda makers to grow revenues in the long term. While Coca Cola is working on a few initiatives, such as introduction of Coke Zero Sugar in the UK, it does not seem to be doing enough. PepsiCo currently seems to be ahead of the game as far as healthier drinks are concerned. The company launched “Hello Goodness” vending machines last year and introduced an organic version of Gatorade. As per our estimates, carbonated soft drinks account for less than 15% of PepsiCo’s valuation, while this number is around 60% for Coca Cola (including Coke Zero, Sprite Zero, Barq and Diet Coke).

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As Coca Cola struggles to grow sales battling sugar tax in the UK and preference for fruit juices over colas in India, we believe reducing reliance on carbonated soft drinks and adding more healthy drinks to its portfolio of beverages is critical for the company. For now, PepsiCo appears to be better placed to tackle the changing consumer landscape.

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