Coca-Cola Earnings Review: Still Beverages Offset Decline In Sparkling, Restructuring Impacts Margins

The Coca-Cola Company (NYSE:KO) announced its Q1 earnings on April 15 as still beverages and emerging economies performed well. Net revenues fell 4% year-over-year to $10.6 billion, marred by structural changes and unfavorable currency translations. ^[1] 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, sales through March grew 2% on a comparable currency neutral basis. Operating income also declined 1% for the three months. Going forward, structural changes and currency are expected to weigh on Coca-Cola’s financials with an estimated unfavorable 1% and 7% impact on the full-year operating income respectively. In February, Coca-Cola had announced its productivity plan, aiming to generate $1 billion in incremental savings by 2016 to be redirected for media investments. The company is on its way to invest an added $400 million in media initiatives this year, as part of this productivity plan.

We estimate a $41.07 price for Coca-Cola, which is around 2% above the current market price. However, we are currently in the process of incorporating the latest earnings into our forecasts.

See our full analysis for Coca-Cola

Increased Marketing Fuels Growth In Brazil, Russia

On the back of increased spending on promotional activities and advertising for global events, Coca-Cola witnessed volume rises in both Russia and Brazil. The company was one of the official sponsors for the Winter Olympics held in Sochi in February. Large-scale marketing initiatives resulted in a 9% volume growth for the flagship drink Coca-Cola in Russia, despite disruptive winter weather and health concerns regarding sugary sodas. Overall, the company’s unit sales in Eurasia and Africa rose 2% this quarter.

On the other hand, Coca-Cola is also sponsoring the 2014 FIFA World Cup and 2016 Summer Olympics to be held in Brazil. Bolstered by increasing disposable incomes and marketing campaigns in the country, Coca-Cola’s Brazil volumes grew 4% year-over-year. Brazil is one of the largest markets for Coca-Cola, accounting for around 7% of the beverage giant’s worldwide volumes. The country’s liquid refreshment beverage (LRB) market was worth nearly $43 billion in 2013, with volumes of over 11.3 billion gallons. ^[2] According to our estimates, Coca-Cola has close to a 27% market share in the Brazilian beverage industry. Due to positive signs of a revival in economic activity and increased disposable incomes, this market is expected to further grow at a CAGR of 6% to over $54 billion by 2017. ^[3] Owing to Coca-Cola’s stronghold in the country’s LRB market, coupled with strong marketing and advertising campaigns, the company could further improve its unit sales in Brazil this year.

Mexico’s Soda Tax Hinders Growth For Coca-Cola

As expected, volumes for Coca-Cola declined by a low-single-digit percent in Mexico, hurt by the newly imposed soda tax. The Mexican government passed a one-peso-per-liter (around 7.6 cents) tax on sugary drinks, effective as of January this year. This move came as the country battles widespread obesity and diabetes. 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 ^[4]. 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 hinder growth for the company’s carbonated soft drinks (CSD) portfolio this year.

Solid Still Beverage Growth Prompts Rise In Net Volumes

While the core cola segment has suffered negative consumer perception due to looming health concerns, especially regarding artificial sweeteners in diet sodas, still beverages continue to grow. Unit sales of Coca-Cola’s still beverage portfolio rose 8% year-over-year in this quarter, offsetting a 1% decline in sparkling volume, to cause a 2% growth in overall global volumes. Health and wellness concerns have prompted consumers to shift beverage preferences from sugary sodas to alternatives such as sport drinks, ready-to-drink (RTD) tea and coconut water. While CSD volumes fell by 3.2% last year, capping off nine consecutive years of decline, segments such as energy drinks, bottled water, sports drinks and RTD tea witnessed volume increases in the U.S. ^[5] Though almost half of Coca-Cola’s unit sales come from the core cola segment of the sparkling beverage category, the company also boasts strong brands in the still beverage category.

Coca-Cola’s juice and juice drinks grew 3% in this quarter, despite growing health concerns about high sugar and calorie content in juices. Unit sales for the brand Simply rose by a double-digit percent in the domestic market, while unit sales for Minute Maid grew 1.5%, displacing PepsiCo’s Tropicana as the highest selling juice brand in the U.S. ^[6] Minute Maid is the first billion-dollar brand to emerge out of China, and the drink Minute Maid Pulpy saw an 8% growth in volumes in the country this quarter, boosting growth for Coca-Cola. ^[7] On the other hand, Coca-Cola’s robust RTD portfolio, including brands such as Gold Peak, Honest Tea and Fuze Tea, grew by 4% through March. This was fueled by a double-digit rises in Honest Tea and Gold Peak volumes in North America. Due to the healthier perception of tea, which contains antioxidants that boost metabolism, RTD tea is one of the fastest growing segments in 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 Coca-Cola 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. ^[8]

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1. “Coca-Cola 8-k“ [↩]
2. “Brazil-soft drinks“, September 2013, datamonitor.com [↩]
3. “ref 2” [↩]
4. “Poverty headcount ratio at national poverty line“, worldbank.com [↩]
5. “The U.S. liquid refreshment beverage market remained flat in 2013“, March 2014, beveragemarketing.com [↩]
6. “ref 3” [↩]
7. “Coca-Cola earnings transcript“ [↩]
8. “RTD tea production in the US“, January 2014, prweb.com [↩]