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Coca-Cola Might Struggle Amid Growth Concerns in Key Markets

April 28, 2014 | About:

The decline in the consumption of carbonated drinks has stalled the growth of the biggest player in the industry, The Coca Cola Company (KO).

A report by Beverage Digest has shown that the future might be even more difficult due to the accelerated decline in the consumption of carbonated drinks. Last year, the sales volume of carbonated drinks in the U.S. fell 3%, as opposed to a drop of 1.2% in the prior year.

Earlier this month, Coca-Cola released its quarterly results in which its earnings came in-line with market’s expectations. The company witnessed growth in some international markets for its soda drinks, but that was not enough to offset the declines coming from North America, Europe and Latin America. Overall, Coca-Cola reported a 1% decline in global soda volumes.

The company could grow in Brazil in the coming years on the back of two major sporting events. Coca-Cola will, however, struggle in Mexico after the price hike coming from the soda tax. Since Mexico is one of its biggest markets, a drop in volumes in this country can create problems for the company’s growth.

The company’s shares have fallen by 2.6% over the last 52 weeks, currently around $41. On the other hand, the S&P 500 has risen by 17.8% in the same period.

Earnings

Coca Cola’s quarterly revenues fell 4.2% year over year to $10.58 billion, better than analysts’ expectation of $10.55 billion. Net Income, on the other hand, dropped by 7.4% to $1.62 billion, or $0.36 per share which translated into adjusted earnings of $0.44 per share, in line with estimates.

Soda Volumes

Nearly 70% of Coca-Cola’s sales volume consists of soda brands where the company has been struggling with declining volumes. Coca-Cola’s customers have reduced the consumption of its flagship drink due to health issues. Moreover, the company is also facing increasing competition from competitors Dr. Pepper (DPS), Pepsi (PEP), and several smaller players.

In the U.S., things are getting even worse. Besides regular Coca-Cola, the company has also reported declining volumes of Diet Coke on account of concerns related to artificial sweeteners. In the previous quarter, diet soda sales fell 7%, which was one of the reasons behind the decline in overall soda volumes in North America.

In the U.S. Diet Coke’s consumption is nearly twice as large as Diet Pepsi. Moreover, Diet Coke is Coca-Cola’s second best selling soda in the U.S.

Overall, Coca-Cola is struggling with growth in North America and Europe, but the company continues to grow in the rest of the world. North America and Europe, however, are its primary markets. Therefore, the company’s global soda volume fell 1% in the quarter.

In North America, soda volume fell by 1%. Similarly, in Europe volume declined by 5%, albeit this quarter did not include Easter sale, unlike the previous year. In the United Kingdom, soda volumes declined by “double-digits”. In Latin America, volume fell 1% amid the Mexican tax reforms.

In Eurasia and Africa region, soda volume rose 1%. Similarly, in Asia Pacific, volume increased in low single digits driven by 2% grown in its primary beverage, Coca-Cola, and 4% growth in Sprite.

Optimistic About Brazil

During the quarter, Coca-Cola increased its promotional and advertising activities which led to growth in key emerging markets, Brazil and Russia.

In Russia, where Coca-Cola was the official sponsor of the Sochi Winter Olympics, the company reported 9% volume growth for its flagship Coca-Cola drink, despite health concerns and the severe winter weather.

Brazil, on the other hand, witnessed 4% growth in volume from last year but could post significant increase in the coming quarters. This is because Coca-Cola is spending heavily in the country as it gears up for two major sporting events: the 2014 FIFA world cup and the 2016 Summer Olympics.

Brazil’s beverage market is worth nearly $43 billion and is growing at an average of 6% per year. Coca-Cola is one of the biggest players in the industry with a 27% market share.

These upcoming events, the rise in the country’s disposable income and the growing size of the market can give a boost to Coca-Cola’s sales in the near future.

Brazil currently accounts for nearly 7% of Coca-Cola’s volume.

Mexico Can Drag Coca Cola’s Growth

In Mexico, the newly imposed soda tax caused an increase in the price of soda drinks. The Mexican government has increased its soda tax amid rising levels of obesity and diabetes in the country. The country has the highest obesity rate in the world, at 32.8%.

Unlike the U.S. and Western Europe, Mexico has more price sensitive consumers since more than half of the country’s population is living below the national poverty line. As a result, Coca-Cola’s volume dropped by a “low-single-digit-percent.”

The country’s soda tax will likely have an adverse impact on Coca-Cola’s growth as Mexico is its second largest market, behind the U.S., and accounts for 13% of its annual volume. In terms of per-capita consumption, Mexico is the largest market for Coca-Cola’s beverages.

Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.

About the author:

Sarfaraz A. Khan
Sarfaraz A. Khan is a capital market analyst and finance writer. His specialty lies in energy stocks. He also covers consumer goods, services sector, technology stocks, emerging markets and ETFs. His work appears on TheStreet, Seeking Alpha, Motley Fool and GuruFocus.

Visit Sarfaraz A. Khan's Website


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