The consumer taste is undergoing a massive change across the globe as people are now becoming more and more inclined towards healthier options that contain less sugar and fewer calories and minimiz any other fitness-threatening elements. This has contributed to a major headwind facing the carbonated beverage industry, and Coca-Cola (KO, Financial), which declared its third quarter results yesterday, seems to be badly hit. The company’s North American business is on a continuous decline and even with the limited growth being generated in emerging markets, it is difficult to compensate.
Analysis of Q3
The Coca-Cola Company reported $12 billion in third quarter revenue, flat from the same period last year. Combined with sales declines in the first two quarters of the year the company’s year-to-date revenue is down 2%. Net income for the quarter came in at $2.1 billion, down a whopping 14% from last year. At 48 cents, earnings per share were 6 cents below the year prior’s results and 4 cents shy of Wall Street analysts’ consensus estimate. Unit case volume grew 1% for the quarter.
While Coca-Cola International volume grew 1% in the quarter, volume in North America declined 1%. A 5% decline in unit case volume in Europe was partially offset by 5% growth in Eurasia and Africa, making it clear that much of the company’s struggles lie in developed markets. Overall still beverage volume grew 2% in the quarter, with tea contributing 4% and both water and energy drinks volume growing 7%.
Silver lining?
It is quite clear from the results that Coca-Cola did not perform badly in all respects but delivered a mixed performance. However, the mixed performance was not satisfactory for the Street as the stock plummeted around 6% after the results were announced. However, Coca-Cola had some parts of the result to be happy about among which the prime is the growth achieved in emerging markets. Though the growth did not touch the glorious figures achieved in the past, the investors should be happy that the volume growth is still positive in these markets and for the company. It should be more aggressive in leveraging this aspect. India offered Coca-Cola the largest growth percentage in the emerging markets while other markets like Russia, China and Brazil could not offer expected growth rates due to a combination of poor economic scenario and weather fluctuations.
Coca-Cola has been taking up several initiatives in order to shield itself from the decline in volumes across the globe. For instance, the company in a bid to reduce the excess sugar content in carbonated soft drinks (a major problem for consumers), launched its naturally sweetened Coca-Cola Life in Argentina and Chile, and after months of testing, the drink is set for introduction in the U.S. and U.K. markets this year. Coca-Cola will aim to spur sales of its ailing diet segment with the launch of Coca-Cola Life in the U.S., and look to further sales in the stabilizing U.K. market. 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.
Takeaway
In conclusion, it may be said that Coca-Cola is facing a tough time in the markets across the globe but at the same time, it is attempting to innovate on its products and serve healthy options. In comparison, PepsiCo (PEP, Financial) has been delivering on Street expectations essentially because of its snacks division and other foods division. The company reported a revenue of $17.2 billion in the third quarter, up 2% on a y-o-y basis and comfortably beating the estimates. However, pretty much like Coca-Cola, the company has been facing tough times in its soft beverages business. Thus, it is quite clear that the preference change among customers is the crucial aspect that is hurting Coca-Cola’s business. As such, it is advisable that investors stay away from the stock for now and wait until there are some major product developments.
