Coca-Cola Earnings Preview: Still Beverages To Drive Growth As The Soda Slump Continues


The Coca-Cola Company ( KO ) is scheduled to announce its third quarter earnings on October 15. We expect the company's results to highlight the consistent decline in the consumption of fizzy drinks in developed markets. As a result, we expect most of the volume growth to be primarily driven by products in the still category such as Minute Maid juices, Powerade and Dasani bottled water. We will also be closely watching Coca-Cola's performance in some of the key international markets such as China, Japan, Mexico and Brazil. Our $45 price estimate for Coca-Cola is about 15% above its current market price.

Coca-Cola is the world's leading beverage company, selling more than 500 sparkling and still brands. The company sells non-alcoholic beverages in nearly every category - sparkling beverages, water, enhanced and flavored water beverages, tea, coffee, juice, sports beverages and energy drinks. Led by Coca-Cola, its most valuable brand, the company's portfolio features 16 billion dollar brands including Diet Coke, Fanta, Sprite, Coca-Cola Zero, Vitaminwater, Powerade, Minute Maid, Simply, Georgia and Del Valle.

See Our Complete Analysis For Coca-Cola

The Soda Slump In Developed Markets

As consumers continue to shift towards healthier alternatives due to obesity and diabetes concerns, the soda slump in developed markets is getting bad to worse. The situation in the U.S. is a key example of this trend - all channel carbonated soft drink ( CSD ) sales volume in the U.S. declined 1.2% in 2012, slightly worse than the 1% decline in 2011 and the 0.5% decline in 2010. Per capita consumption of CSDs peaked around 1998 at about 54 gallons a year. In 2012, the figure stood at around 44 gallons a year. Growing consumer awareness about the negative health impact of CSDs has been a major reason behind this trend. A research paper recently published in the American Journal of Public Health concluded: " Soft drink consumption is significantly linked to overweight, obesity, and diabetes prevalent worldwide. "

The situation is also difficult in the low-calorie segment, which was once seen as a savior of the CSD lineup. A recent report from Beverage Digest , a trade publication, suggests that the consumption of low-calorie or diet sodas is falling faster that the regular CSDs. It noted that while the sales of regular Coke and Pepsi declined by just 1% and 3% in 2012, their low-calorie counterparts fell by more than 3% and 6%, respectively. This is primarily due to health concerns associated with the consumption of aspartame, an artificial sweetener that contains close to zero calories and is almost 200 times sweeter than sugar. It can also be attributed to a growing shift in consumer preferences towards natural or organic ingredients in the U.S. Weak demand for diet drinks recently drove Coca-Cola to launch an ad campaign specifically focused on defending the use of artificial sweeteners in its diet beverages.

Still Beverages To Lead Volume Growth

Compiled using Coca-Cola's annual SEC filings, the table below shows that the company's still beverages have been out-growing its sparkling offerings over the last few years now. This is primarily due to the declining consumption of sparkling beverages in developed markets as discussed above. During the second quarter, Coca-Cola's sparkling sales volume was flat y-o-y, while its sales volume in the still category grew by 6% over the same period. This helped the company report a consolidated volume growth of 1%.

Year 2012 2011 2010 2009 2008
Total Volume (billion cases) 27.7 26.7 25.5 24.4 23.7
%Sparkling 75% 75% 76% 77% 78%
%Still 25% 25% 24% 23% 22%
Sparkling Volume 20.8 20.0 19.4 18.8 18.5
%Growth in Sparkling 4% 3% 3% 2% NA
Still Volume 6.9 6.7 6.1 5.6 5.2
%Growth in Still 4% 9% 9% 8% NA

We expect Coca-Cola's still beverages sales volume to be boosted by its partnership with Aujan Industries, one of the largest independent beverage companies in the Middle East. Aujan sells one of the leading juice brands in the Middle East, Rani, that is sold in more than 56 countries and generates sales revenues of more than $600 million. We also expect Coca-Cola to ride on the fast-growing ready to drink tea category with its popular brands. The company's Gold Peak , Honest Tea and Fuze Tea brands did well to grow its ready to drink tea sales volume by 10% during the second quarter. Volume growth will also come from other still beverage categories such as energy and sports drinks, juices and bottled water.

Eyeing Performance In Key International Markets

Coca-Cola operates in all but two countries worldwide, generating about 60% of its revenues from international markets. Such broad geographical presence has greatly helped the company amid declining consumption of CSDs in the U.S. Emerging and developing markets where per capita consumption of CSDs is much lower compared to the developed markets and income levels are rising rapidly, provide huge growth opportunity for the company. However, its performance in China, one of the most important emerging markets, which is expected to become the largest beverage market by 2015, has been lackluster during the first half of the year. Coca-Cola's CSD volume in China remained flat year-on-year during the first six months, while PepsiCo was able to grow its sales volume by ~10% over the same period. Not only this, the company's performance in other important international markets such as Mexico, Japan and Brazil was also subdued during the second quarter. We will be closely watching for an update on Coca-Cola's performance in these four markets, as they contribute more than 30% to its global sales volume.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: CSD , DPS , KO , KRFT , PEP



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