The Coca-Cola Company
) 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.
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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
) 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
, 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
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%.
|Total Volume (billion cases)
|%Growth in Sparkling
|%Growth in Still
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
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
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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