Diet Soda Slump To Lower Coca-Cola's Volumes; Still Beverages Could Offset This Decline
Beverage behemoth, The Coca-Cola Company ( KO ), is scheduled to announce its Q1 earnings on April 15. Disruptive winter weather and the diet soda slump are expected to weigh on the company's financials. With the two biggest soda consumers, the U.S. and Mexico, strengthening their resolve against widespread obesity and cutting down sugar intake, carbonated soft drink ( CSD ) volumes for Coca-Cola might register another year-over-year decline this quarter. CSDs in the U.S. and Mexico constitute just over one-fifths of the company's overall volumes by our estimates. However, this possible decline in volumes might be offset by increases in prices, international growth and still beverage volumes. In addition, beverage volume growth could also be fueled by the commencement of summer. Coca-Cola is already one of the most valued and recognizable brands around the world, and aims to raise marketing investment going forward. The company's marketing spend topped $4 billion last year, more than any of its competitors. With increased promotional activities and advertising, Coca-Cola aims to maintain its position as the world's highest selling beverage manufacturer, going forward.
We estimate a $41.07 price for Coca-Cola , which is around 5% above the current market price.
Diet Sodas Are A Flop In The Domestic Market
After three consecutive years of growth, the U.S. liquid refreshment beverage (LRB) market remained flat in terms of volumes in 2013. CSD volumes declined by 3.2% year-over-year to less than 13 billion gallons last year, primarily due to a slide in diet drink sales. According to Beverage Digest, while Coca-Cola improved its market share by 0.4% to 42.4%, the flagship brand Diet Coke reported a 6.8% fall in volumes. Consumers have been shifting to natural and healthier beverages with less sugar and calorie content due to the health risks associated with sugary drinks. The diet counterparts have fared even worse, with the artificial sweetener aspartame being criticized for causing sugar cravings, dehydration, weight gain and even heart diseases. Health and wellness concerns have further caused a 7% decline in diet soda consumption in the domestic market in the first quarter. Consumers have also reported bitter aftertastes of diet drinks which use the natural sweetener stevia, initially considered a bankable solution. This decline in Diet Coke volumes, the second best selling CSD in the domestic market, is expected to impact Coca-Cola's unit sales this quarter.
Going forward, Coca-Cola will look to introduce its 64-calorie naturally-sweetened Coke Life in the U.S. this year. Coke Life is only available in Argentina and Chile at present, and has been successful in these countries, adding incremental volumes. This drink uses stevia, but also contains sugar to balance-out the sour aftertaste. The launch of Coke Life in the U.S. this year might spur diet CSD sales. Another bright spot for Coca-Cola is that the regular sodas witnessed a 1% year-over-year sales growth in the first quarter ending March, after seven consecutive quarters of negative growth.
Mexico's Soda Tax To Weigh On Coca-Cola's Volumes
Mexico is the largest consumer of Coca-Cola's beverage offerings, in terms of per capita intake. But the country is also battling the world's largest obesity rate (percentage of population with obesity) of 32.8%, and a high diabetes rate of 9%. In order to curb growing health problems, the Mexican government imposed a one-peso-per-liter (around 7.6 cents) tax on sugary beverages, effective as of January this year. According to Coca-Cola Femsa, Coca-Cola's second largest bottler, beverage makers are looking at a 5-7% decline in sugary soft drink volumes this year in Mexico, hurt by the soda tax. However, what bodes well for Coca-Cola is that its market share improved in Mexico following the tax imposition. This means that the company has been able to hold onto its consumer base, more effectively than its peers in the country.
Still Beverages Could Offset The Fall In CSD Sales
Amid declining sales of CSDs, Coca-Cola's robust ready-to-drink (RTD) tea portfolio, including brands such as Gold Peak, Honest Tea and Fuze Tea, grew by 11% last year. 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.
On the other hand, growth is also expected to come from fruit beverages this quarter. Coca-Cola's juice and juice drinks including Minute Maid, Simply, Rani and Innocent saw a 5% rise in volumes in 2013. In fact, while fruit beverages in the domestic market declined 2%, unit sales of Minute Maid rose 1.5%, displacing PepsiCo's Tropicana as the highest selling fruit drink in the U.S. This trend could continue into the first quarter, boosting Coca-Cola's volume growth.
Coca-Cola's Brand Appeal And Marketing Spend To Spur Sales
Volumes for the flagship drink Coca-Cola grew by a double-digit percent in Russia last year, bolstered by marketing campaigns and promotional activities in anticipation of the Winter Olympics in Sochi in February. Sales for the company are expected to further grow in Russia in the first quarter, following completion of the Olympic Games. Coca-Cola is in the middle of its five-year $3 billion investment plan in the country, laid out in 2011. The company has also built a $120 million plant at Rostov to cater to the growing demand for beverages ahead of the Sochi Winter Games. The Rostov plant is estimated to have added around 120 million gallons to Coca-Cola's production capacity in Russia.
Coca-Cola is also one of the official sponsors for the FIFA World Cup to be held in Brazil in June. Being a consumer product, large scale promotional activities and advertising could spur sales for Coca-Cola. In February, the company announced its plans to save an incremental $1 billion in productivity by 2016, which would be redirected to media investments. Coca-Cola aims to achieve this through system standardization, supply-chain optimization, and industrious resource and cost allocation. In line with this productivity savings plan, the company plans to save $550-$660 million this year. This bodes well for Coca-Cola as the productivity plan not only aims at increasing media spend and subsequently beverage sales, but could also widen operating margins for the company.
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