By Mike Esterl
Coca-Cola Co. showed improvement in the second quarter, fueled
not by soda, but by noncarbonated drinks like tea, bottled water
and ultra-filtered nutrient-rich milk.
The maker of Sprite, Fanta and Coke and other sodas, which make
up about 70% of its business, also got a modest lift from improving
sales in the U.S., where higher prices and smaller packages are
offsetting turbulence in emerging markets that formerly supplied
much of the Atlanta-based company's growth.
Both trends are helping keep Coke afloat as it tries to
jump-start its business by redirecting cost cuts into marketing
like its "Share A Coke" campaign after falling short of its growth
targets the past two years. Weakening foreign currencies also are
pushing down profit at the company, whose other billion-dollar
brands include Minute Maid orange juice, Fuze ice tea and Dasani
water.
"The global economic recovery remains uneven," Chief Executive
Muhtar Kent told analysts Wednesday in an earnings call, adding
that emerging markets from Brazil to Russia "remain
challenged."
Revenue fell 3.3% in the second quarter to $12.16 billion, with
foreign exchange representing a headwind of about seven percentage
points. Net income surged 20% to $3.11 billion, boosted by a net
gain of $1.40 billion tied to its acquisition of a minority stake
in energy drink maker Monster Beverage Corp.
Coke said its beverage volumes rose 2% in the second quarter.
So-called still beverages grew 5%, including 7% for tea, 8% for
water and double-digit growth for dairy drinks.
Carbonated drinks rose 1%, including its flagship cola, as
health-conscious consumers scale back. Diet Coke fell 7% in the
second quarter, with U.S. consumers continuing to balk at
artificial sweeteners like aspartame.
North American revenue increased 3.5% to $5.92 billion as the
company steered consumers to smaller soda packages like 7.5-ounce
"mini cans" that cost consumers more on a per-ounce basis. Such
smaller packages still make up less than 20% of the product mix but
are growing at a nearly 20% rate.
"Our marketing model is about more people enjoying more Cokes
more often for a little bit more money," said Sandy Douglas,
president, North America.
Still, North American carbonated drink volumes rose just 1% in
the second quarter, compared with a 4% increase in noncarbonated
drinks, including double-digit growth in Smartwater and tea brands
Gold Peak and Honest Tea. Late last year in the U.S., Coke also
launched Fairlife, a premium-priced, lactose-free milk with 50%
more protein and 30% fewer calories than regular milk.
Mr. Kent said on Wednesday that he was "very excited" with
Fairlife's early results as the company increasingly targets the
value-added dairy category in a diversification push. Dairy remains
a tiny part of Coke's overall sales but Mr. Kent said the company
is enjoying growth with brands like Minute Maid Pulpy Super Milky,
a mix of juice and milk developed in China, and Santa Clara, which
makes yogurt and other dairy products in Mexico.
But slumping sales in several key emerging markets continue to
weigh the company down. Coke said beverage volumes in the second
quarter declined by a low-single-digit percentage in Russia and in
Brazil. Volumes grew 6% in China but contracted by a
mid-single-digit percentage in India.
The strengthening dollar is also hurting Coke, which generates
about 75% of its operating income abroad. The company said it
expects weakening foreign currencies to represent headwinds of six
percentage points on revenue and 11 points on operating income in
2015.
Although PepsiCo Inc. has said it plans to replace aspartame
with sucralose in Diet Pepsi in the U.S. in late August, Mr.
Douglas, Coke's North American president, said his company has no
plans to change its formulation for Diet Coke because loyal
drinkers "have told us, absolutely don't change the taste." He
noted that health authorities have repeatedly found aspartame to be
safe over decades.
Coke also said it is on track to book $500 million in cost
savings this year, part of a $3 billion productivity program
announced last October that included zero-base budgeting and 1,600
to 1,800 in layoffs this year.
Write to Mike Esterl at mike.esterl@wsj.com
Access Investor Kit for The Coca-Cola Co.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US1912161007
Subscribe to WSJ: http://online.wsj.com?mod=djnwires