Flat Soda Consumption Hits Coke -- WSJ
April 21 2016 - 3:03AM
Dow Jones News
Health concerns weigh down namesake cola
By Mike Esterl
Coca-Cola Co.'s growth slowed in the first quarter as it was
dragged down by its namesake cola, renewing questions of whether
the beverage giant can return to promised revenue increases in the
mid-single digits.
Soda volumes were flat after five straight quarters of increases
as flagship Coke declined in every region but Asia, weighed down by
a weakening global economy and rising health concerns over sugary
drinks.
Coke's share price closed 4.8% lower at $44.37 Wednesday, wiping
out more than half of this year's gain. The selloff came even as
the company reported 7% volume growth in noncarbonated drinks and
as it speeds up sales of less profitable bottling assets.
Management faced tough questions from Wall Street analysts on an
earnings call, with Sanford Bernstein analyst Ali Dibadj noting "a
lot of skepticism" among investors that Coke can reach its 2016
target of 4% to 5% organic revenue growth.
Chief Executive Muhtar Kent said Coke expects to reach its
growth projection and believes that soda, which represents nearly
three-quarters of company sales, will grow this year as a new cola
marketing campaign kicks in and the global economic slowdown
bottoms out.
"We feel confident that we will still achieve what we have
said," Mr. Kent told analysts, adding that Coke anticipates "a
certain degree of improvement" in hard-hit economies during the
second half of the year.
Net profit fell 4.8% to $1.48 billion and revenue dropped 4% to
$10.28 billion in the first quarter from a year earlier. Weakening
foreign currencies had a negative impact of 12 percentage points on
earnings. Restructuring charges tied to divestments also weighed on
results.
Beverage volumes rose 2%, down from 3% growth in the second half
of last year. Organic revenue also rose just 2%, half of the
company's 2015 growth rate.
Coke said the numbers were affected by one fewer calendar day in
the quarter and ongoing bottling divestments. It said the revenue
growth rate was 4% in the first quarter after stripping out those
factors and foreign-exchange losses.
The company posted another quarter of solid growth in North
America, where still-beverage volumes rose 5%, including
double-digit growth in its Smartwater and Gold Peak tea brands.
Coke also has been steering consumers to smaller soda packages like
7.5-ounce cans, charging more per ounce. Overall, it raised prices
by 3% in its home market in the most recent quarter, even as
carbonated volumes were flat.
But management said it faces big economic challenges in several
erstwhile growth markets, including Brazil, Russia and China, even
as the company continues to swipe market share from beverage
rivals.
There are also growing signs that consumers in many parts of the
world are cutting back on soda in response to rising obesity and
diabetes rates. The U.K. plans to implement a special tax on
sugar-added drinks in 2018 and several other countries, including
India and South Africa, are weighing similar measures.
Coke reiterated Wednesday it has high hopes for its new global
marketing campaign, "Taste the Feeling." The campaign, launched in
January, plays up the company's zero-calorie cola brands including
Diet Coke and Coca-Cola Zero. Earlier this week it announced a
global packaging overhaul in which the front of diet cola cans and
bottles carry the phrase "Zero Sugar" or "No Calories."
Coke has stepped up its soda marketing as it redirects savings
from its $3 billion cost-cutting program and hopes to benefit from
this year's Olympics, which it sponsors. The company said it is on
track to cut costs by $600 million this year.
But Coke also will "continue to look for bolt-on acquisitions to
accelerate our growth" in noncarbonated beverages, Chief Operating
Officer James Quincey told analysts.
Coke agreed in January to buy a 40% stake in Nigeria's largest
juice maker, TGI Group's Chi Ltd., with an option to buy the rest
in a deal that valued the company at a little less than $1 billion.
Last year, Coke agreed to acquire China Culiangwang Beverages
Holdings Ltd., which specializes in multigrain drinks, for about
$400 million including debt.
The company also said Wednesday it had reached a new round of
refranchising deals with four companies in the U.S. It announced in
February it would sell its North American manufacturing and
distribution assets by the end of 2017 to focus on its more
profitable concentrate business. With the latest deals, Coke has
agreed to refranchise nearly two-thirds of the U.S. territory it
acquired in 2010, when it bought its biggest soda bottler.
Coke reiterated it expects earnings per share to rise 4% to 6%
in 2016, but that is after stripping out a negative impact of 8 to
9 percentage points on profit from weaker foreign currencies.
Write to Mike Esterl at mike.esterl@wsj.com
Corrections & Amplifications: Coke reported its earnings on
Wednesday. An earlier version of this article incorrectly stated
the report came Tuesday.
(END) Dow Jones Newswires
April 21, 2016 02:48 ET (06:48 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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