Has Coca-Cola Gone Flat?

The results are in for beverage behemoth Coca-Cola (NYSE: KO  ) , and for the most part they're lackluster. Coca-Cola struggled last year despite the steady global economic recovery. Its results were weak enough to raise questions about its strategic direction. The evolution of consumer preferences away from sugary, high-calorie drinks is hitting Coca-Cola where it hurts.

However, Coca-Cola has remained steadfast in its strategy. For the most part, Coca-Cola is a pure-play soda company. While that's obviously served the company well over the past several decades, it may be time for a 21st century approach and a more diversified product portfolio. That's the strategy adopted by arch rival PepsiCo (NYSE: PEP  ) , and it may be working in Pepsi's favor.

The end of soda's reign in the U.S.?
Consumers, particularly in the United States, are becoming much more conscious of what they're putting into their bodies. Nowhere is that more evident than in Coca-Cola's earnings report. Last year was one of striking disparities between Coca-Cola's performances in North America and across the globe.

Unit case volumes remained flat in North America, and because of higher costs, Coca-Cola's operating profit in North America dropped 3% last year after stripping out currency effects. By contrast, Coca-Cola grew case volumes by 7% in its Eurasia and Africa segment. These results mirror those of Pepsi, which reported 4% organic revenue growth last year, thanks to 11% organic sales growth in its Asia, Middle East, and Africa segment.

In all, Coca-Cola reported a 2% decline in revenue last year. After stripping out the effects of currency fluctuations, organic revenue grew 3% in 2013.

Emerging markets remain a strong opportunity
Coca-Cola's penetration in the emerging markets, such as Latin America, represents its best growth opportunity going forward. Coca-Cola grew its constant-currency operating profit by 13% and 16% in its Latin America and Pacific segments, respectively. Clearly, Coca-Cola has done a great job of expanding its footprint in the under-developed economies so far, and thanks to its pristine brand strength and world-class distribution, it's set up well to keep growing across the globe.

At the same time, Coca-Cola's North American business is flat-lining, which is a concern because obviously North America still represents a major geography for the company. Coca-Cola is testing more health-conscious products, including Coca-Cola Life. This is a new, naturally sweetened mid-calorie cola that the company is testing in Argentina and Chile. If that product does well in those countries, maybe it will catch on in the U.S. as well. In addition, Coca-Cola holds a wide beverage portfolio that includes juices, ready-to-drink teas, and bottled water.

However, Coca-Cola still produces the vast majority of its revenue and profit from its traditional sparkling beverages. North American consumers simply aren't buying as many cases of sugary sodas as they used to. This is why Pepsi has split its business fairly evenly between beverages and food. Its food product categories include Quaker and Lay's.

Will Coca-Cola's new partnership move the needle?
Coca-Cola has not demonstrated any desire to enter the food category. It's resisting the urge to diversify away from beverages like its close rival Pepsi did many years ago. Instead, Coca-Cola's recent announcements signal a doubling-down in soda. Coca-Cola will invest $1.25 billion over the next 10 years in a strategic partnership with Green Mountain Coffee Roasters (NASDAQ: GMCR  ) , maker of the Keurig at-home coffee brewing system. Going forward, Green Mountain and Coca-Cola will team up to develop a Keurig Cold Beverage platform. This will utilize the highly successful Keurig system as well as tap into Coca-Cola's sterling brand connection with consumers.

Coca-Cola's new initiatives, including its Coca Cola Life product as well as its work on a Keurig Cold machine, may pay off. Still, they represent more of the same. In North America, consumers seem to be turning away from carbonated beverages and sugary drinks. Existing at-home soda machines haven't taken off in the United States for that very reason. People are shying away from carbonated sodas, regardless of their method of delivery. As a result, Coca-Cola may want to pursue food offerings in the future to better capitalize on the changing consumer landscape.

Buffett made billions on Coke
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, like Coca-Cola, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2846613, ~/Articles/ArticleHandler.aspx, 10/25/2014 2:24:26 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement