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Why Coca-Cola Is Cutting Ad Spending

By Demitri Kalogeropoulos - Apr 23, 2020 at 12:45PM

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The beverage titan is adapting to a new consumer landscape.

More stay-at-home time does not translate into more soda consumption. In fact, Coca-Cola's (KO 2.34%) latest earnings report showed a sharp drop in sales volumes as COVID-19 spread in late March and April.

Higher spending online and at supermarket chains has failed to offset plunging sales across its on-the-go categories, which include restaurants, sporting events, concerts, and convenience stores. In a conference call with investors, Coke executives detailed their response to this historic shift in consumer demand while explaining why they're cautiously optimistic that the fiscal second quarter will mark the worst of the pandemic's impact on its business.

Let's look at some highlights.

A glass of soda.

Image source: Getty Images.

The scale of the challenge

We're still in the most intense first phase of the crisis in many places, if not most of the world.
-- CEO James Quincey

Most of the company's first-quarter results reflected the positive momentum investors saw in recent months, with sales volumes and market share improving across most of its key markets. The sweeping application of shelter-at-home orders then spurred a "temporary but profound pressure" on demand trends starting in late March.

Coke said sales for at-home consumption rose as consumers loaded up their pantries. But that spike quickly subsided. There has been a greater pullback in the away-from-home sales that make up just over half of business. Overall volume dove 25% through the first few weeks of April, in fact.

Adapting to the new reality

We are in a better position today than we were heading into previous periods of challenge.
-- Quincey

Thanks to steady investments over the years, Coke has a good working relationship with its network of bottlers around the world. That setup is facilitating a rapid shifting of resources away from slow-growth areas, including the manufacturing of more in-demand products that are easily delivered from e-commerce warehouses or restaurants. "The agility that we're seeing in this regard has been impressive," CFO John Murphy said.

Saving cash and cutting marketing

We'll pull sizable marketing campaign through the early stages of the crisis and reengage when the timing is right.
-- Quincey

Coke has determined that consumers aren't responding to traditional marketing right now, so the company is pulling back its massive advertising budget for the time being. That move joins with other cost-saving initiatives to support cash flow and bolster the balance sheet, which management says is strong today. The good news is that Coke doesn't see the sharp sales drop as necessitating a change to its dividend, even though management has reduced all other capital allocation outflows.

The worst is yet to come

We expect a temporary but significant impact on our business in the second quarter primarily coming from the slowdown in our away-from-home business. For context, if we look at our April month-to-date trends, we are seeing volumes down globally, approximately 25%, driven by the sharp declines in our away-from-home businesses. Fortunately, based on the latest projections, we do expect the second quarter to be the most severely impacted.
-- Quincey

The second quarter that runs from April to July should show a historic sales decline. While volume fell just 1% in Q1, that metric is trending lower by 25% in recent weeks. Based on its experience in China and other areas, the consumer staples giant believes the current quarter will mark the high point in terms of the financial impact before demand starts recovering. But the scale and timing of that rebound will depend on how the pandemic progresses over the next few weeks and months.

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