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Coca-Cola Explains Why a Full Recovery Could Take Years

By Demitri Kalogeropoulos – Jul 23, 2020 at 3:34PM

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Consumers aren't moving around like they used to, according to details from Coke's second-quarter earnings report.

Coca-Cola (KO -0.97%) investors recently saw some metrics that they aren't used to seeing from the blue chip stock. Shifts in consumer behavior since the beginning of the COVID-19 pandemic led to significant market share losses, the company said in its second-quarter earnings report. Meanwhile, profits and cash flow both slumped.

In a conference call with Wall Street analysts following that report Tuesday, CEO James Quincey and his team expressed optimism that the worst is likely behind the company when it comes to those critical trends. However, management suggested it might be more than a year before the business returns to its pre-pandemic sales levels.

Let's take a closer look.

A cooler filled with bottled and canned drinks on a wooden dock with a body of water in the background

Image source: Getty Images.

Market share struggles

The trajectory of our business trends in the near term is closely linked to the size of our away-from-home business in any given country and the level of lockdowns in the market.
-- Quincey

Coke's business is more focused on beverages than peers such as PepsiCo (PEP -2.01%) that operate significant food and snack segments. That's why it was no surprise when the soda giant reported a greater sales decrease during the early pandemic months, with organic revenue falling 26% through late June. Pepsi's comparable figure was flat.

The bigger surprise was Coke's loss of market share, which is clear when you compare its 16% volume drop with Pepsi's 11% beverage volume decrease. That gap, management explained, is due to the disproportionate hit that the industry took in the on-the-go segment. Coke dominates this niche, which caters to restaurants, sporting arenas, theaters, and convenience stores. When consumers stopped frequenting these establishments, the company's market share suffered.

The growing debt burden

In the first half, we issued $11.5 billion of long-term maturities, resulting in higher interest expense. While we firmly believe this is the right thing to do longer term, you will continue to see a year-over-year increase in interest expense in the back half of the year.
-- CFO John Murphy

Investors are just starting to see the negative impact from the debt that Coke has been taking on to help it manage the historic drop in global sales. Interest expenses were up 16% this quarter to $274 million, and executives say that trend should continue at least into 2021.

Coke is hoping to offset that pressure with cost cuts and a wide range of packaging, manufacturing, and product improvements that should help push operating and gross profit margins higher over time. But management stressed that its main focus is on satisfying Coke's customers. "The hallmark of our business is winning locally with our consumers," Murphy said.

Recovery could take years

We generally align with forecasts that imply the global economy could take two to three years to fully recover.
-- Quincey

Coke expressed some optimism that its beverage niche will recover a bit faster than the broader market, which might take around two years to return to pre-pandemic levels. There's still strong demand across growing categories like reduced sugar sodas and flavored sparkling water, for example. Coke sees opportunities to innovate in its on-the-go solutions, too, whether through better packaging or upgraded equipment like its touchless "freestyle" soda machines.

But the timing of the return to growth will ultimately depend on the resumption of normal levels of consumer engagement, which might still be several quarters away. Coke's sales "correlate closely to the level of mobility of consumers and the health of the away-from-home channels," executives explained, and that fact implies rocky results ahead.

"The pandemic is not behind us," Murphy noted. "There is still good reason to be cautious as global COVID infections continue to increase."

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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$56.02 (-0.97%) $0.55
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