Coca-Cola (KO -1.77%) shares have stumbled in 2020, having underperformed the market by over 10 percentage points through mid-August. That gap might seem surprising to investors who see the consumer staples giant as an attractive stock to hold through rocky economic times. The soda titan has sailed through dozens of past recessions, after all, and boosted earnings through just about every selling environment imaginable since its founding in 1886.
But the COVID-19 pandemic has created challenges for Coca-Cola that have harmed its sales and profit outlook at least through 2021. These problems aren't impacting rivals like PepsiCo (PEP -1.12%) to the same extent. Below, we'll look at why investors are less excited about owning Coke today, with an eye toward whether that sentiment could quickly improve as the COVID-19 threat fades.
Coke's unique vulnerability
Before the pandemic struck in early 2020, Coke was considered among the most stable consumer companies on the planet. It dominates the global market for an industry that touches nearly every person, each and every day. In fact, Coca-Cola accounts for 2 billion beverage serving sales around the world per day -- or just over 3% of all drinks consumed worldwide.
Two key aspects of the COVID-19 pandemic combined to neutralize those formidable competitive assets. First, the virus's global impact meant Coke's international portfolio provided no real protection from the demand slump. Organic sales fell by over 30% in Europe, dove 22% in the Asia segment, and fell 18% in the U.S. market in the three months ended on June 26.
Yet the bigger issue is increased stay-at-home time for consumers. Coca-Cola dominates the market for on-the-go beverage sales that occur at places like sports and music venues, convenience stores, and fast-food restaurants. As consumer traffic fell in these arenas, Coke's sales took an unusually big hit. Volume fell 16% last quarter compared to PepsiCo's 11% decline.
CEO James Quincey and his team said in late July that the business has likely already seen the worst of the impact from the COVID-19 pandemic. The 28% sales slump in the fiscal second quarter, and the 32% hit to earnings, should represent the high-water mark for those demand pressures. Fortunately, volume was already rebounding as economies reopened around the world in July and as the restaurant industry restarted.
The bad news is that Coke is expecting persistent profit pressure tied to the extra debt it took on to help it navigate through the historic sales slump from February through June. Interest expenses jumped in Q2 and should be elevated at least through 2021.
The bigger challenge is that Coca-Cola's business depends on people acting in ways that, before COVID-19, were taken as a fundamental fixture of the consumer landscape. Coke needs shoppers to resume their normal patterns of trafficking crowded sporting events, restaurants, and theme parks. Sales "correlate closely to the level of mobility of consumers," Quincey told investors last month, "and the health of away-from-home [sales] channels."
Coke's significant branding and supply chain assets, plus its huge global marketing budget, give it the resources it needs to outperform the beverage industry as the pandemic threat fades. But management is still predicting more than a year will pass before the business returns to anything approaching its normal growth cadence.
The good news for shareholders is that it's not a question of whether consumers will get back to their prior mobility patterns. But there's no telling the exact timing of that rebound, and so many investors are approaching Coca-Cola's stock with an unusual level of caution these days.