Coca-Cola (NYSE:KO) dominates the market for on-the-go beverages, which makes it poorly suited to today's stay-at-home global consumer environment. That was the key takeaway from the beverage titan's fiscal third-quarter report this past week.
The announcement showed encouraging progress at stemming sales declines and slashing costs. But other worrying signs for Coke investors included market-share losses and the prospect of near zero growth well into 2021.
Sales declines moderated to 9% compared to the 28% slump Coke endured during the peak social distancing months of April and May. The company's 4% volume decline also marked a solid improvement from the second quarter's 16% dive .
But Coke is still losing market share. PepsiCo (NASDAQ:PEP) notched a 1% volume boost in Q3 in its beverage division and boosted organic revenue by 4% overall. Coke's comparable metric was a 6% decline.
Executives said Coke lost ground in its core product segments due to the global weakness in away-from-home channels like the restaurants, theme parks, sports, and music venues that make up most of its business. Those comments echoed their late July prediction that a full rebound might be several years away.
The news was better around the financial metrics that Coke can influence even as demand in its biggest markets is severely disrupted. CEO James Quincey and his team slashed costs and even managed higher prices in the U.S. These wins allowed adjusted operating margin to rise to 30.4% of sales from 28.1%. As a result, adjusted earnings only fell 2% compared to the 9% drop in reported revenue.
Coke continued to generate plenty of cash, but that metric also showed signs of stress from COVID-19. Free cash flow is down 17% so far in 2020, to $5.5 billion. Pepsi's cash, in contrast, is up 29% to $4.1 billion .
A flat outlook
Coke didn't issue an official outlook in another contrast with Pepsi, which recently predicted growth that will be close to 2019's strong result. The beverage giant doesn't have the benefit of a huge consumer food division to offset weakness in the drink segment, after all. And within its beverage segment, sales are tilted toward on-the-go niches.
That positioning helps explain why Coke provided some hints that point to more soft demand trends into 2021. While volumes have been improving for months, the rate of improvement is slowing, said management. Sales are still running lower in the low single digits in October.
The company has plenty of levers it can keep pulling to protect earnings and cash flow. And there are promising new product launches on the way, too, including its hard seltzer brand set to hit the U.S. market in early 2021.
But the latest results should have investors bracing for several more quarters of unusually weak sales and market-share results while most consumer mobility remains far lower than it was before the pandemic disrupted global social behaviors.