Coca-Cola (KO +1.26%) was heavily impacted by the pandemic due to its significant away-from-home segment that was crushed when people stayed home. But this cash cow had plenty of resources to weather the storm and forge a new way forward, and its steady recovery just zoomed faster in the 2021 second quarter. Let's get to the key takeaways from this robust rebound.
1. Away-from-home is back
The main thorn in Coke's side was the drop in the on-the-go business, so it was a fairly sure thing that sales would bounce back with the reopening of the economy. In the second quarter, as people began to go out again in greater numbers in many regions, net revenue increased 42%, more than its biggest pandemic decline.
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The increase was fueled by a 26% rise in concentrate sales, which is used by restaurants, movie theaters, and other away-from-home establishments. Before the pandemic started, the away-from-home category accounted for about half of total sales, which meant that Coca-Cola was set up for calamity when the world shut down. But staying at home also meant customers upped their at-home beverage purchases, and Coke strategically restructured to make the most of the switch.
That's why management is raising guidance despite what CEO James Quincy termed the "asynchronous nature of the recovery." Several markets are still facing restrictions, and others could join them at any moment. But Coke has figured out how to grow sales in this environment.
2. Core brands were strong
Coke is the dominant global beverage company, and sales are typically driven by the eponymous brand of cola. This is the company's bread and butter, and it drove sales in the second-quarter rebound. Sparkling drinks grew 14% year over year, with a 12% increase in the Coke brand, beating 2019 levels. Sprite and Fanta both contributed high growth as well.
Nutrition, juice, dairy, and plant-based was another blowout category, growing 25%, driven by Minute Maid and Fairlife in North America. Hydration, sports, coffee, and tea grew 25%, with coffee up 78% and hydration up 35%, driven by Powerade in North America.
The company is investing in growing these brands even more, developing new recipes and taste lines, such as the reformulated Coca Cola Zero Sugar.
As part of its restructuring, Coke trimmed down its master list of more than 400 brands to around 200, cutting out mostly small, local brands that altogether contributed less than 2% of volume and 1% of the top line.
3. Efficient distribution networks allowed it to play its best game
Coke isn't Coke for nothing. It has what it calls an "unrivaled" distribution network that gets its products into the right channels to reach as many consumers as it can. The company's restructuring last August to create a more efficient system helped it make the most of its resources in Q2.
Aside from its traditional in-store channels, its harnessing e-commerce to grow business. It's seeing strong growth in its e-commerce business-to-business platform, where stores can manage their accounts. But retail e-commerce is also healthy, with North American e-commerce growing its retail value 54% year to date in the NARTD (non-alcoholic, ready-to-drink) category.
Rival PepsiCo performed better than Coke throughout the pandemic due to its breakfast and snack categories, which Coca-Cola doesn't have. But beverages are Coca-Cola's sweet spot, and organic revenue grew 37% in Q2, versus PepsiCo's 21% beverage organic revenue growth.
The company's efforts over the past year have paid off, and Coca-Cola should see continued success into the next quarter. Dividend investors in particular should take a closer look at what Coke has to offer.
