The results are in for beverage behemoth Coca-Cola (NYSE:KO), and for the most part they're lackluster. Coca-Cola struggled last year despite the steady global economic recovery. Its results were weak enough to raise questions about its strategic direction. The evolution of consumer preferences away from sugary, high-calorie drinks is hitting Coca-Cola where it hurts.
However, Coca-Cola has remained steadfast in its strategy. For the most part, Coca-Cola is a pure-play soda company. While that's obviously served the company well over the past several decades, it may be time for a 21st century approach and a more diversified product portfolio. That's the strategy adopted by arch rival PepsiCo (NASDAQ:PEP), and it may be working in Pepsi's favor.
The end of soda's reign in the U.S.?
Consumers, particularly in the United States, are becoming much more conscious of what they're putting into their bodies. Nowhere is that more evident than in Coca-Cola's earnings report. Last year was one of striking disparities between Coca-Cola's performances in North America and across the globe.
Unit case volumes remained flat in North America, and because of higher costs, Coca-Cola's operating profit in North America dropped 3% last year after stripping out currency effects. By contrast, Coca-Cola grew case volumes by 7% in its Eurasia and Africa segment. These results mirror those of Pepsi, which reported 4% organic revenue growth last year, thanks to 11% organic sales growth in its Asia, Middle East, and Africa segment.
In all, Coca-Cola reported a 2% decline in revenue last year. After stripping out the effects of currency fluctuations, organic revenue grew 3% in 2013.
Emerging markets remain a strong opportunity
Coca-Cola's penetration in the emerging markets, such as Latin America, represents its best growth opportunity going forward. Coca-Cola grew its constant-currency operating profit by 13% and 16% in its Latin America and Pacific segments, respectively. Clearly, Coca-Cola has done a great job of expanding its footprint in the under-developed economies so far, and thanks to its pristine brand strength and world-class distribution, it's set up well to keep growing across the globe.
At the same time, Coca-Cola's North American business is flat-lining, which is a concern because obviously North America still represents a major geography for the company. Coca-Cola is testing more health-conscious products, including Coca-Cola Life. This is a new, naturally sweetened mid-calorie cola that the company is testing in Argentina and Chile. If that product does well in those countries, maybe it will catch on in the U.S. as well. In addition, Coca-Cola holds a wide beverage portfolio that includes juices, ready-to-drink teas, and bottled water.
However, Coca-Cola still produces the vast majority of its revenue and profit from its traditional sparkling beverages. North American consumers simply aren't buying as many cases of sugary sodas as they used to. This is why Pepsi has split its business fairly evenly between beverages and food. Its food product categories include Quaker and Lay's.
Will Coca-Cola's new partnership move the needle?
Coca-Cola has not demonstrated any desire to enter the food category. It's resisting the urge to diversify away from beverages like its close rival Pepsi did many years ago. Instead, Coca-Cola's recent announcements signal a doubling-down in soda. Coca-Cola will invest $1.25 billion over the next 10 years in a strategic partnership with Green Mountain Coffee Roasters (NASDAQ:GMCR.DL), maker of the Keurig at-home coffee brewing system. Going forward, Green Mountain and Coca-Cola will team up to develop a Keurig Cold Beverage platform. This will utilize the highly successful Keurig system as well as tap into Coca-Cola's sterling brand connection with consumers.
Coca-Cola's new initiatives, including its Coca Cola Life product as well as its work on a Keurig Cold machine, may pay off. Still, they represent more of the same. In North America, consumers seem to be turning away from carbonated beverages and sugary drinks. Existing at-home soda machines haven't taken off in the United States for that very reason. People are shying away from carbonated sodas, regardless of their method of delivery. As a result, Coca-Cola may want to pursue food offerings in the future to better capitalize on the changing consumer landscape.