Coca-Cola Lacks Fizz In Q2

The Coca-Cola Company , the world's largest soft drink producer, has reported disappointing results for the second quarter of this year. With group volumes and revenue affected by depressed consumer spendin g in developed markets and less-than- dynamic growth in some key emerging markets , the recently released results point to the challenges faced by carbonate producers in the search for long-term growth.

For the three months to June 28 2013, Coca-Cola's global sales volume s rose by only 1% year-on-year (y-o-y) , with revenue dipping 3% y-o-y , from US$13.08bn to US$12.75bn. Unsurprisingly, C hief E xecutive Muhtar Kent expressed the company 's 'unhappiness' with its Q2 performance, with volume growth declining markedly when compared with 4% growth over the same period last year. Providing a key insight into the nature and growth trajectory of the global soft drinks landscap e , Coca-Cola's recent results make for interesting analysis , in our view .

Europe & North America: Unsurprising ly Flat

Performance Disappoints
The Coca-Cola Company Q213 Volume Growth, % Change Year-On-Year

Coca-Cola Lacks Fizz In Q2

The Coca-Cola Company , the world's largest soft drink producer, has reported disappointing results for the second quarter of this year. With group volumes and revenue affected by depressed consumer spendin g in developed markets and less-than- dynamic growth in some key emerging markets , the recently released results point to the challenges faced by carbonate producers in the search for long-term growth.

For the three months to June 28 2013, Coca-Cola's global sales volume s rose by only 1% year-on-year (y-o-y) , with revenue dipping 3% y-o-y , from US$13.08bn to US$12.75bn. Unsurprisingly, C hief E xecutive Muhtar Kent expressed the company 's 'unhappiness' with its Q2 performance, with volume growth declining markedly when compared with 4% growth over the same period last year. Providing a key insight into the nature and growth trajectory of the global soft drinks landscap e , Coca-Cola's recent results make for interesting analysis , in our view .

Performance Disappoints
The Coca-Cola Company Q213 Volume Growth, % Change Year-On-Year

Europe & North America: Unsurprising ly Flat

A key takeaway from Coca-Cola's recent results points to the continued stagnation of developed market carbonate volume growth . Both North America and Europe continue to drag on volumes , with both recording declines. Although the company cited weak consumer sentiment and poor weather, carbonate sales over recent years have continued to contract. Not unique to Coca-Cola, this is a trend we expect to gain momentum over the medium - to - long term as flattening forces such as rising health consciousness continue to direct consumers away from core carbonates.

Consequently, we believe Coca-Cola will be left with little choice but to continue aggressive pricing strategies (namely directed at rival PepsiCo ) and push further into new segments. This is a strategy that has provided some counter - force s to declining carbonate sales in North America , where the firm registered 5% volume growth in the still - beverage segmen t. B ottled water and ready-to-drink tea pro ducts saw strong performance, highlighting the growth potential in 'healthier', value - added segments.

Developed-Market Dip
United States - Carbonated Soft Drink Sales, US$mn & % Change Year-On-Year

Emerging Markets Better But Not Without Challenges

A hallmark of fast - moving consumer goods companies in recent years has been efforts to push emerging market exposure, a trend Coca-Cola has not bucked. Key e merging markets such as China have been specifically targeted by Coca-Cola ; with the company recently announcing a US$4bn investment injection in the country's drink sector. Indeed, international growth is an increasingly important facet of glob al strategy as the company looks to reduce reliance on its home market.

Asia Pacific: In Q2 t he company registered 28% growth in Vietnam, 22% in Indonesia and 17% in Thailand but only a 1% volume increase in India compared to the same period last year . China was similarly disappointing, highlighting the company's need to stabilise emerging market expansion but also focus on its key China and India markets if it is to secure long-term growth. We continue to hold a positive view of both soft drinks markets and maintain that in order to secure long-term growth, Coca - Cola must work harder here

Africa & Eurasia: Clearly the group's regional outperformer, all business units in the group achieved volume growth in the quarter, led by the Middle East and North Africa with volumes up 17% y-o-y. Again, strong opportunities are a trend we expect to continue over our forecast period as companies such as Coca-C ola remain well positioned to answer increasing demand for iconic carbonate and non-carbonate offerings in high growth markets such as the UAE and across Africa .

Developed Market Bias Remains
The Coca-Cola Company FY2012 Revenue Breakdown By Region (%)

More To Be Done, But No Need For Panic

As Coca-Cola's recent results demonstrate , the shape of the soft drinks industry continues to change, with developed markets clearly presenting challenges in the carbonated segment, with consumers increasingly demanding non-t raditional soft drinks options. This a trend that has continued to gain momentum over recent years and one BMI expects to continue as Coca-Cola looks for opportunities in diversified sectors ( such as smoothie maker Innocent , wh ich it acquired earlier last year ) . Conversely, main rival PepsiCo has responded to this challenge by ramping up its PepsiCo Americas Food Division , which counted for 36.6% of total revenue in 2012.

From an emerging markets perspective , Coca-Cola's recent results point to the challenges global companies face in operating across a diverse geographical platform, along with significant opportunity. Slow growth in India and China highlight s these obstacles , and the company will have to focus on igniting growth in these core markets moving forward. However, as Vietnam and the Middle East show, emerging markets continue to offer dynamic opportunities, and we don't expect these to falter over our foreca s t period to 2017.

Consequently, despite the less - than - impressive Q2 figures, BMI is not concerned about the long-term prospects of The Coca-Cola Company . Firstly , one quarter cannot detract from the hugely impressive trajectory the company has taken to become one of the world's most valuable brands. Secondly, with its unrivalled brand power and international distribution networks (supported by an impressive collection of franchisees and bottlers) it remains well positioned to continue to push growth in key markets.

Coca-Cola And Our Core Views

  • Carbonates will continue to flatten in developed markets, namely North America and Europe .

  • Emerging markets offer dynamic long-term growth opportunities with their typically low per capita consumption, rising incomes and the aspirational value tied to Western - branded food and drink products .

  • Diversification and innovation will continue to drive soft drinks producers ' strategies in both developed and developing markets, with promising potential seen in non-carbonates such as bottled water, ready-to-drink and functional beverages.

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