Will Coke Raise or Lower Prices to Offset Commodities?

From Forbes :

Coca-Cola Co.(KO) and bottler Coca-Cola Enterprises (CCE) may lose market share for raising prices higher than Pepsico Inc.(PEP) and bottler Pepsi Bottling Group (PBG) Inc. Coca-Cola Enterprises has said it wanted to raise prices because of higher commodity costs and lower American soda sales. Bottlers set prices for retailers like grocery stores.

On Coca Cola Enterprises' 2009 Outlook call, the company noted that the decline in commodity prices would be felt by customers in H209:

With declines from recent highs in oil and other commodities, we now expect 2008 commodity cost growth in North America of approximately 4.5%. For 2009, we expect a commodity growth of approximately 7% in North America. The benefit from the decrease we have seen in commodity costs over the last several months will be weighted to the back half of 2009 as a result of existing hedge positions.

Other notable quotes from CCE's call:

Commercial paper market appears to be working:

We continue to strengthen our balance sheet; and at this point, we project our yearend net debt to be approximately $8.5 billion. We remain confident that we will have the resources and cash flow necessary to cover future funding requirements. For example, in October, CCE raised approximately $500 million in commercial paper and, in early November, raised an additional $1 billion from term debt issuances.

In November, we repaid a $600 million U.S. note maturity. And in December, we repaid a 350 million Euro note maturity. Based on current estimates, we expect to have a cash balance of approximately $400 million at 12/31/08.

We believe we are well positioned to meet our future needs, including satisfying approximately $400 million in notes maturing during the first half of 2009. We have confidence that we can continue to manage our debt portfolio and access commercial paper and term debt as needed. Furthermore, just as a reminder, we continue to have a $2.5 billion credit facility if needed.

Like many other U.S. retailers:

At some point during 2009, it may be necessary to make an additional contribution to our U.S. pension plan.

Comments

[Brad Ferris:]

I think margins really tell the story here. A drop in demand isn't something new for KO and they've traditionally done a masterful job of protecting both their gross & profit margins during down periods. Sales have even held up rather well and I don't see consumer weakness as a real threat for the company. Commodity prices are now coming down so raw material costs should abate. KO also has holdings in bottling operations so they're not 100% exposed to costs as many believe.

2008 Dec 25 10:18 PM