Coca-Cola (KO) will make a transformation over the next decade that will see a larger chunk of its revenue source comes from healthy drinks as the soft drink arena continues to decline, especially in America. Let's explore this battle that's going on in our culture and see how the company is handling it. It is readily observable in the company's fourth-quarter numbers.
Fourth-quarter earnings just barely beat analyst expectations.
- Earnings grew by 15%.
- Revenue growth came in at 11.04 billion, just under analyst expectations.
- Currency headwinds weren't as bad as expected, which helped earnings as increased volume for the quarter was offset by flat pricing.
With a so-so fourth quarter, estimates in 2013 have been moving down like they have for many companies this year. Analysts' 2013 estimates were revised downward by 1% and in 2014 they were revised by about 0.9% downward. Much of this can be attributed to the weakening in consumer spending.
Sparkling Beverage Challenges
On the one hand Americans are drinking more non-alcoholic beverages than ever before. In 2012 Americans bought an extra 1% of these beverages over the year before, unfortunately it's not Pepsi or Coke that are reaping the benefits. It appears that the constant attack on soft drinks (thank you Mayor Bloomberg) is leading to a decline in the sales of soft drinks as Americans are turning toward water, teas and other alternatives.
Through the 1990s the soft drinks continued to grow in popularity at a clip of about 3% a year. Transitioning into the 2000s, soft drinks have been struggling, declining since about 2005. Here are some recent statistics of this decline:
- 2012 saw a third straight year of decline as sales dropped 1.2%
- Soft drinks dropped 1% in 2011
- 2010 saw a drop of 0.5%
- 2012 carbonated drink sales (by the gallon) was 12.3 billion gallons as compared to 12.6 billion gallons in 2011 and this is the eighth consecutive year of decline
While soft drinks may have declined, healthy alternatives appear to be growing. Dasani water increased by 11% in 2012 while Arizona Tea also expanded by 9.3%.
It is a fact, Americans are turning to healthier drinks like water, ready to drink teas, coffee and sports drinks. This is the new alternative to sipping on soft drinks and fruit drinks like we have done in the past. Gatorade, the fifth-largest brand in America, has been the fastest-growing sports drink while bottled water just continues to capture pieces of the beverage market. Its volume levels grew at 3.5% in 2010 and 4.1% in 2011.
Coke Looks to Healthier Drinks
Recognizing the need to offer healthier beverages; the company is working on such alternatives as: Simply Orange, Honest Tea and Powerade. While North America saw an increase of 1% last quarter in total sales for Coke, it was not in soft drink beverages, which fell by 2%. An 8% increase in the demand for alternative drinks led by Powerade carried the company.
Since North America is always going to be a key market for Coke, it is going to have to focus much of its energy on alternative drinks. I am sure as a global beverage giant moves into emerging markets and sees steady growth, it will not abandon its soft drinks as the key breadwinner, but that doesn't play here in our markets anymore. Even as the company recently put out ads encouraging exercise and burning calories, it came across criticisms that it's trying to do nothing but damage control. The epidemic obesity rate in the United States is being linked to excess sugar in soft drinks as one major contributor and Coke would do well to continue to increase its line of non-sugary drinks.
The stock has done well since the beginning of the year when it built the base around 35.5 but is presently trading at 40.65 - a return of about 14 5%. Since its last big dip in mid March, the stock has been using the middle Bollinger bands as support and this shows how strong the move has been. Recently I have seen an over-bought sign in the RSI indicator and the MACD indicator has also peaked and looks like it is going down. Often these signs will either mean the stock needs to rest before it goes up again or we may have a reverse pattern coming upon us soon. What happens here may be dictated by the markets as a whole and not the company by itself. Analysts believe that consumer spending is slowing down and that could have an effect on how much beverage is bought from Coke. So don't be surprised if we see a turn down in the stock soon.
I believe Coke will continue to expand its soft drinks, which is its bread-and-butter. This will take place in the emerging markets around the globe but here at home the company is going to have to change face. If the trend continues soft drinks will slowly continue to decline in market share and unless the company spends more energy on offering non-sugary drinks, there will be other competitors both large and small that will come in and steal its market share and I believe it knows this. For this reason I expect the company to continue to focus on offering alternatives to its soft drink market and we should see a slow progression of its revenue picking up in this arena over the years.