Coke and Consumer Companies Could Fail in China

By Chris Marasco - October 24, 2012 | Tickers: KO, PEP, PG, COL, UL | 0 Comments

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Coca-Cola (NYSE: KO) had a favorable earnings session, racking up 3.9% in earnings growth during the quarter.  However, Coke’s growth slowed in one area: China.

Pepsi Brings Challenge

Coke’s staple area is the United States, its native market.  Coke saw a 2% jump in sales volume in the U.S. – largely the result of price increases on soda that it implemented earlier this year.

However, PepsiCo (NYSE: PEP), in an attempt to snag market share from Coke, has unleashed a barrage of marketing campaigns.  Pepsi is “pumping more advertising into its top brands like Pepsi-Cola and Mountain Dew sodas,” said The Wall Street Journal.  Pepsi’s move allowed the company to hold on to its market share, but it did not grow. 

With its strategy, however, Pepsi increased net revenue by 5%.  The company achieved this by boosting organic volume by 1% and prices by 4% effective net pricing, CEO Indra Nooyi said in the company’s quarterly report.

Coca-Cola has held off Pepsi in the U.S., but in China, the battle is going poorly..

Declining Chinese Demand

Coca-Cola’s volume increase in China pales in comparison to past increases, such as the company’s double-digit growth in the same quarter last year.  However, Coke’s slowing growth comes at a time when the entire Chinese industry is falling behind.  Says Coke CEO and Chairman Muhtar Kent:

China’s economy is in the midst of a natural transition where the government is more focused on controlling inflation than stoking growth, which poses challenges for Coca-Cola and others operating in the country.

Not Just Coca-Cola

Slowing consumer demand has implications outside the soda industry – companies that manufacture consumer products will also see declines.  Procter and Gamble (NYSE: PG), Unilever (NYSE: UL), and Colgate-Palmolive (NYSE: COL) are also facing trouble as the Chinese market begins to slow.

UL Total Return Price data by YCharts

Competition from Chinese firms is picking up, and the Chinese are creating products that are more on par with American products than ever before.  P&G’s and Unilever’s market share in the toothpaste category is one example.  As a result of growing Chinese competition, P&G’s market share fell from 20.8% to 19.7%, and Unilever’s fell to 9.9% from 12% over the past five years.  Pair this problem with knock-off products and slow demand, and the consumer firms could see weaker growth.

As P&G, Unilever, and Colgate-Palmolive report last quarter’s earnings, I will be looking for their performance in China to gauge their performance going forward.

If Chinese consumer demand is slacking, these three giants may see slightly lower margins.

Revving the Engine

Coca-Cola released positive earnings numbers.  To keep these numbers growing, Coke – and other consumer products companies – must keep investing in the Chinese market, despite the current downturn. 

Even though the Chinese economy is slowing, the nation will eventually turn around, benefiting the companies that stayed the course and poured investment dollars into the world’s most populous nation.

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