Looking Beyond Coca-Cola’s Q2
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I was again made to believe that there are companies which are always investor favorites to since they provide returns despite facing difficulties. The biggest beverage manufacturer, Coca Cola (NYSE: KO), holds its head high without being knocked down by the headwinds of a troubled economy, cold weather and popular cost inflation. It posted great second quarter results recently which delighted investors and beat the market’s expectations. Let’s delve deeper.
A Snapshot of the Quarter
Higher product prices pushed revenue north by 3% to $13.09 billion for the quarter. Despite weak demand from the European market, overall volumes grew by 4% affecting the top line favorably. One of the key drivers was the expanding international presence of the beverage giant, especially in emerging markets such as China and India. Coca-Cola has been eying to expand its footprint in India for a long time now and it plans to invest largely in the country over the next few years. In fact, India is not the only target. The company has plans to spend almost $30 billion over the next few years to expand its reach globally. This will add to the leader’s market share which is already ahead of its closest rivals, PepsiCo (NYSE: PEP) and Dr Pepper Snapple (NYSE: DPS), who lag quite behind.
Though the beverage provider managed to deliver a positive top line performance, it failed to do so with the bottom line, but only by a whisker. The profit for the period came in at $2.79 billion, compared to $2.8 billion last year. Nevertheless, it did beat the estimates. The provider of more than 500 varieties of drinks missed on the earnings mainly because of the 5% higher ingredient costs. But the commodity costs are expected to moderate in the coming months. Hence, the company lowered its expectations of a cost increase for the year.
Strategy Indeed!
Moreover, Coca-Cola enjoyed volume growth in all segments except Europe where it witnessed a volume drop of 4%. This is because of restrained spending habits of the residents. Also, the cooler weather played a major role to affect the cold drink sales unfavorably. But the company was smart enough to fight this problem by raising the product prices and increasing focus on providing a variety of smaller packages since it gives them higher margins.
In fact, it has gone a step further by using its wide range of drinks and variety of packaging in the Olympic Games which will be a major booster to its revenue. This strategy comes hand in hand with a greener move. Coca-Cola will now make efforts for a greener world by collecting the used bottles in the Olympic Games and recycling it. This surely will help the company develop healthy public relations giving a greener image.
This move comes as an answer to its rivals’ strategies of gaining market share. PepsiCo’s attempt to remove the label of cancer warning from its drinks by making its drinks healthier and Dr Pepper Snapple’s introduction of Orangina, a healthy drink in an eco-friendly packaging, in its key markets are yet to attract benefits before which the giant came in with its big step.
The biggest beverage maker plans its expansion in India since they want to capture an untapped market where they see a lot of potential. It wants to enjoy the first mover advantage in emerging markets. Another reason behind the move is saturation in developed markets where further revenue growth looks difficult. The consumers in the developed markets are now shifting largely to healthier drinks such as juices and RTD teas from the sweet colas which are bad for health and lead to the common problem of obesity.
My Takeaway
After understanding the initiatives of Coca-Cola and its efforts to fight a list of hardships this company has attracted a lot of attention from investors. Its sustained expansion plans, cost saving initiatives and strategies to push volumes has won investors’ hearts. Moreover, small hiccups in performance are normal for any company till it is on track and in line with expectations. With the expansion in the emerging markets and its strategy of small packaging, this beverage giant looks to have a long way to go.
justhimanshu has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company and PepsiCo. Motley Fool newsletter services recommend PepsiCo and The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
