Shares in soft drinks rivals PepsiCo and The Coca-Cola Co were down this week as the firm’s released their first-quarter results, both showing signs of a struggle in their domestic market.
While PepsiCo reported an increase in net profits for the quarter, the market unfortunately did not see fit to reward the company by bidding-up shares.
In today’s strong-performance-or-else market, PepsiCo shares slid by US$1.29 to $64.70 on Thursday (22 April) afternoon trading. Similarly, Coca-Cola’s stock price fell by 1.5% to $54.50 on Tuesday, in spite of first-quarter earnings that beat analyst expectations.
Despite North American being the world’s largest soft drinks market, sales have undoubtedly been weak as the consumer shift towards the healthier alternatives of juices and teas continues unabated, prompting the two biggest players to focus their attentions on foreign soil.
About three-quarters of Coca-Cola’s revenue came from outside North America in the quarter. The firm attributed its 19% increase in profits to rising sales across Asia, boasting double-digit growth in India, Vietnam and the Philippines.
Russia and Brazil also saw strong growth, with Muhtar Kent, the company’s chairman, saying he is seeing sequential improvement in both the spending habits and the overall sentiment of Russian consumers.
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By GlobalDataIn North America, however, the situation was less positive with sales volumes dropping by 2% in the quarter. The company blamed the weakened economy and the bad weather experienced across the US and Canada in January and February.
And, while shoppers cut back on spending in North America, the firm has persisted in courting consumers in international markets, a move Edwards Jones analyst Jack Russo believes is an important one.
“Emerging markets are still key, and Coca-Cola is doing a solid job of getting people to consume more soft drinks by investing in its business there,” said Russo.
Philip Gorham, an analyst for The Star believes that while North America has and will continue to be challenging for the company, Coca-Cola’s growth was clearly driven by emerging markets.
“We think that Coke’s investment of $2bn in China over the next three years should allow the company to continue to expand its distribution footprint in this key market for several years to come,” Gorham said.
But it’s in looking ahead to future quarters that most observers agree that Coca-Cola has positioned itself for healthier returns.
The company is still in the process of buying its North American bottling operations from Coca-Cola Enterprises (CCE), in a deal similar to that recently undertaken by long-time rival PepsiCo.
IBISWorld analysts believe Coca-Cola’s acquisition of CCE’s North American bottling business is “vital” for the former.
“It’s really important for Coke in that it directly gives them the biggest market share in both bottling and syrup,” IBISWorld analyst Areeb Pirani told The Street. “The deal is taking place in a challenging North America soft drink market and in a time when soft drink companies are also facing increasing import competition,” Pirani said, noting customers are becoming increasingly discerning with their tastes.
“There’s a lot of competition, and consumption has been on the decline in the US,” Pirani said. “This is driving companies like Coca-Cola and Pepsi to do significant marketing, while cutting margins. Still, both companies are able to withstand the economic pressures that plague smaller players in the industry.”
Pirani said he expects both Coca-Cola and PepsiCo to continue their shift away from CSDs and to focus more on energy, sports drinks, bottled water and other higher-margin products.
Over at PepsiCo, meanwhile, the firm not only has its soft drinks business to entice overseas consumers, it’s also has one of the largest food businesses in the world – with brands including Quaker Oats, Fritos, Munchos, SoBe, Naked Juice and Rice-A-Roni.
And the company’s first-quarter earnings were also buoyed by the acquisition of its bottling business, which unlike Coca-Cola, it has now completed.
PepsiCo posted a 26% increased in first quarter profits totalling $1.43bn. Revenue was up 13%, to $9.37bn.
Beverage sales volume in the US and Europe were soft, although PepsiCo said top-line trends improved in its North American beverage business, which no doubt benefitted from the purchase of its bottlers.
Stifel Nicolaus analyst Mark Swartzbergnoted, however, that PepsiCo Americas Beverages remains “weak”.
“This is not new news, and how does one respond to the company’s remark that “topline trends improved in the North American beverage business”? This at the beginning of a period of realising cost synergies simultaneous with commodity savings to drive increased levels of brand investment,” Swartzberg said.
The Wall Street Journal believes PepsiCo plans to use the bottler acquisitions to get more of a presence in the food-service industry in North America, bundle more of its snacks and drinks together in stores, and strengthen its European business.
The deal, inevitably, will heighten competition with Coca-Cola. Indeed, The Street believes that, while there are signs that consumer confidence is now returning, it expects a “rejuvenated” PepsiCo to pose a real challenge to Coca-Cola now.
“Coke’s great rival is further advanced in the integration of its bottlers,” the publication wrote, “and we expect that to give Pepsi an advantage in its route to market for the remainder of 2010.”
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