Coca-Cola , the quintessential U.S. multinational, had good news from the home front in its second quarter: unexpected North American sales growth, the first volume gain in nearly three years.
The increase was not driven by the legacy Coca-Cola brand, which needed promotional pricing just to eke out a small gain in the quarter, analysts believe. Instead, it was the company's juices, teas and sports drinks that provided North American growth, illustrating that "Coke Is It" - in developing countries.
The North American boost in volume - up 2 per cent in the second quarter from year-before levels - was excellent news for the company. Analyst Caroline Levy of Credit Agricole Securities had expected North American volume declines, so she said the gain was "an important achievement" that led to "stunning" overall volume growth of 5 per cent. Analysts at Citigroup Global Markets Inc. called the North American performance "a standout."
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That is because, as the Citi analysts say, international markets are where Coca-Cola's growth is expected. In North America, the company's legacy market, the results have been flat to declining for some time.
Coca-Cola CEO Muhtar Kent told investors during the company's conference Thursday call that Coca-Cola has been "focused on building strong value-creating brands led by brand Coca-Cola" and the results were not an aberration. "For the past two years, we have voiced strong confidence in our strategies in North America and we told you that we would return growth to our flagship market."
The flagship Coca-Cola beverages, however, posted volume growth of only 1 per cent. The North American product leaders were "still" beverages (non-carbonated drinks) with 7 per cent growth, led by the Powerade sport-drink brand. The company said its glacéau vitamin-water business posted a 6-per-cent gain.
Moreover, promotional pricing at Wal-Mart played a role in the Coke brand's North American gains, the Citigroup analysts believe. The JPMorgan beverage-analyst team also cited promotional pricing at retailers as a reason for the performance of the Coke brands.
The excitement about the North American numbers threatens to distract investors from the long-standing Coca-Cola narrative: The company is an international concern that relies less and less on the performance on its home turf.
North America, at $2.28-billion in net operating revenue, provides just over one-quarter of the company's sales. And as international markets grow faster than North America, that proportion will continue to shrink.
The Pacific region, which includes China, reported 6-per-cent volume growth in the second quarter and will soon overtake Europe as the company's second-largest market. (The company blamed poor weather for lower-than-hoped sales.) Latin America grew 7 per cent, and the Eurasia/Africa segment grew 10 per cent. In those regions, the Coca-Cola brand is growing at the levels of Coke's overall business.
While the Citigroup analysts called the second-quarter North American performance the "most impressive" of the regions, they still look worldwide when making their "buy" recommendation: "We continue to believe that [Coca-Cola]is one of the best global growth stories under our coverage, with terrific brands and a great global footprint."
Special to The Globe and Mail
David Milstead