Coca-Cola's Big Third Quarter Highlights its Rivalry with Pepsi

By Mike Caggeso
Staff Writer

Coca-Cola Co. (KO), the world's biggest soft drink maker, released better-than-expected third-quarter results yesterday (Wednesday), attributing the upside surprise to its worldwide growth.

Overall, the company posted a 13% gain in profits, a 19% jump in net revenue and a 15% increase in earnings per share.

Other highlights from its quarterly report include:

  • A 24% increase in net revenue growth in Eurasia (Russia, India, Turkey, Pakistan and Eastern Europe).
  • 28% net revenue growth in Latin America.
  • And 21% net revenue growth in North America, despite a 1% decline in soda consumption.

"Once again, this strong performance was led by our international business," Neville Isdell, Coca-Cola's chairman and chief executive officer, said in a company statement. "Emerging market growth, combined with sequential improvement in North America, resulted in our third consecutive quarter of 6% unit case volume growth."

Coke shares jumped $1.33 each, or 2.3%, to close at $59.09, after setting a new 52-week high of $59.43 yesterday. The stock is at its highest point in six years. Before yesterday, Coke shares had climbed 20% for the year, eclipsing the 15%-advance for archrival PepsiCo Inc. (PEP), Bloomberg News reported.

Contradictions Over Costs

But beneath Coke's results are some interesting trends, which hint at a possible shift in the competitive landscape a few years in the future.

Coke gets 70% of its sales outside North America.

Net revenue growth in its "Pacific" region (China, Japan, and Philippians) was a meager 6%, despite a 20% increase in unit case volumes to China. The company said slow growth in the region is "partially offset by unfavorable country mix," but the numbers say that demand wasn't as high as the company expected.

Adding to the pain, U.S. futures for corn - a primary ingredient in soda sweeteners - are up 27% from a year ago, according to Reuters. This especially hurts Coca-Cola because 80% of its revenue comes from soda sales. Only 20% of the sales of rival PepsiCo Inc. (PEP) come from soda, Bloomberg reports.

Coke Chief Financial Officer Gary Fayard told analysts and journalists on a conference call that the company sees a moderation in such commodity costs as corn syrup and aluminum that affect beverage companies.

"We believe the worst is behind us," Fayard said.

 However, many experts would disagree with that assessment, predicting instead that demand from China, India and other growing markets around the world will keep commodities demand - and long-term prices - on an upward trajectory.

Indeed, while Coke yesterday said raw materials prices would be flat to slightly down this year, Pepsi last week actually predicted that raw materials prices would be higher. However, Pepsi's mix of raw materials does differ a bit, including grains for Quaker oatmeal, and cooking oils for its salty snacks, for instance.

Battleground Asia

Coke brought Isdell out of retirement three years ago to jump-start growth, and the company has been making some moves away from its long-too-predictable game plan. The company introduced its highly successful Coke Zero soda, and in an effort to reduce its sweet tooth - its high reliance on soda sales for revenue - Coke bought Vitaminwaters-maker Glaceau for $4.1 billion.

But it's no surprise that China will real battleground between Coca-Cola and Pepsi. And Pepsi's bold move to "go red" in China is paying off. Pepsi introduced a red soda can that looks strikingly like Coke's, which could cause brand confusion in the still-nascent soda market of China, giving Pepsi a chance to gain ground.

Last week, Pepsi announced a 17% gain in net profit  - both larger than Coke's and more closely linked to China's soaring growth rate. Also, Pepsi has a broader platform of products (from soda to juice to snacks) that could open up more revenue streams and help protect the company from some of the escalating cost of corn (although that's a key ingredient in some of its snacks, too).

Coca-Cola can still boast better name recognition around the world, but Pepsi is only 15% smaller than Coca-Cola in terms of market capitalization. It also has a better EPS, forward P/E and dividend than Coca-Cola. If the companies' numbers continue, especially in Asia, Pepsi might be able to mount a serious charge and wrest away a chunk of Coca-Cola's overseas market share over the next few years.

Could it actually overtake its larger and better-known rival? That's a very tall order. And only time will tell.

But that would definitely be some tough new reality for Coca-Cola to swallow. And don't expect that a "spoonful of sugar" - or even a shot of high fructose corn syrup - will help that bitter medicine go down.

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