The Coca-Cola Co. (NYSE: KO) is taking an innovative approach to product development and renewing its home base markets as it looks to reassert its dominance in the soft-drink market.
Coke, the world's largest manufacturer, marketer and distributor of non-alcoholic beverages, on Wednesday posted solid fourth-quarter growth on increased sales around the globe and took share back from rival PepsiCo Inc. (NYSE: PEP) in the key North American market.
The company's profit jumped to $5.77 billion, or $2.46 a share, from $1.54 billion, or 66 cents a share, a year earlier, reflecting the acquisition of its biggest bottler's North American operations.
Stripping out benefits related to the bottling acquisition, Coke matched the analyst consensus for net income in the fourth quarter of 72 cents per share, up 9% from the year-ago quarter.
Its revenue clobbered estimates, coming in at $10.49 billion, a 5% increase over the $10 billion analysts were expecting.
Taking Market Share From Pepsi
Coke's growth from abroad, where the company gets three quarters of its sales, continues to sparkle. But the company is also regaining market share in larger, developed markets.
Worldwide volume growth was 6% for the quarter and 5% for the full year. A cross-licensing deal with other brands, primarily Dr. Pepper, helped Coke add to worldwide sales.
But the really good news is coming from its home base of North America, where the company's sales volume and market share had been declining for some time. Sales volume rose 3% in those markets.
Coke's primary competitor Pepsi had been demonstrating strength and gaining market share in North American markets for the last decade. But Coke's growth in its largest market is now coming at the expense of its rivals' market share, where Coke has now taken back share for three straight quarters.
"The only way to get growth for either company is to take share, and it's quite clear over the last three quarters that Coke has done that," Morningstar analyst Philip Gorham told The Wall Street Journal.
The growth in North American share confirmed what Coke Chief Executive Officer Muhtar Kent said last summer when he pointed to the North American market as a beacon for growth in the future.
"What we are seeing today is not an aberration," he said on a conference call. "We firmly believe that North America will be a growth market of great opportunity for the next 10 years and beyond."
Volumes in emerging markets picked up as well, reaffirming Coca-Cola's dominance in the largest growth segment. Volumes were up 37% in Russia, 20% in Turkey and 10% in India during the quarter.
Sparkling beverages, including Coca-Cola and Diet Coke, continue to see strong growth, the company said. However, so-called niche beverages, including still beverages like Powerade and Vitamin water, rose 11% in international markets and notched 7% gains in North America.
Fighting Industry Trend of Declining Sales
Despite the recent rebound in earnings, the carbonated soft drink (CSD) market has been in steady decline for years as a result of health concerns surrounding the products.
Consumers fear that drinking CSDs may increase obesity levels and cause other health problems. Health officials have mounted a barrage of publicity campaigns to highlight the negative impact of Coke and other CSDs.
Adding fuel to the fire, a study released Wednesday found that people who drank diet soda every day had a 61% higher risk of vascular events, including stroke and heart attack, than those who avoid drinking the diet drinks altogether.
The study, which followed more than 2,500 New Yorkers for nine or more years, was conducted by researchers who presented at the American Stroke Association's International Stroke Conference in Los Angeles.
The news has been driving Americans to healthier alternatives, including energy drinks, fruit juices and bottled waters. Niche brands like Gatorade and Red Bull that cater to specific consumer needs are gaining popularity, cannibalizing Coke's sales while also appealing to a younger audience.
As a result, overall sales of CSDs in the U.S. declined from about 10 billion cases in 2005 to about 9.4 billion cases in 2009. At the same time, Coke's market share declined from about 18% to 17%, according to an analysis by Trefis Company.
Coke Gets Personal
With the presence of so many alternatives, the trend toward niche products has been steadily gaining momentum throughout the soft drink industry. Coke and its competitors are now rolling out innovative new products designed to turn the market declines into new channels of growth.
Soft drink makers are reacting to the new market conditions by dividing the non-alcoholic beverage market into the smallest possible segments. Coke has taken on its rivals by targeting specific customer benefits in its marketing campaigns in order to appeal to individual tastes.
In the North American market, Coke has recently been boosting sales with a number of new product launches, including a new two-liter contour package and single serving size packaging.
One product generating a flurry of positive reviews is a soda fountain machine that provides Coke with new ways to market its CSD brands like Coke and Sprite by catering to individual tastes.
The machine is capable of adding a variety of flavors and sweeteners that allows consumers to make their own personal drink. For example, consumers can use the machine to mix up to 104 different flavors to create their own favorite drink such as Caffeine-free Diet Strawberry Sprite.
Future innovations in the sweetener industry are likely to help Coke to produce healthier alternatives of CSDs. A range of flavors and nutrients will help the company create niche products targeted at specific customer segments, according to the Trefis analysis.
Challenges and Opportunities
Coke is not alone in the beverage industry as it faces mounting pressure from rising commodity prices. Higher costs for sweeteners, aluminum, juice and plastic used in bottles will translate to Coke's 2011 costs rising by up to $400 million, according to Trefis.
Coke intends to mitigate at least some of the increase by raising prices, although executives said competitive considerations would keep them from matching the commodity rise dollar for dollar. Coke will try to implement price increases that won't send cost-conscious consumers into shock.
"We are not pricing at the level to say, 'I have to make up for all this commodity pressure,'" Coke Chief Financial Officer Gary Fayard told The Journal.
Coke shares should continue to benefit from its purchase of its big bottling operations in the U.S.
The company's fourth quarter earnings were largely due to a one-time $5 billion gain from its one-third ownership of Coca-Cola Enterprises Inc.'s (NYSE: CCE) North American bottling operations last year. The total acquisition was valued at $12.3 billion, and the gain accounted for $1.74 of its earnings per share for the fourth quarter.
Cash from operations also increased in 2010 by 16% to $9.5 billion, and the company repurchased $3.1 billion worth of shares.
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