Home Business Coca-Cola CEO Gives 3 Reasons Why the Company will Dominate in China

Coca-Cola CEO Gives 3 Reasons Why the Company will Dominate in China

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The Coca-Cola Company (NYSE:KO) reported comparable 3Q12 EPS of $0.51 vs. consensus of $0.51.  The Coca-Cola Company (NYSE:KO)’s largest shareholder is Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B), and Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B)’s largest holding is Coke. The Coca-Cola Company (NYSE:KO) is a great bellwether for the global market. Coke has a presence in every country in the world except for two. We note some interesting comments which Muhtar Kent says about China. He sees long term weakness but sees the company dominating the Chinese market in the future for three reasons.

Coca-Cola CEO Gives 3 Reasons Why the Company will Dominate in China

First a bit more on earnings:

The earnings beat was primarily driven by better-than expected EU top-line and EBIT (+$0.01) as well as a benefit from equity income ($0.01). Operating expense leverage in the quarter was down 4%, in line with KO’s -3 to -5% guidance, and the company still expects modestly positively leverage for the full year. The Coca-Cola Company (NYSE:KO) lowered its commodity outlook to a $$225mm drag from $300mm and expects FX to be a MSD drag for 2012 versus high-end of MSD drag it indicated previously.

The Good

( 1) Worldwide volume growth of 4% (+2% North America and +5% International) was in line with expectations, with 10% growth for Still beverages and 3% growth for Sparkling beverages, led by 2% growth for brand Coca Cola; (2) North America Price/mix benefit of +3% suggests continued stability; (3) Lower 2012 incremental commodity costs, now $225M from $300M; (4) 4Q/2012

The Bad

(1) 2% volume growth in China vs. 7% in 2Q, and 3% growth in the Pacific segment vs. +8% in 2Q; (2) Global price mix benefit was somewhat soft; (3) SG&A was 1.2% above our forecast.

Muhtar Kent – The Coca-Cola Co – Chairman, CEO was on the conference call. He had some interesting comments, which we highlight below (emphasis is ours):

The balanced result that we have achieved across our portfolio demonstrate that we are delivering on this commitment.
As we shared during our prior earnings call this year, we recognize that consumers across the globe are still feeling the effects of the prolonged uncertainty in Europe, the ongoing cooling of the economy in China, and a mild recovery in the United States. We believe these global macroeconomic pressures will extend through 2012 and likely into 2013.

He expended further about issues in China:

Moving now to China, our business delivered 2% volume growth this quarter, cycling last year’s double-digit growth. On a year-to-date basis, our volume in China has grown 6%, cycling strong 15% growth from last year. And, once again this quarter, we captured both volume and value share in sparkling beverages. Importantly, and in alignment with our strategic priorities in China, we are growing transactions ahead of volume with total transactions up 10% year-to-date. One package that is helping us deliver against that strategy is our 300 ml — milliliter –package. On a year-to-date basis, this new package has generated over 0.5 billion incremental transactions in China. We will keep driving our 300 ml package to provide consumers with a great offering at the right price point, while also building our brands in the sparkling category in a healthy way over the long-term.

As we look ahead to the next six months, it is reasonable to expect that China’s ongoing economic slowdown may have a short-term effect on our industry and on our business. In our view, the Chinese economy is undergoing a natural and necessary economic transition, as the government places greater emphasis on controlling long-term inflation over injecting short-term economic stimulus. While the Chinese economy undergoes this period of transition, we have every confidence in the long-term resilience of our business for three key reasons.

First, our brands in China are strong. In our latest survey of consumers, age 12 to 49 years old, Coca-Cola was rated as both the most favorite sparkling and nonalcoholic, ready-to-drink brand. In this same survey, Minute Maid was rated as the most favorite juice drinks brand. Second, we hold the leadership position in the sparkling category. This is the ninth consecutive quarter in which our sparkling beverages in China either maintained or gained both volume and value share. And third, our system in China is strategically focused, well aligned, and committed to invest for sustainable long-term growth. As such, we remain encouraged and excited about our opportunities in this region and continue to believe that
China will serve as a long-term growth driver for our business.

However, Kent states that China and India look positive long term:

we broadened the relevance of our Bottling Investments Group, evolving it further from its initial role of fixing
challenging markets to a more significant role of spearheading our growth in select strategic markets, such as India and China. Constant renewal is in our DNA. Now, with solid fundamentals and real momentum in our business, we are ready to take the next step towards our 2020 vision.

Disclosure: No position

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