Will the 1H14 Fizz of Beverage Giants Go Flat in 2H?
Soda giants-- The Coca-Cola Company (KO), PepsiCo, Inc. (PEP) and Dr Pepper Snapple Group, Inc. (DPS) -- outperformed expectations in the first half of this year.
This outperformance was primarily driven by aggressive marketing initiatives, cost containment and productivity improvements. A sequential improvement in beverage volumes in the second quarter at all the three giants did not go unnoticed by investors. The shares of these three bellwethers witnessed a decent run too.
A 1H14 Review of the Giants
Pepsi
Pepsi began 2014 on a solid note delivering positive earnings and revenue surprises in both the quarters. Strong pricing, solid global snacks performance, sales gain in developing/emerging markets and cost reductions and productivity gains aided to this upbeat results.
The food and beverage giant also raised its earnings guidance for the year on the second quarter conference call based on its strong year-to-date performance and an optimistic market outlook for the rest of the year.
Though carbonated soft drinks (CSD) remained weak, Pepsi’s American beverage business showed sequential improvements in both the quarters due to better non-carbonated beverage (NCB) volumes.
The share price of this Zacks Rank #2 (Buy) company has risen more than14% year to date.
Dr Pepper
Dr Pepper had an impressive run in the first half delivering strong profits in the both the quarters. This was driven by pricing gains, productivity improvements, lower marketing investments than last year and lower interest expense and taxes.
The company also raised its adjusted earnings per share outlook for the year on the second quarter conference call on the back of stronger–than-expected first half results.
Most impressively, CSD volume grew 2% in the second quarter, much better than the decline seen in the past two quarters, helped by the company’s aggressive marketing initiatives. In order to drive sales, Dr Pepper is carrying out well-planned marketing programs which include increasing distribution and availability of its key brands and packages and expanding single-serve availability. These efforts have resulted in improved equity scores of its brands with regard to both relevance and strength.
The share price of this Zacks Rank #2 (Buy) company has soared 33% year to date.
Coca-Cola
Improved volume trends, better pricing and strong international performance helped Coca-Cola to turn around in the first half of 2014 after posting lower-than-expected revenues and profits in 2013.
Coca-Cola’s sparkling beverage (CSD) volumes grew 2% in the second quarter, much better than the 1% decline in the first quarter due to increased media investments during the FIFA World Cup and the successful “Share a Coke” campaign. Most importantly, the Coca-Cola brand grew 1% in North America — a sequential improvement helped by the shift to smaller sized packages and improved pricing strategy.
The improved sparkling beverage performance is indeed a pat in the back to management’s strategic priority of accelerating sparkling beverage growth led by the namesake Coca-Cola brand. Other priorities – as laid down at the beginning of the year – include expanding the still beverage portfolio, increasing brand investments by maximizing productivity and winning at the point of sale. Coca-Cola has executed these priorities quite well in the first half of 2014.
The share price of this Zacks Rank #3 (Hold) company rose 4% year to date.
What’s in Store for 2H?
We believe that Pepsi should continue the momentum in the second half of the year as well helped by a strong snacks business, robust international growth, and aggressive cost savings and marketing efforts. Moreover, lower calorie, naturally sweetened non-cola products are expected to be launched in the U.S. later this year which should provide a boost to volumes.
For Dr Pepper, price mix and productivity gains and lower input and marketing costs are expected to drive earnings in the second half, offsetting weaker volumes and higher transportation and people costs.
Coca-Cola’s aggressive marketing investments, innovation, product development, infrastructure, distribution and an overall improved execution should result in further improvement in volume trends in the second half. An expanded launch of Coca-Cola Life, a naturally sweetened mid-calorie cola, in newer markets should boost the top line. Coca-Cola Life was launched in Argentina and Chile this year.
What Are the Challenges Ahead?
What concerns us in the second half is a possible gradual slowdown in NCB volumes at these soft drink makers.
Dr Pepper’s NCB volume dipped 3% in the first half and is expected to decline in the low single digits for the full year. Coca-Cola’s global NCB volume growth moderated to 5% in the second quarter from 8% in the first quarter. Pepsi’s NCB volume in North America also slowed down to 1% in the second quarter from 2% in the first.
Though we are encouraged by the overall growth of these beverage makers in the first half, sustaining the momentum through the rest of the year will significantly depend on how they deal with the soft consumer spending environment, increasing business volatility in emerging markets due to currency fluctuations and other structural issues, and a rising commodity cost environment.
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