The Coca-Cola Co reported flat earnings on Tuesday (20 October), with lower-than-expected quarterly revenue hurt by the stronger US dollar. Michelle Russell examines the fallout.

The world's largest soft drink maker echoed comments made earlier this month by rival PepsiCo, which also posted disappointing revenue and cautioned that it didn't expect a major revival of spending in 2010.

Revenue for the quarter fell 4% to $8.04bn from $8.39bn.

Global case volume sales rose 2%, including a 4% increase overseas. The volume jumped 37% in India, 15% in China and 3% in Brazil. But, North America was down 4% and Europe fell 2%.

"We continue to grow our currency neutral revenues, gain global non-alcoholic ready-to-drink volume and value share, expand our margins and invest in our business, all while generating tremendous cash flow," said Muhtar Kent, group CEO.

He added that the company expects "the consumer to continue facing economic uncertainties into 2010 and for consumer sentiment to recover slowly."

However, the North American decline, driven by a 5% drop in carbonated drinks, was steeper than Stifel Nicolaus analyst Mark Swartzberg was expecting - the steepest North America has seen in three years, in fact.

Swartzberg said it was likely the cause for the 2.7% drop in shares of Coca-Cola Enterprises (CCE), the largest US bottler, following the results announcement.

Kent told analysts on Tuesday that the company was continuing to take action to restore growth in North America.

"It is clear that global economic challenges have impacted people in every market around the world. As I have said before, no single consumer has been immune to these challenges as we anticipate these economic pressures will continue to weigh on consumers through 2010.

"However, it is also just as clear that our companies focus on a consistent set of strategic initiatives is proving successful. We are operating with realism about current challenges but remain excited about our global opportunities ahead of us," Kent said.

Coca-Cola Co and CCE emphasised the effect of 4 July timing, but Swartzberg argued that the other factor is an increased focus on profitable bottler mix even at the expense of near-term volumes.

On CCE, he said: "This plus valuation and our belief that the company's potential long-term capacity to grow is upgrading due to structural changes to its relationship with Coke (e.g. new incidence-based pricing model) prompt us to reiterate our 'buy' recommendation, especially in light of Tuesday's weakness."

He added that Coca-Cola Co's results were "light versus expectations" but profit growth, excluding the impact of currency, met or exceeded expectations. He recommended a "buy" rating.

Kaumil S Gajrawala, an analyst with UBS, said that while earnings were in line with expectations, the sales revenue was "well below our estimate of down 1%".

Toon Van Beeck, senior industry analyst with research firm IBISWorld, said consumers have been trading down to private label drinks in some categories to try to save money.

Overall volume of carbonated drinks, such as Coca-Cola and Sprite, rose 1% in the quarter, while non-carbonated drinks, such as vitaminwater and Dasani water, rose 7%.

The soft drinks giant insisted it still believed the US consumer would take the lead in pulling consumer sentiment higher around the globe. "We'll probably see that happen," the company's management said of US consumers' resiliency.

Bob O'Brien, of the Wall Street Journal, believes the US market has become a rather "inconsequential" part of the company's bottom line.

"International operations provide some 85% of its profits - but the domestic consumer has remained the proverbial straw that stirs the drink globally," he said.

"While we may continue to experience some quarter-to-quarter volatility during the difficult economic times, our focus remains on the long-term opportunities before us," Kent told analysts earlier this week.

Gajrawala praised Coke for resuming its share buyback plan, strong performance in emerging markets and improving relationship with its largest bottler.

"That said, we prefer PepsiCo shares, which are currently trading at a 2 multiple point discount versus Coca-Cola," Gajrawala said.

Nonetheless, Kent told analysts that in the short term, not unlike the rest of the industry, it remains challenged by the timing of the consumer recovery across markets. He said the company sees a growing opportunity to leverage the strength of its brands as well as its geographic footprint to drive share gains and position its system for profitable sustainable growth.

"In the long-term, we remain very positive about the broader global macro trends and can say with confidence that there is no better growth business to be in than the non-alcoholic ready-to-drink business. Our seasoned leadership team and our strong bottling partners are focused on investing together for growth to achieve our 20/20 vision."

Coca-Cola Co shares fell 89 cents to $53.90 on Tuesday, while CCE shares were down 65 cents at $20.48.