USA: Comment - Coca-Cola: Not all magic
Coca-Cola's Q3 earnings are level with last year's, helped by volume and margin growth. While Coke beat analysts targets, those expectations were undeniably pessimistic.
Sales performance was good despite marketing investments and exchange rates, which reduced earnings. By boosting sales through its promotional activities, the company hopes to ensure consumer spending on its products will continue in the face of an economic slowdown.
There's been a lot of pressure on Coca-Cola's management lately, its share price has fallen by a third since it announced a restructuring program in 1999, while key rival PepsiCo's price has risen by 40% over the same period. Earnings, at US$1.07bn, or US$0.43 a share, were level with the equivalent quarter last year, but still beat expectations.
Unit sales were up, rising 3% in North America, Coca-Cola's largest market, and 4% overall. Margins also improved. Excluding special items, Coca-Cola made US$0.45 a share, US$0.3 more than last year. Despite adverse currency effects that wiped out US$0.1 per share and marketing investments that reduced earnings by a further US$0.3, special items, which include a stock issue by Coca-Cola's largest bottler, were able to add US$0.2 per share.
However, the marketing is expected to pay off. Just as one example, the Harry Potter campaign has already received a great deal of publicity - although not everyone is happy with the idea. Consumer groups are campaigning against the use of the popular character to encourage children to drink what they consider to be "liquid candy." Coca-Cola has been quick to point out the educational aspects of its campaign, designed to encourage children to read and prevent people from dropping out of education.
The new marketing initiatives couldn't come at a better time. Concerns are being voiced over slowing consumption of carbonated drinks in the face of a recession, although different nationalities have different ways of tightening their purse strings. Americans are a lot more likely to cut back on bigger items but still splurge on smaller expenses such as Coca-Cola, while consumers in emerging markets and Europe are more likely to rule out unnecessary expenditure in all areas.
Coca-Cola is keen not to be caught out by any drop in overall spending, and boosting sales through additional promotional expenditure now may mean that customers are less likely to question that particular cost further down the line, should the slowdown prove to be a long one.
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