Coca-Cola Co saw its volumes in China decline by 3% in the final quarter

Coca-Cola Co saw its volumes in China decline by 3% in the final quarter

Coca-Cola’s fourth-quarter and full-year results, published earlier this month, appear to offer further vindication for the company’s investment in developing markets. But, Ben Cooper writes, while such investment provides growth opportunities it can heighten sustainability issues.

Investing in developing economies to offset flat or declining sales in mature markets has been seen as a key route to growth for years. And, with the US and Europe hit hardest by the economic crisis, the strategy appears even more shrewd, if not vital, as The Coca-Cola Co’s recently published year-end results appear to bear out.

While Coca-Cola’s North American performance was far from disastrous (volumes up 8% for the quarter and 2% for the year), a pattern of stronger growth from emerging markets over established ones can clearly be seen.

Volumes from Eurasia and Africa rose by 14% for the quarter and 12% for the year. Full-year net revenues were up 16%, while annual operating income increased by 21%, or 14% on a comparable currency basis. By comparison, volumes in Europe were flat and operating income rose by 1%, or 3% excluding currency impacts.

The Pacific group posted 6% volume growth and an 8% net revenue increase for the year, with operating income rising by 9%, or 2% on a comparable currency basis.

Latin America returned full-year volume growth of 5%, and net revenue growth of 6%. Full-year reported operating income was up by 18% on a comparable currency neutral basis.

The exception to all the positive news on emerging markets – and it’s a fairly significant exception – was China, which saw volumes decline by 3% in the final quarter, though year-end volumes were up 6%.

Coca-Cola not surprisingly sought to account for this reversal in the world’s prime emerging market. It said it was “not uncommon” to see such volume swings in China from quarter to quarter, particularly between the fourth and first quarters owing to the variable timing of the Chinese New Year. On the plus side, it pointed to volume and value share gains in China in sparkling beverages, juices and juice drinks, and to Minute Maid Pulpy, a brand created for the Chinese market, achieving billion-dollar brand status after only five years.

Illustrating the sheer volume potential of the market, Coca-Cola said it had grown its business in China by more than 100m incremental unit cases last year, the seventh consecutive year of achieving this level of volume growth.

“As our business and the industry in China continue to evolve," Coca-Cola said, "we are adapting our in-market strategies to make sure we keep building on our strong foundation and remain well-positioned to win in China between now and 2020.”

The company clearly sees the fourth-quarter drop in China as a blip and, while it was a detail noted by many observers, it does not appear to have unduly alarmed analysts. “We are not too concerned because Coca-Cola brands are very popular in China,” said Philip Gorham, senior equity analyst at Morningstar.

While concurring that the drop could be attributed to the timing of New Year, Gorham did sound one note of caution. “PepsiCo is slightly outspending Coca-Cola on infrastructure in China," he said. "We shall keep an eye on the firm's medium-term performance in this important growth market.”

Gorham believes the results taken as a whole showed “once again” that Coca-Cola’s growth is being driven primarily by emerging markets. Notwithstanding the slower revenue growth in the Pacific region – up 6% in the final quarter versus double-digit growth in recent quarters – he was optimistic about emerging markets continuing to provide consistent growth.

“In general, growth in emerging markets is slowing sequentially, in part as a result of the cycling of strong comparisons from a year ago," he added. "But Coca-Cola's heavy investment in infrastructure in Asia and Africa should allow the company to increase volume for several years to come.”

While Coca-Cola’s results appear unquestionably to vindicate its investment in emerging markets, another critical factor in such expansion is its possible impact on a company’s sustainability profile.

Working in emerging markets and the developing world brings with it a raft of sustainability issues. Indeed, in today’s climate, the more financial reward a company gains from emerging markets, the more it has to show it is operating responsibly in those countries and contributing positively to the development of their infrastructure and economies.

Shortly before publishing its annual result,s Coca-Cola issued its seventh annual sustainability report and, not surprisingly, environmental and social responsibility in emerging markets features fairly prominently.

The report covers the full range of sustainable business issues from energy efficiency and recycling to working conditions and healthy living. But, for a major soft drinks producer, one of the undoubted hot potatoes is water usage and nowhere is this more relevant than in developing markets where water scarcity is often such an issue.

Coca-Cola states that, in 2009, it achieved its seventh consecutive year of improved water efficiency, reducing water use to 2.36 litres per litre of final product, representing a 13% reduction since 2004 and a 2.9% reduction from 2008 to 2009. It has pledged to improve its water use ratio by 20% from the 2004 baseline by 2012 and is “on track” to meet that target.

However, a critical facet of the water efficiency issue is site-specificity. On an aggregated basis, a company may have a very solid performance but the objective has to be to achieve optimal efficiency in the locations where water is at its scarcest. Here, Coca-Cola has some work to do. Its breakdown of efficiency performance by region shows that efficiency is highest in North America where it takes 1.71 litres of water to produce a litre of product and in Europe where 2.0 litres are required.

However, in the Eurasia/Africa region it takes 2.97 litres, significantly above the global average. Water efficiency in Latin America is better at 2.14 litres per litre, but in the Pacific region it takes 3.23 litres of water to make 1 litre of product.

While Coca-Cola has been a signatory to the UN Global Compact’s CEO Water Mandate since 2007 and is making progress, this is likely to remain an area of exposure for the company.

The tenor of Coca-Cola’s sustainability report underlines its recognition of the importance of environmental and social responsibility to its continued growth and to its reputation, and nowhere is this more critical than in developing markets.