Coca-Cola is diversifying into non-CSD categories

Coca-Cola is diversifying into non-CSD categories

Yesterday, a few hours after The Coca-Cola Co released its third-quarter results that showed a 14% drop in profits, CNBC analyst Jim Cramer made it clear where he believed the blame lay. “This is not a well-run company,” the Mad Money presenter bellowed, demanding that Coca-Cola's “halo” be “ripped off”.

“I'm tired of excuses,” he said.

It was perhaps the strongest reaction to yesterday's performance, but Cramer wasn't alone in criticising a company that used to be regarded on Wall Street as the “king of beverages”.

Amid the inevitable flood of “Coca-Cola loses its fizz” headlines were analysts concluding that the company's management could do better. “Much more can be done,” said Nomura's Ian Shackleton, though he also agreed with the consensus that the extra cost savings announced alongside the results were a “step in the right direction”.

It seems, however, that some are underestimating the shifting trends Coca-Cola is currently working its way through. On CNBC, Cramer - in mid rant - expressed surprise that Coca-Cola was shedding profits. “You're not supposed to stop drinking soda,” he said. “Soda's like medicine; you drink it regardless.”

The problem, though, is that people are stopping soda consumption, especially in developed countries. Even in soda-loving Mexico, where consumers apparently prioritise it over toilet paper, CSD demand is down, largely due to sugar taxes enacted this year

Health concerns have much to do with the decline (coincidentally fast-food chain McDonald's also announced a profits drop yesterday), as is the marked availability of other beverages on the market and the new ways consumers can access them, such as through online retail.

All of these things were acknowledged yesterday by Coca-Cola CEO Muhtar Kent, who in a conference call with analysts spoke about the “new normal” that the company is coming to terms with.

The trends are, after all, well known to Coca-Cola and other soft drinks makers, which is why for the past few years they have been diversifying into energy drinks, fruit juice and, in Coca-Cola's case, new delivery systems such as the upcoming Keurig Cold home carbonation platform.

New sweetener innovations are appearing and producers have also been experimenting with new retail channels, with both PepsiCo and Coca-Cola recently announcing exclusive tie-ups with Amazon.

Kent yesterday also upbraided critics for focussing too much on developed markets and ignoring the potential of countries such as Poland, Nigeria and Indonesia, where Coca-Cola's distribution system is building consumer loyalty.

“The world is a very big place,” Kent said. “It’s not just the countries that we live in and we know. It’s a very wide place out there and there is significant opportunities to continue to generate growth.”

These, then, are all good reasons to ignore doom-mongers such as Cramer. (Another good reason is his 2009 evisceration on the Daily Show when host John Stewart turned him briefly into the comedy clown of the financial collapse.)

Yesterday, many analysts did ignore the hoopla around Coca-Cola's poor Q3 and stuck with the long view that a company that is making upwards up US$2bn a quarter in profit must be doing something right.

“(It's) a good time to look at Coca-Cola for patient investors,” Bernstein's Ali Dibadj said, an encouraging riposte to short-termist such as Cramer, who believes the company needs an agitating investor smimilar to PepsiCo's Nelson Peltz to frighten it into growth. 

But Coca-Cola doesn't need a Peltz figure, what it needs is a bit of time.