There were no valentines exchanged between Coca-Cola and investors on Feb. 14 after the company offered a cautious full-year 2019 earnings forecast. Coke shares declined more than –8% as some analysts also expressed disappointment in the quality of Coke’s fourth-quarter earnings result. Bernstein Analyst Ali Dibadj wrote in a note to clients today: “Messy outlook hits stock hard, though core business seems healthy; patience required.” Global organic revenue actually increased +4% (not including an extra selling day, structural changes and the impact of currency fluctuation), which was higher than most analysts expected. Global pricing rose +4%while global volume was little changed. However, the overall results were helped by a lower-than-expected tax rate. On a volume basis, Coke’s sparkling soft drinks category cluster declined -1% globally for the quarter. The juice, dairy and plant-based beverage cluster declined –2%, hurt in part by packaging downsizing in North America, the company said. The water, enhanced water and sports drinks cluster grew +1% and the tea and coffee cluster jumped +3%.
North America. Coke’s North America organic revenue was little changed after price/mix that rose +2% and volume that declined -1%.
Forecast. Coke forecast full-year 2019 organic revenue growth of “approximately” +4%. That was a repeat of last year’s forecast, which also raised questions at the time. The company ended up posting +5% in 2018, as announced yesterday. The forecast falls at the low end of Coke’s long-term guidance of +4% to +6%. A key difference in the 2019 forecast, however, was a -3% to -4% currency headwind, compared to the a +1% tailwind predicted a year ago for 2018.
CBD Update. In an interview, Quincey told BD that the new U.S. Farm Bill passed in December “arguably” helps with the legality of cannabis-based CBD beverages. “Although, it’s not entirely clear that everyone in the U.S. government feels that way,” he said, referring to the U.S. FDA’s subsequent guidance that interstate sales of CBD-infused drinks aren’t permitted. Quincey said last year that CBD would need to be legal, safe and consumable daily in beverages for Coke to pursue the category (BD 11/12/18). Despite the improving regulatory path for CBD, the ingredient “hasn’t really crossed the other hurdle, so no real change in expectations from us,” Quincey said.
Coffee. Coca-Cola North America has delayed a planned U.S. launch this year of a Far Coast ready-to-drink coffee (BD 10/12/18). In a statement, the company said it has decided instead to focus on its Dunkin’ and McCafe RTD partnerships. The statement added that CCNA is “tracking the success of Honest coffee products overseas,” a possible hint that the Honest Tea coffee extension may head to the U.S. market. There is also the possibility of a Costa Coffee RTD product, now that Coke has acquired the U.K.-based cafe chain. When asked Thursday about the pace of ready-to-drink coffee innovation in the U.S., Quincey told BD that the company is working with its dairy partner Fairlife to bring more production capacity online this year. “Simply put, there wasn’t enough capacity in the U.S. to make a lot more coffee last year,” he said. Quincey did not define the level of production increase expected. “You will over the coming years see more people trying more things in coffee as more capacity comes online and that’s going to include us,” he said. As for the Far Coast delay, Quincey said “brand credentials” are important when investing in a category like coffee. “You’re not going to get very far if you don’t have a brand, or if you’re not going to invest the money to establish a brand,” he said. “That’s why we work with some of the other coffee brand owners like McCafe and Dunkin’.” Costa. Quincey said he was pleased that the acquisition of Costa Coffee closed earlier than expected this year on Jan. 3. The team is now putting “plans in place for the synergies.” When asked, Quincey said he still didn’t “see stores being the strategy for the U.S.,” adding, “It’s about, ‘How do we help our customers in the U.S. do better in coffee?’”
Monster Arbitration. Quincey told BD that arbitration with Monster Beverage over a proposed Coca-Cola Energy drink is proceeding “in the spirit of partnership.” Monster CEO Rodney Sacks espoused a similar view in January during a meeting with analysts. “Our view is that the contract allows us to do Coke Energy and they have some differences and that’s fine,” Quincey said. “Ultimately, strategically this is about expanding the opportunity available in the energy space.” Quincey insinuated that Coke Energy would not directly compete with Monster Energy. “It’s a white space strategy, not a substitution strategy,” he said.
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