It is not a good time for legacy consumer brands. Predictions of the demise of one American icon Campbell’s Soup (NYSE: CPB) are filling the media.
Another institution of American consumerism, the Coca-Cola Co. (NYSE: KO) is struggling with collapsing revenues. Disturbingly, Coke just experienced its ninth straight quarter of negative revenue growth.
Coca-Cola year-to-year revenue growth fell by 7.99% between 2nd Quarter 2017 and 2nd Quarter 2018. Frighteningly, that figure was an improvement, revenue growth fell by 16.36% during 1st Quarter 2018, 20.16% in 4th Quarter 2017, 14.72% in 3rd Quarter 2017, and 15.92% in 2nd Quarter 2017.
Coke is making a Lot of Money
By my calculations, Coca-Cola’s revenue growth fell by 75.15% during the last five quarters. Quarterly revenues also dropped during that period followed by $775 million from $9.702 billion in June 2017 to $8.927 billion a year later.
Despite the revenue drop, Coke is still making a lot of money. It reported a net income of $2.316 billion in June 2018, up from $1.371 billion in June 2017.
The company also experienced an operating income of $2.727 billion a $5.675 billion in gross profits in 2nd Quarter 2018. Selling flavored, and carbonated water is still profitable.
Coca-Cola achieved an operating cash flow of $1.995 billion and a free cash flow of $1.676 billion in 2nd Quarter 2018. Though, Coke had an investing cash flow of $1.02 billion in 2nd Quarter 2018 and $1.321 billion in 1st Quarter 2018.
Why is Coca-Cola Borrowing Money?
The investing cash flow is bad because it indicates Coke borrowed more $2.323 billion during 1st and 2nd Quarters 2018. I have to wonder why Coca-Cola was borrowed that money.
The company has a lot of cash in the bank. Coca-Cola reported cash and equivalents of $13.818 billion and cash and short-term investments of $19.354 billion in cash and short-term investments on June 29, 2018.
Coke had assets that totaled $89.593 billion in June 2018. Those assets were down from $93.282 billion in 1st Quarter 2018 and $91.146 billion in 2nd Quarter 2017.
The asset drop and the borrowing indicate problems at Coke. It is not clear how deep those problems go but the revenue drop indicates they are serious.
What is wrong at Coke?
The source of Coca-Cola’s problems is clear; Americans are drinking fewer and fewer soft drinks.
America’s volume of soft drink consumption fell by 5.3982 billion liters between 2011 and 2018, Statista calculated. Americans drank 88.8115 billion liters of soft drinks in 2011 and 83.263 billion of soft drinks in 2018. To add insult to injury, it project the volume of soft drinks consumed will fall to 81.4308 billion in 2021.
Therefore, Coke’s market is shrinking and will keep shrinking. Interestingly, soft drink revenues are projected to keep growing over that period. If Statista’s forecast is correct, those revenues will rise from $112.515 billion in 2018 to $116.95 billion in 2021.
The data indicates that Coca-Cola’s market will shrink but its business will remain profitable for the foreseeable future. It also exposes Coca-Cola’s struggle for survival. The struggle is to adjust production to compensate for lost sales.
Can Coke Keep Making Money?
An obvious strategy will be to raise prices. The problem with that is Coke’s customers may not accept the price increases.
They have many alternatives including Pepsi and private-label colas from retailers like Kroger (NYSE: KR) and Walmart (NYSE: WMT). Walmart and Kroger are major menaces to Coca-Cola because they often use soda pop as a loss leader.
A long-term threat to Coke’s survival would be Amazon (NASDAQ: AMZN) bringing out its own private-label soda and doing the same thing. Amazon is already offering deeply discounted private label brands for some consumer goods such as diapers.
A danger is that Coke will have to offer its own deep discounts to counter Big Retail. That and falling sales volume might force costly changes to Coca-Cola’s business.
What can Coke Do?
An obvious solution Coca-Cola can undertake is to add more high-end consumer brands to its stable to grow the profits. Others are to offer exclusive offers and specialty products that cost more.
An example of such a product is the old-formula Coke made from real sugar rather than corn syrup. Others are special flavors and clear colas.
A radical solution might be to say “no” to Big Retail. Stop selling through Kroger or Walmart. Restrict sales to convenience stores or restaurants or refuse to deep-discount.
A way to block discounting would to stop selling the one liter or two liter bottles. Another would be to only sell six or 12 packs of Coke. Unfortunately, it is not clear how customers would react to those steps.
A problem Coke faces is that customers are used to deep discounting. That might be fatal to its business, by preventing the company from raising prices as sales fall.
Is Coke still a Value Investment?
Despite its uncertain future, Coca-Cola is still a value investment. The company offered a low stock price, $46.09 on August 15, 2018, and a respectable dividend.
The next dividend of 39¢ is scheduled to be paid on October 1, 2018. That dividend has been growing by around 2¢ a year for some time. It was 37¢ in 2017, 35¢ in 2016, 33¢ in 2015, and 30.5¢ in 2014.
To add icing to the cake; Coke has reportedly paid a dividend for 55 years straight. Coke (NYSE: KO) is still one of the most reliable dividend stocks around.
Coca-Cola shareholders enjoyed a dividend yield of 3.39%, an annualized payout of $1.56, and a payout ratio of 75.4% on August 10, 2018. Persons that want a low-cost dividend stock will be well served by Coke. Coca-Cola shareholders enjoyed a dividend yield of 3.39%, an annualized payout of $1.56, and a payout ratio of 75.4% on August 10, 2018.
Coca-Cola is still a good consumer value investment. The low price makes this soda pop manufacturer, an intriguing value buy in a changing consumer marketplace.