Coke: Diet CSDs Fuel 5 Percent Growth

The Coca-Cola Company’s revamped diet and zero sugar soft drinks continue to bolster overall sales, the company reported today during its second quarter earnings report. On a call with investors and analysts, the beverage conglomerate announced organic revenue was up by 5 percent, nearly double the consensus estimate of a 2.87 percent raise.

In the U.S. alone, retail sales were up 3 percent during the quarter, CEO James Quincey said during the call. The company’s sparkling no-sugar portfolio — which includes the recently rebranded Diet Coke and Coke Zero Sugar lines — saw 7 percent retail value growth. Diet Coke’s sales decline also slowed to a 1 percent decrease.

“I think as you ladder that up to the overall strategic answer, the interesting thing is that the success and the turnaround of Diet Coke … is not coming at the expense of Coke Zero Sugar,” Quincey said. “Coke Zero Sugar is also growing double digits in North America volumetrically, clearly high teens, double digits in terms of revenue, such that we’re getting strong first half overall revenue growth and volume growth with our Zero Diet portfolio in the U.S., which is a part of our strategy to go forward.”

Waters, enhanced water and sports drinks led unit case volume growth by category at 4 percent, bolstered by Powerade Zero and Dasani Sparkling. Sparkling soft drinks saw 2 percent growth, while juice, dairy and plant-based beverages were down 2 percent and tea and coffee were down 1 percent.

During the Q&A section of the call, Quincey explained that while juice volume was down, prices were up. Higher costs for orange juice and packaging led the company to decrease pack size, leading to volume decline.

“I think what you see is volumes are down, prices are up,” Quincey said. “Competitors and the retailers, on balance, didn’t follow us overnight. They probably followed us closer at the beginning of the third quarter, so that’s starting to come through. So we had probably a larger volume impact, which is unfortunate, but traditional for the price leader. And so that’s the story in juice. I think the juice thing will start to improve as we get into the back half.”

Despite high market performance, the price/mix in North America was down by 3 percent, which Quincey said was the result of several points of pressure, including rising freight costs, inopportune timing of deductions, and business mix as the company’s sparkling business grew faster than its offerings in the juice and tea categories.

Globally, the company is putting an increased focus on new innovations, Quincey said. In Japan, the company has launched a premium coffee line called Craftsman, an extension of the Georgia Coffee brand. Quincey said it is also exploring new ways to innovate within the core Coke brand, including by expanding the international Coca-Cola with Coffee line that launched in Japan last year. Although there are no announced plans for the coffee-flavored cola to get a release in the U.S. yet, positive results in Australia and Vietnam are “indicative of the broader strategic approach [Coke is] taking to reinvigorate the sparkling category,” he added.

“Over the last few calls, we’ve discussed how we’re expanding our portfolio through innovations, acquisitions, and lifting, shifting, and sustaining successful brands across markets,” Quincey said. “But disciplined growth also requires that our existing brands retain and sharpen their edge by connecting better with consumers’ needs. We’re working diligently to increase our capabilities in this area because satisfying key consumption occasions allows us to attract new drinkers and ultimately achieve quality leadership.”

The reaction by market analysts to the earnings report was largely positive. Bonnie Herzog of Wells Fargo Securities said the “strong and balanced topline” suggested the company’s refranchising efforts and evolving portfolio were paying off. Herzog added that the company’s prediction of at least 4 percent organic sales growth for 2018 suggests an optimistic outlook for Coke’s momentum. Susquehanna analyst Pablo Zuanic was more mixed, stating “the quarter shows mixed trends” with North American pricing, unit case slowdown, and margin squeeze being causes for concern.

Speaking to CNBC after the call, Quincey said that recent tariffs on steel and aluminum placed by President Donald Trump have also put pressure on the company, forcing a rare mid-year price hike with its bottling partners.

Coca-Cola Company stocks closed up today by 0.85 points at $46.09 per share.