Coke: On-Premise Challenges Offset Retail Sales Growth in Q3

Slumping on-premise accounts “more than offset” an increase in retail sales for The Coca-Cola Company during Q3 of this year, according to a company earnings report released today.

Global case unit volume fell 4% in the quarter, while net revenues declined 9% year-over-year. Organic revenues fell 6% and operating income was down 8%. Meanwhile, operating income increased 7% and operating margin was 26.6% versus 26.3% last year. Earnings per share declined 33% to $0.40.

In North America, unit case volume dropped 6%. Price/mix improved 4%, driven by growth in premium product offerings, and operating income was up 14%.

Globally, sparkling soft drinks declined 1% in Q3, weighed down by a slide in North American fountain drink sales. The core Coca-Cola brand was up 1% while Coca-Cola Zero Sugar grew 7% in the quarter and was up 4% year-to-date. Juice, dairy and plant-based beverages fell 6%, although sales of Simply and Fairlife in North America were strong, according to the report.

Water, enhanced water and sports drinks were down 11%, primarily due to a drop in lower-margin water brands. Tea and coffee fell 15%, driven by the pandemic’s impact on Costa retail stores worldwide.

Speaking with analysts and investors, CEO James Quincey contributed much of Coke’s struggles to the pandemic’s drag on the away-from-home space, which represents about half of the company’s global business. However, the company has stopped some of the bleeding: declines in away from home sales were roughly in the mid-teens percentage wise during Q3, compared to down over 50% in April, while consolidated volume sales were down 4% after dropping 16% in the previous quarter.

“This [improvement] was driven by the agility of our sales teams throughout the system and the efforts to create value for our customers during the gradual reopening phase,” Quincey said on the call. “We are seeing the away-from-home recovery starting to stabilize given the ongoing restrictions in many regions.”

As well, Coke saw sales accelerate in retail and ecommerce channels, with increased foot traffic in North American convenience and quick service restaurants helping drive growth. Although Quincey said strong performance for these channels was “upset by continued softness” in food service sales, digital partnerships with takeout restaurants have resulted in a four-point increase in attachment rates on meal orders, while ecommerce retail sales have more than doubled year-over-year.

Quincey also said Coke has “finalized” its master list of brands, signalling a potential end to a process that saw the company discontinue multiple underperforming brands this year including Odwalla, Hubert’s Lemonade, Zico and Tab. The revised portfolio now consists of 11% global brands, 11% regional brands and 78% local products.

Moving forward, the company will continue to focus on brands it views as scalable, such as sparkling water Topo Chico. Speaking during the call’s Q&A session, Quincey noted the launch of Topo Chico Hard Seltzer next year, which is being made and distributed in partnership with Molson Coors Beverage Company, presents Coke with a significant opportunity to grow brand awareness despite being a newcomer to the alcoholic beverage space.

“We are for sure clear that what we don’t know about the alcohol and hard seltzer category is more than what we do know, and we need to continue to work our way to understand these opportunities,” he said. “[We’re] starting small, learning and then expanding as we get success.”

Elsewhere, Quincey said the company will continue to focus on new innovation and growing brands such as sparkling water AHA, as well as expansions to existing brand trademarks such as Coca-Cola Energy.

The company has also begun a global marketing initiative to “improve efficiency and effectiveness,” Quincey added, with a goal of reducing ad spending. He said there was no specific savings target, but that Coke will look to “eliminate duplication” in its marketing while increasing its use of third party agencies.

Though Quincey said the company is “encouraged” by improvements in the business, he warned investors of an uncertain future as virus cases rise and the potential for regional lockdowns increases. He noted that the off-premise channel recovery showed “signs of stalling” last month due to increasing restrictions in select markets.

“It’s important to remember the world is in a fragile state,” Quincey said. “We don’t expect to return to the peak levels of global lockdown, but we are prepared for setbacks due to the local spikes in cases and targeted restrictions and closures.”

As of publication, Coke stock price was up 0.94% to $50.47 per share.