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By: Howard Telford

Both Coca-Cola Co and PepsiCo made their fourth quarter and full-year results public last week. At the top-line level, these results offer a mixed bag to analysts and investors. On the positive side, both companies beat quarterly market expectations in terms of profitability. On a more negative note, earnings and volumes were weak in developed market beverages and both companies had to lean on diversifying their respective category portfolios and strengthening emerging market presence in order to secure and defend global pockets of growth.

Last week, I discussed four challenges for Coca-Cola ahead of its reported results. Perhaps the most immediate strategic concern among these challenges is the risk of a general slowdown in these emerging markets, and the loss of valuable positions in these growth regions to either local players or larger, multinational competition:

“Is share performance in these vital growth markets holding up, or is the company losing ground to domestic players, particularly brands with value positioning?”

Euromonitor International’s Competitive Analytics tool allows us to better visualise the importance of emerging markets to Coca-Cola’s recent volume growth strategy over 2008-2013 – and the very real, specific dangers that an emerging market slowdown in 2014-2015 would pose to the company’s strategy.

Coca-Cola’s story in developed markets: Sinking volumes, but squeezing out value

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Source: Euromonitor International

Volumes – particularly in sparkling categories – are down in North America and many parts of Western Europe. However, over 2008-2013 high-growth and higher-value categories and brands like Simply Orange juice, sports drinks and new emerging categories like premium RTD tea (Gold Peak, Honest Tea) enabled TCCC to partially offset the disappointing performance of cola and non-cola carbonates, as well as the company’s struggling US still water and flavoured water brands. Over this period, decline and weakness in Japanese RTD brewed beverages also weighed heavily on the company’s results, although cola carbonates sales in Northern Europe and bottled waters in Japan allowed the company to balance this performance in value terms.

An examination of category balance in developed markets suggests that the core, eponymous portfolio of CSD brands is being gradually adjusted in favour of healthier teas, juices and higher-value waters. Instead of depending on developed market volume growth in CSD, incremental increases in unit price of sparkling brands through package mix and size is the company’s approach to squeezing out value growth opportunities in the flat or declining North American and Southern European markets. This is the new reality of the soft drinks market in developed countries, which accounted for 48% of Coca-Cola’s value sales. As the company’s CEO, Muhtar Kent, remarked in his investor call to analysts this week:

“Some markets focus on price realisation, others on volume and the remainder on a balance of the two.”

So what of these volume markets? How has Coca-Cola’s emerging market growth engine actually performed?

Coca-Cola’s story in emerging markets: BRICs, Middle East and Mexico keep CSDs afloat

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Source: Euromonitor International

Over 2008-2013, Coca-Cola increased emerging market sales by US$27.9 billion, in contrast to a value sales increase of just US$2 billion in developed markets. Chief among these opportunity areas were Mexico, Brazil, China, Argentina, Russia and the Gulf region. The company’s flagship CSD brands – Coca-Cola brand carbonates and non-colas – were leaders in Latin America, dwarfing competition for most of the review period. In China, the company particularly benefited from the strong performance of its Minute Maid juice brand over this 2008-2013 period, leading to a strong overall position in the important Chinese juice drinks category.

In order to sustain a strategy of smaller packages and higher unit prices in the flat or declining developed markets in which Coca-Cola dominates, the company requires the dizzying BRICs, Mexico and other emerging market growth rates that sustained the growth experienced over 2008-2013. However, the most recent data from Euromonitor International’s Non-Alcoholic Drinks system – for full year 2014 – provides a sobering update to Coca-Cola’s emerging market ambition.

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Source: Euromonitor International

In two of the company’s top three emerging markets in terms of absolute value sales – China and Mexico – volume growth (retail sales of total soft drinks in litres) slowed in 2013-2014. A small uptick in Brazil in 2014 came despite a significant slowdown since 2009-2010. Despite growth in absolute terms, 5-year trend lines are simply pointing in the wrong direction in several of the markets the company has identified as key to global volume growth.

This category-wide problem is compounded by growing competition from domestic players in these key markets. Let’s examine two prominent examples: first, Aje Group in Latin America.

Coca-Cola v Aje Group in Latin America: Market Overlap

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Source: Euromonitor International

Excepting only global rival PepsiCo from this analysis of Coca-Cola’s competitors in Latin America, low-cost cola manufacturer Aje Group is quickly gaining on Coca-Cola’s dominant regional position with a portfolio of low-cost cola brands, including Big Cola and Kola Real (Peru). Aje has achieved double-digit market shares in Peru, Colombia, Venezuela and Central America, with a growing presence in Coca-Cola’s important Mexican market. Market overlap between TCCC and its Peruvian competitor has doubled in just five years. In some Latin American countries, Aje brands present an even bigger threat to Coca-Cola than rival Pepsi, thanks to economy pricing on Aje’s leading brands. While Aje brands pose little overall threat to the primacy of Coca-Cola in Latin America, the slow erosion of market share to discount players when coupled with a general slowdown in the company’s key emerging market territories represents a real risk to TCCC’s future growth strategy.

Aje is far from the only domestic player applying pressure to Coca-Cola in emerging markets. Another threat is emerging from China, where local players – particularly those brands present in high-flavour, affordable juice drinks – are clawing back market share from Coca-Cola’s successful Minute Maid and Minute Maid Pulpy brands.

Coca-Cola v Ting Hsin International Group in Asia: Market Overlap

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Source: Euromonitor International

Local giant Ting Hsin International Group – the Taiwan­-based manufacturer and marketer of Master Kong juice drinks, among other brands in China – was successful in taking share away from Minute Maid in the juice drinks category in 2013. Over 2008-2013, the market overlap between Coca-Cola and its large domestic competitor in Asia increased from US$1.3 billion to US$2.6 billion, as Ting-Hsin experienced strong revenue growth in juices and waters. Minute Maid rebounded strongly in 2014, taking some share back from Master Kong in the Chinese juice drinks category, but a myriad of other domestic players continue to encroach on Coca-Cola’s category space in the region. Intensifying competition from Ting Hsin and other domestic players, coupled with a surprising slowdown in off-trade volumes of juice drinks (down 2% in 2014), will be a real challenge for the soft drinks giant to overcome.

Changing consumer behaviour in North America and instability in Europe necessarily force more dependence from Coca-Cola and PepsiCo on emerging markets. Any uptick is a welcome trend (Coca-Cola reported flat North American CSD volumes but a 3% increase in its non-sparkling North American portfolio). But the unimpressive growth picture for Coca-Cola in developed markets underlines the serious challenge the company faces. While the company may have no control over the broader macro trends dampening emerging market prospects, Coca-Cola must push ahead with new plans to take on insurgent domestic soft drinks brands that are taking market share.

 

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