Have Millennials laid the groundwork for the downfall of U.S. corporate behemoths such as The Coca-Cola Co (NYSE:KO) and McDonald’s Corporation (NYSE:MCD)? It appears that the younger generation of Americans prefer healthier options.
We have seen lately how McDonald’s is having problems adapting, but what about Coke?
Soft drinks are on the decline in America — actually for the last decade. The March 2015 report of Beverage Digest found that U.S. sales of carbonated soft drinks fell for the 10th consecutive year in 2014. Coke — specifically on a year-over-over basis — has seen its revenues drop eight consecutive quarters.
What’s going on with KO, and can it be turned around?
Well, Coca-Cola CEO Muhtar Kent said that 2015 will be a “transition year” for KO. We will get our first glimpse of how change is coming along Wednesday morning when Coca-Cola reports its quarterly earnings.
Expectations for Coca-Cola Stock
The consensus among analysts is that Coca-Cola earnings will be 43 cents a share on revenues of $10.65 billion, a slight decrease from a year ago, when earnings were 44 cents on revenues of $10.58 billion.
Now, let’s look at the variables which led us here.
For years Coca-Cola stock looked to international markets for growth due to stagnate North American sales. Now, the combination of a deflationary landscape in Europe and a continued softness in emerging markets has dealt a major blow to demand in overseas markets.
And then there’s that strong dollar, which has been and will be Kryptonite to the bottom line of many multinational companies in the near term.
However, Coke isn’t resting on the laurels of one of the most recognizable brands in the world. In fact, management sees this year as a turning point to increased profitability and growth.
In 2015, Coca-Cola wants to both implement changes to bring about a new operating model while at the same time use partnerships to drive growth.
Coca-Cola’s Plans for 2015
One of Coke’s spotlights last quarter — when it actually beat analysts’ forecasts — was its use of a “rational approach to pricing” to boost sales and profits domestically. In the past, the company’s obsession with market share was detrimental to its bottom line due to weak pricing.
Let’s see if the new pricing strategy continues to work.
Another profitability issue stems from Coke’s ownership of its biggest North American bottler. Coke took over the operation five years ago because it believed it was underperforming. However, now it has become a burden on the bottom line.
The company is in the process of refranchising its bottling territories in order to produce a more cost-effective system. There should be a good deal of guidance on this front.
And then we come to growth and product diversification. Coke has made equity investments in both Monster Beverage Corp (NASDAQ:MNST) and Keurig Green Mountain Inc (NASDQ:GMCR) to expand growth options.
The deal struck with Monster Beverage gives KO a 16.7% stake in the company and some much-needed exposure into an energy drink market that’s exploding.
Its partnership with GMCR is a little more interesting and a bit of a gamble. Coke has a 16% stake in the company and is helping to develop a Keurig machine that would allow consumers to make cold carbonated drinks at home.
With the trends pointing downward in carbonated drinks, this seems a little risky. It will be interesting to see how this is progressing.
As of this writing, Jason Jenkins did not hold a position in any of the aforementioned securities.
