Always Coca-Cola, Just Not Right Now - The Wall Street Journal

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Coca-Cola’s second-quarter sales fell 28% from a year earlier. Coke products being delivered to a... — Coca-Cola’s second-quarter sales fell 28% from a year earlier. Coke products being delivered to a store in Racine, Wis., in June.
Photo: Mark Hertzberg/Zuma Press

July 21, 2020 11:26 am ET

Coca-Cola KO 2.41% has been slammed by the coronavirus pandemic. It remains far from clear how quickly it can get back on track.

The beverage giant said Tuesday that second-quarter sales fell 28% from a year earlier as out-of-home consumption—everything from restaurants to vending machines—plummeted.

Across countries and regions, the degree of pain roughly correlated to the share of out-of-home vs. in-home consumption, as well as the severity of lockdown measures, the company said. Nonetheless, the situation was severe across the board. It ranged from an 18% organic revenue decline in North America to a 35% plunge in Europe, the Middle East and Africa.

In this environment, Coca-Cola looks poorly positioned compared with PepsiCo, where beverage declines are being counteracted by rising at-home consumption of Frito-Lay snacks and other foods. Pepsi shares are down around 2% so far this year while Coca-Cola is about 15% lower.

There was some encouraging news. Coca-Cola said global case unit volume trends have been improving, from a decline of around 25% in April, to a 10% fall in June, to a drop in the mid-single-digits this month. Perhaps in response to this, Coca-Cola shares were up around 3% in early trading Tuesday.

Still, on Tuesday’s conference call company executives were careful to emphasize that the outlook is highly uncertain, especially with the recent surge in coronavirus cases in markets such as Iran, Australia and the U.S.

“There are too many known unknowns ahead of us,” Chief Executive James Quincey said on a conference call. We cannot discount that there could be further waves of lockdowns, either partial or full.”

In response, the company has started trimming its portfolio of brands and emphasizing efficiency and effectiveness in marketing spending. Coca-Cola earlier this month said it will halt operations entirely for fresh juice and smoothie brand Odwalla.

Some pruning is logical. The company noted that more than half of its 400 brands globally are single-country brands without large scale, accounting for just 2% of combined revenue.

But it is crucial that any austerity measures taken amid the pandemic don’t undermine Coca-Cola’s formula for long-term success. This has included bets on a range of “explorer” brands that help it diversify away from sugary, carbonated sodas. It also has been defined by decades of shock-and-awe levels of investment in branding and marketing.

Mr. Quincey is aware of the risks, stressing on Tuesday that the company merely wants to distinguish between “explorer” brands that are succeeding and those that aren’t. If the company were to focus excessively on cost-cutting at the expense of growth potential, he said, “we will do well for a year or two, but then the wheels will come off.”

While Coca-Cola typically trades at a premium to rival PepsiCo, the two are now valued equivalently, though not cheaply, at around 24 times forward earnings. At the moment, that price doesn’t look tempting for either, but particularly not for Coca-Cola. Best to let this one settle before opening.