The Coca-Cola Company
KO
is one stock that has been resilient in the recent months despite the headwinds posed by the coronavirus pandemic. Shares of this soft-drinks behemoth have seen robust momentum lately, thanks to its efforts to streamline portfolio and accelerate investments to expand its digital presence due to the shift in consumer preference. The company has been benefiting from the effective execution of strategies to evolve as a consumer-centric total beverage company. Also, recent innovations are likely to help the stock maintain its winning momentum in 2021.
Although earnings and sales declined year over year in third-quarter 2020, its revenues reflected improved trends from the second quarter. The company pointed out that overall volume continued to improve gradually with low single-digit decline experienced in September compared with 25% decline in April and mid-single-digit decline through summer. Much of the sequential growth is attributed to the recovery in away-from-home channels, which represents nearly half of its business globally.
Meanwhile, accelerated sales growth in at-home channels throughout the third quarter were key contributors to volume growth. Particularly, the company witnessed strong demand trends in the grocery and e-commerce channels due to shifts in consumer behavior and its robust system actions to capture these opportunities.
Backed by the above factors, shares of this Zacks Rank #3 (Hold) company have gained 18.2% in the past six months compared with the
industry
’s growth of 13.8%. Further, Coca-Cola has comfortably outpaced the Consumer Staples sector’s growth of 14.9% during the same period.
Factors to Drive Growth in 2021
Driven by a shift in consumer behavior due to the coronavirus pandemic, Coca-Cola has been witnessing a splurge in e-commerce with the growth rate of the channel doubling in many countries. It has been accelerating investments to expand presence in this channel compared with the pre-crisis levels. In North America, it is investing in e-commerce to support retailers and meal delivery services, shifting toward fit-for-purpose package sizes for online sales, and redeploying consumer and trade promotions toward digital.
Its digital partnerships with restaurants and aggregators to optimize menus resulted in a four-point increase in attachment rates, while digital commerce retail sales have more than doubled year to date, outpacing the category. It is also strengthening consumer connections and further piloting numerous different digital-enabled initiatives through fulfillment methods, be it B2B to home or B2C platforms in many countries, to capture online demand for at-home consumption. The company saw favorable results initially and is looking to scale similar partnerships with more customers. The company’s focus on accelerating expansion in digital channel is likely to be sustainable, positioning it for long-term growth.
Moreover, Coca-Cola is known for streamlining its brand portfolio from time to time. It has been on track with its ambition of creating a winning portfolio with global, regional and local brands that have the strongest potential to grow their customer bases and drive profits in the long term. However, the sudden occurrence of the pandemic led it to accelerate its already underway brand-restructuring efforts earlier this year.
Consequently, it outlined plans to slash its 430 master brands portfolio by 50%, retaining about 200 brands. As part of these efforts, the company has so far exited some of its underperforming brands like Tab, Zico coconut water, Diet Coke Fiesty Cherry and Odwalla juices. The company expects to use the savings from these brand exits to provide flexibility and support investments in its growing brands like Minute Maid, Simply juices, Topo Chico Hard Seltzer, Coca-Cola Energy and Aha sparkling water.
Additionally, the company recently revealed plans to cut nearly 2,200 jobs globally, including 1,200 in the United States, as part of its next leg of restructuring actions to reduce costs. The company expects to execute the job cuts through a combination of buyouts and layoffs. It also expects to reorganize its North America business unit to resemble its other units around the world. Currently, the company has separate teams for marketing, communicating with retailers and coordinating with bottlers for each of its sub-businesses at the North America unit.
In August, the company offered voluntary separations to a minimum of 4,000 employees in the United States, Canada and Puerto Rico. This action was mainly in response to its efforts to revamp its brand portfolio. It estimates the severance program to attract costs of nearly $350-$550 million. Meanwhile, the company indicated that it will also result in savings of about a similar amount.
Conclusion
Despite the effects of the coronavirus pandemic on the company’s away-from-home business, we believe the aforementioned strengths and investments position it well for continued growth in 2021. This is further supported by a
Momentum Score
of B and an expected long-term earnings growth rate of 4.2%.
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