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Coke hit by sales decline

17-Apr-2003

Volume growth at US-based soft drinks giant Coca-Cola was 4 per cent in the first quarter of 2003, at the low end of market expectations, and impacted by declining sales in Japan and Germany. But there was no real impact on sales from the anti-American sentiment in many Arab nations or the launch of 'ethical' rivals such as Mecca Cola or Qibla Cola.

While Coca-Cola 's chairman, Doug Daft, was keen to highlight the volume growth performance, the stock market clearly remained unconvinced about the company's ability to meet its annual growth targets, as Coca-Cola's shares tumbled yesterday.

 

The first quarter results were impacted by a number of factors, Daft said. The general slowdown in the world's economy clearly took its toll, but there were also a number of short-term factors which affected sales volumes, such as a reduction in away-from-home consumption caused by the war in Iraq, a lengthy national strike in Venezuela, a change in deposit laws in Germany and a shift in the timing of the Easter holiday.

 

"The results of The Coca-Cola Company are always driven by the operational, financial and brand strengths of our entire system in our markets," said Daft. "Given the current volatile worldwide environment, our management team has continued to carefully monitor worldwide events and respond rapidly and effectively.

 

"We have enhanced productivity and cost efficiencies. We are also targeting our resources to the markets of greatest opportunity and stability, while taking all necessary steps to protect our business in more challenging markets. We are confident our results will improve during the year as we move beyond the short-term external factors that impacted this quarter."

 

In the company's flagship North American market, unit case growth was 3 per cent for the first quarter, driven by a solid performance in the retail sector and offset by a decline in the foodservice and hospitality segments. Retail sales of Coca-Cola (in all its variants) rose by 2 per cent, helped by strong performances from Vanilla Coke, diet Vanilla Coke, diet Coke and the continued expansion of the new Fridge Pack.

 

There was also an impressive 22 per cent increase in sales of the Dasani bottled water brand, while energy drink Powerade saw its volumes rise 16 per cent. There was continued strong double-digit growth from Minute Maid Lemonades, and the addition of Evian and Danone water brands to Coca-Cola's US portfolio last year also led to sharp volume rises.

 

In Asia, unit case volumes increased 8 per cent for the quarter, led by double-digit growth in China, the Philippines, India and Thailand. Coca-Cola and Fanta continued to drive the growth in many key markets, along with strong performance of local brands such as Thums Up, Qoo and Kinley.

 

In China alone, the company saw a 21 per cent rise in unit case volume, driven by double-digit growth in Coca-Cola (all variants), Fanta and Sprite, helped by several new packaging initiatives. In addition, non-carbonated beverages continued to increase their share of the Chinese market, helped by the launch of Nestea and the continued expansion of Qoo.

 

In Japan, unit case volume declined 2 per cent in the quarter, with solid growth in both January and February offset by a sharp decline in industry trends during March. Despite the challenging economic environment, the company said it had increased share during the quarter in the highly profitable tea, coffee and carbonated soft drink categories.

 

To try and offset future problems in Japan, Coca-Cola said it had undertaken a number of initiatives there, such as focusing on the profitable convenience store and vending channels and the creation of a national supply chain management company in association with its bottling partners there.

 

In Latin America, unit case volume increased 5 per cent in the first quarter, led by strong growth in Mexico and improving trends in Argentina, partially offset by the general strike in Venezuela, which forced the company to close its production facilities for all of January and most of February. Mexican unit case volume grew 14 per cent in the quarter driven by strong performance from Fanta and Lift, the continued expansion of the company's non-carbonated beverage business, the launch of the Real advertising campaign, and the introduction of several packaging initiatives.

 

In Argentina, unit case volume grew 7 per cent in the first quarter, reflecting the company's long-term strategy of investing in the country during last year's economic crisis. A new focus on refillable packages has helped Coca-Cola increase its share of total Argentinian sales by 2 percentage points compared to the first quarter of the previous year.

 

In the wide-ranging Europe, Eurasia and Middle East operating division, unit case volumes in the first quarter declined 1 per cent, a sharp fall after 8 per cent growth in the same period a year earlier. The timing of the Easter holiday period (in Q1 in 2002 and Q2 in 2003) was partially to blame for the decline, but sales were also reduced by severe winter weather conditions in Eastern Europe and declines in German volume resulting from the implementation of a deposit law on non-returnable packages.

 

The division did benefit from a number of product introductions during the year, however: Diet Coke with lemon, Vanilla Coke, and Sprite Ice Cube were all launched during the quarter.

 

The deposit law in Germany reduced volume sales there by 10 per cent, but Coca-Cola said that while the change in deposit laws was disruptive in the short-term, it remained extremely well placed to take advantage of the move by consumers back to returnable packaging. The company is introducing several new packages and initiatives in the second quarter that are expected to lead to growth in Germany during the second half of the year.

 

In Africa, unit case volume growth was 3 per cent in the quarter, with the southern and east Africa division generating solid growth and offsetting declines from north and west Africa, where economic conditions were difficult.

 

The first quarter also saw a number of streamlining measures, including the integration of Coca-Cola's three separate North American business units - Coca-Cola North America, Minute Maid and Fountain - and a revamp at the German unit Coca-Cola Erfrischungsgetraenke.

 

In value terms, first quarter sales reached $4.5 billion (€4.1bn) during the quarter, up 10 per cent, but operating profits were 7 per cent lower at $1.08 billion as a result of increased charges relating to the restructuring measures. At the net level, profits reached $835 million, a major improvement on losses of $194 million in 2002 related to the economic crisis in Latin America.