Coca-Cola beats expectations thanks to higher prices, innovations that appeals to Gen Z
Noting the company’s 21% increase in comparable currency neutral operating income in North America during the quarter ending March 31 “stood out,” Barclays analyst Lauren Lieberman asked if the unexpected lift was a one-time fluke or the result of a more strategic play by Coca-Cola.
While Lieberman and the street more broadly were surprised by the company’s performance, which beat expectations, Coca-Cola CFO John Murphy was not.
“We expected in Q1 to see North America coming out of the gates strong, given the carryover pricing that we knew would be a tailwind for the quarter. We also saw benefits from immediate consumption [has] been strong through the quarter,” he explained.
And while he said he feels good about this start and the “rest of the year is looking positive,” Murphy and the rest of the management held back from raising the company’s full-year guidance – choosing instead to reiterate an expected organic revenue increase of 708% for the full year, primarily led by price mix, and taking into account an approximate 2-3 point headwind to comparable net revenue and a 3-4 point currency headwind to comparable earnings per share for the full year.
CEO James Quincey agreed that the company’s strong first quarter was “certainly within the bounds of our expectations and plans,” with full company net revenues climbing 5% and the overall company’s comparable currency neutral operating income rising 15% in the quarter. But, he added, the remainder of the year is harder to predict.
“The outlook has a degree of uncertainty … in terms of the direction of travel of inflation, both the consumers’ reaction to it and the input side. So, we have a set of guidance out there that sees both input costs, our own costs, and pricing moderating through the year – but there is still a long way to go,” Quincey explained.
Limited-time flavor offerings, innovative marketing engage Gen Z consumers
The company’s success in North America is driven in part by growth in soft drinks, including “good resonance in Coke and Coke Zero,” and limited-edition flavors, like Starlight and a zero sugar flavor inspired by artist Marshmello, Quincey said.
Beyond the new flavors, marketing campaigns that tapped into Gen Z’s desire for experience as well as the buzz around OpenAI, ChatCPT and Dall-E also helped engage younger consumers and drive a sales lift, he added.
For example, he highlighted how the company connected consumers love of music to consumption occasions by spotlighting breakthrough talent via Coke Studio, which provides a portal to live digital experiences and can be activated using QR codes on the company’s packaging.
“Consumers can drink, scan and enjoy their favorite beverage along with music from genres around the world,” he said.
Likewise, the company’s leading move to collaborate with artificial intelligence to enhance its marketing capabilities allowed “consumers to become digital marketers” through the “Create Real Magic” platform in which they used AI to generate original artwork and iconic creative assets from the Coca-Cola archives that could appear on the Times Square billboard, he said.
Focus beyond soft drinks pays off
Coca-Cola also is reaping the benefits of investing and innovating in its expanded portfolio beyond soft drinks in North America, Quincey also noted.
He explained the company’s premium dairy milk fairlife “has been on a multi-year journey” and is “doing really well,” with volume up double digits for eight consecutive years and becoming a billion dollar brand last year.
To support this growth, Coca-Cola launched its first digital campaign for the brand in the club channel and it plans to expand the product to more channels and packaging in the coming months, he said.
“Obviously, that builds on some of the previous acquisitions with Vitamin Water and Smart Water, which are doing really well in the quarter,” he added.
Not all of the company’s brands are performing well in North America, however, he acknowledged.
“We need to stabilize and reinvigorate Body Armor in tandem with Powerade,” and reinforce early signs of growth in the ready-to-drink coffee business in North America, he said.
Executives remain cautious
While company executives are encouraged by the business’ performance in the first quarter, they remain cautious about the remainder of the year given ongoing macroeconomic challenges that add a degree of uncertainty.
They repeatedly noted that they are unsure how consumers will continue to respond to higher prices – not just of Coca-Cola Co. products, but across the board – and they anticipate a pull-back on spending at some point.
When that happens, Quincey said, Coca-Cola plans to be ready with the right mix of premium and more price sensitive options to keep consumers across economic tiers engaged.