Coke, Pepsi Feeling Drained Overseas

by Mike Esterl

Coca-Cola Co. and PepsiCo Inc. likely will highlight rough going abroad but improving conditions at home when they publish fourth-quarter results this week.

Both companies are expected to report sluggish sales and stiff foreign-exchange headwinds in key overseas markets. And 2015 could bring more of the same, amid slowing economies and rising political volatility.

At the same time the picture is brightening in the U.S, where consumers are still drinking less soda but have begun paying more for it again. That has been enough in recent months to push U.S. soda retail sales back into positive territory in dollar terms, albeit barely.

Add it up, and revenue at both companies likely fell in the most recent quarter. Coke already warned in October that it would miss its profit target in 2014 for the first time in several years.

J.P. Morgan estimates fourth-quarter beverage volumes at Coke, which reports results Tuesday, contracted 1% in Brazil and Mexico, 2% in Europe and Japan, and 4% in China. Soda consumption in Mexico, which buys more Coke products per capita than any other country, has fallen after the government introduced a “fat tax’’ on sugary drinks last January.

Coke generates most of its profit overseas and also warned in December that foreign currencies would cut operating income by 6% to 7% in the quarter because of the strengthening dollar. It also predicted foreign exchange will represent a 5% to 6% headwind in 2015. The company hedges its exposure to major currencies such as the euro and yen from developed-market countries, but says it is too expensive to do the same for currencies from emerging markets.

PepsiCo, which reports Wednesday, made a big bet on Russia in 2011, when it completed its roughly $5 billion acquisition of dairy and fruit-juice maker OAO Wimm-Bill-Dann. About 7% of its revenue is tied to Russia, whose commodity-dependent economy and currency have been battered by falling oil prices and Western sanctions after its annexation of the Crimea region in Ukraine.

PepsiCo also is expected to take a hit in Venezuela, another major oil exporter, which slid into recession last year and is expected to contract 7% this year. Consumer Edge Research estimates PepsiCo derives 4% of earnings from Venezuela and predicts it will likely follow other companies by no longer booking profits at the country’s official exchange rate of 6.3 bolívares. Kimberly-Clark Corp. last month announced a $462 million Venezuelan charge after adopting an exchange rate of 50.

Lower oil prices have put more money in the pockets of U.S. consumers, who are also benefiting from a rebounding economy, rising wages and falling unemployment. That has helped Coke and PepsiCo start charging more for their beverages again on their home soil. The consumer-price index for nonalcoholic beverages rose each of the last four months of 2014 after being flat for two years, according to Citi Research.

That has shored up U.S. soda revenue even though volumes fell for the 10th straight year as health-conscious consumers drink more water. Soda sales in the U.S. rose 1.2% in the 12 weeks ended Dec. 28 as prices increased 3.8% over the same period, according to Morgan Stanley , citing IRI store-scanner data. Sales in dollar terms were negative in the first half of 2014 before edging into positive territory during the third quarter.

The higher pricing is giving a big lift to Dr Pepper Snapple Group Inc., the third-largest soda company, which derives almost all of its revenue from the U.S. and reports its fourth-quarter results Thursday. Investors lately haven’t been able to get enough of Dr Pepper, whose share price has risen 8.8% this year, while shares of PepsiCo and Coke have risen 2.3% and fallen 1.8%, respectively.

“We believe the combination of improving U.S. trends and very modest exposure to troubled international currencies and markets will support [Dr Pepper’s] stock through earnings season,’’ Barclays wrote in a recent research note.


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