Coca-Cola to Get Boost from Emerging Markets

Tickers in this article: KO
NEW YORK (Trefis) -- The Coca-Cola Company(KO) is scheduled to announce its second-quarter earnings Tuesday, July 17.

The company posted solid Q1 earnings helped by strong performances in emerging markets such as Thailand, India, China and South Africa. Soft drink volumes should continue to post healthy growth as the company invests heavily in emerging markets to increase capacity, spread out distribution networks and boost marketing.

In particular, China volumes should be buoyed by the opening of its 42nd bottling plant in the first quarter of the year. Recently, the company also announced its plan to spend an additional $3 billion in India in the next eight years which will see the total investment at $5 billion. In total, Coca-Cola plans to spend around $30 billion globally in the next five years.

Minute Maid will be an important top-line driver for the company in the U.S. as consumers ditch colas for healthier alternatives such as juices, RTD teas, coffee, etc.

Coca-Cola is spending $99 million on its Aurburndale, Florida plant to expand its 'Simply' line of products, which falls under the Minute Maid brand. Internationally, the juice brand's volumes should also get a boost as it debuted in three African countries of Tanzania, Uganda and Kenya in the latter half of 2011.

See our full analysis for Coca-Cola

Margins to Remain Steady

The company's gross margins fell from 63.9% in 2010 to 60.9% in 2011 primarily due to the negative impact of higher commodity prices and the acquisition of its North American bottling operations.

Bottling operations usually carry lower gross margins compared to manufacturing operations. In 2011, the company incurred incremental cost of $800 million related to goods. For 2012, it expects the corresponding figure to be in the region of $350-400 million.

However, we expect the margins to remain in a similar territory for the second quarter for a couple of reasons.

First, the company has upped its focus on smaller sized products (such as the 12.5 ounce, 89-cent bottle). Smaller-sized products usually have higher gross margins and, at the same time, help attract consumers who keep a count on calories consumed.

Second, the price hikes for the full year 2012 are expected to be around 2% to 3%. The combination of these factors should help sustain the margins.

We estimate a $76 price for Coca-Cola, slightly below the current market price.

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