Will Coke's Plan to Cut Its Zombie Brands Boost Revenues?

The coronavirus pandemic has put The Coca-Cola Company KO in a spot where the company is seriously considering to pay more attention to its stronger brands and getting rid of its “zombie brands.” The decision would allow the beverage giant to invest more in its brands that hold potential.

Pandemic Dragged Coca-Cola’s Revenues in Q2

A major reason behind this decision is the company’s performance in second-quarter 2020. Coca-Cola’s revenues declined as much as 28% on a year-over-year basis. The company had year-ago revenues of $10 billion. Revenues for the quarter ended June came in at $7,150 million, missing the Zacks Consensus Estimate of $7,153.5 million.

Coca-Cola’s earnings for the said quarter beat estimates but reduced sales have pushed the company to prioritize and weed out its not-so-productive and less revenue-generating brands. Although the company’s comparable earnings of 42 cents per share surpassed the Zacks Consensus Estimate of 40 cents, the figure was 33% lower when compared to the year-ago period.

To understand the Coca-Cola’s motive, let’s take a look at how its various product categories performed during the said quarter. The coronavirus outbreak severely impacted all operating segments because of pressure on the company’s away-from-home channels. With stadiums, gaming centers and movie theatres closed because of the pandemic, Coca-Cola missed out on major centers of business.

As much as a 16% decline was witnessed in Coca-Cola’s total unit case volume (the number of unit cases of the company’s beverages sold by it and its bottling partners to customers directly or indirectly).

Unit case volumes of sparkling soft drinks’ shed 12%, mostly driven by declines in India, Western Europe and the fountain business in North America. These declines were mainly due to a decline in away-from-home channels. The Coca-Cola trademark dropped 7%, with Coca-Cola Zero Sugar losing 4%. Volume for juice, dairy and plant-based beverages declined 20%. This category was primarily impacted by softness in operating segments in the Asia Pacific, Europe, Middle East and Africa.

In addition, water, enhanced water and sports drinks fell 24% because of declines in the Asia Pacific, in particular for the lower-margin water brands. Tea and coffee volume dropped 31% because of temporary closures of almost all of the Costa retail stores in Western Europe.

Zombie Brand Closures Could Push Business

The company has been quick to act even in these trying times, beginning with figuring out which brands hold value and those that do not. The streamlining has already begun with the company’s fruit juice, smoothie and food bar brand Odwalla (effective Jul 31).

According to chief executive James Quincey, the move gives the company flexibility to invest in brands such as Minute Maid and Simply, and rising stars like Topo Chico, which offers sparkling water. After all, with rising demand for seltzer, tonic and club soda, this brand of Coca-Cola clearly holds promise.

The company will also be sorting and lowering its efforts to innovate and instead establish a more disciplined framework as it goes on in a post-pandemic market. Coca-Cola will also be focusing more on contactless solutions and functional benefits as more consumers are inclined toward issues pertaining to health, hygiene and safety.

In conclusion, one may note that as Coca-Cola takes into account what consumers want and focuses more on the brands in demand, it would ultimately streamline the investments and thus boost stronger brands. This, in turn, would definitely generate more revenues.

Stock Paints a Stable Picture Ahead

Coca-Cola has an expected earnings growth rate of 12.9% for the next year. Shares of the company, which belongs to the Zacks Beverages - Soft drinks industry, have gained 6.7% over the past three months compared to the industry’s rise of 4.3% during the same period. The Coca-Cola stock carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

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