Shares of the Coca-Cola Company (NYSE: KO) traded in green territory during afternoon hours on Wednesday, a day after the company reported its first quarter 2020 earnings results. Revenues dropped 1% to $8.6 billion while adjusted EPS rose 8% to $0.51.
Like most businesses, the coronavirus outbreak has affected Coca-Cola and the company believes the shift in customer behaviour will have a material impact on its second quarter results.
COVID-19
The biggest impact the company felt from the pandemic was a sharp drop in its away-from-home business, which includes its convenience retail channel. Although the exposure varies across markets, the away-from-home channel makes up for about half of the company’s revenues.
Despite a steep decline in restaurant trips and limited business hours, the beverage giant was able to offset some of the pressure through drive-thru and carryout operations. The company expects these changes in consumer purchasing patterns to impact Q2 results significantly.
Coca-Cola Q1 2020 Earnings Infographic
Since the start of April, Coca-Cola saw its volume decline by around 25% globally, and the majority of it came from the away-from-home channel. Since the lockdown has led to a drop in away-from-home channels, the company is focused on at-home consumption, which comprises of multi-packs. CEO James Quincey said,
“In the at-home channels, we’ve seen some early pantry loading, particularly in certain developed markets at the beginning of many of the lockdown phases. Then, as we get past the initial phase of the lockdown, however, we are seeing levels normalize.”
Coca-Cola has seen a massive shift towards ecommerce and the company is expanding its presence in this important channel in order to be well-positioned for long-term growth. The company is investing in digital capabilities and rolling out several digital-enabled initiatives to secure online demand for at-home consumption.
Coca-Cola also said that supply chains across the world have been impacted by the crisis and it experienced challenges in terms of sourcing ingredients and moving them across regions. However the company has benefited from having local supply chains and the issues related to the sourcing of ingredients have largely been solved. Its production facilities are largely running and it has doubled down on distribution. Although there are still some issues in certain countries pertaining to logistics, overall the company has adapted.
Outlook
Coca-Cola expects the decline in the away-from-home business to impact its second quarter results significantly. Although the company is unable to determine the exact impact on the Q2 and full year results, it said it will depend heavily on the duration of the restrictions and the pace of macroeconomic recovery. The company believes the pressure it is facing is temporary and hopes to see a sequential improvement in the second half of 2020.
Coca-Cola expects the social distancing measures to continue into Q3 albeit not as severe as Q2. The company is focused on managing the lockdown period through specific plans and is working on positioning itself properly when a recovery takes place.
The beverage giant said that if there is a big shift in the mix towards future consumption packages versus immediate consumption in any country, it would be a headwind to mix in the coming quarters.
The company also pointed out that the pickup in ecommerce was not offsetting the losses in away-from-home stating that although ecommerce doubled in sales for beverages, it still forms a small percentage of the category.
Expenses
Coca-Cola said it is pulling back on its marketing and trade spend for the time being. The company is reviewing its operating expenses and cutting down on unnecessary costs. The company has also put its capital spend on hold barring what is essential or already committed.