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Heard on the Street: Low Sugar Sweetens Coke Growth -- WSJ

26 Jul 2018 6:32 am
By Aaron Back 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 26, 2018).

Sometimes it's better to be lucky than smart. Coca-Cola right now is both.

The beverage giant has just wrapped up a yearslong effort to divest its bottling operations in the U.S., effectively outsourcing many shipping and logistics tasks. The merits of this move are debatable, but the timing is fortuitous -- finishing up just as the U.S. is seeing a surge in freight and shipping costs. Rival PepsiCo owns its U.S. bottling operations but has recently said it is considering spinning them off.

Underlying business trends are also positive. Worldwide comparable sales rose 5% from a year earlier in the second quarter and the company slightly raised its forecast for the full year, saying it now sees "at least 4%" comparable revenue growth, up from just "approximately 4%" earlier.

In North America, comparable revenue declined 1% from a year earlier, but this was largely due to a shift in the mix of beverages sold, with pricier juice sales declining in the quarter. What is encouraging is that the company's sparkling soft drinks -- a troubled category in recent years -- are performing well thanks to its focus on zero and low-sugar products. Sparkling soft drink volume grew 1% from a year earlier in the North America and 2% world-wide.

Coca-Cola Zero Sugar is growing by "high double digits" in North America, Chief Executive James Quincey said on a conference call Wednesday. Although the company still isn't breaking out results for Diet Coke, the relaunch of the brand with new flavors and a redesigned can appear to be shoring it up in the U.S., with the effort now expanding to other markets.

"Clearly we're doing better with Diet Coke than we've been doing for a good number of years," Mr. Quincey said.

Meanwhile, Powerade Zero is seeing strong growth, helping Coca-Cola grow its North America water and sports drink volumes by 5% in the quarter. The company continues to innovate in the low and zero sugar space. For example, the company recently launched a new Coke line in New Zealand sweetened entirely with Stevia, a natural sugar alternative.

Coca-Cola trades at 21 times forward earnings, compared with 19.5 for PepsiCo. That small premium looks well deserved. Indeed, Coca-Cola's success in responding to shifting consumer trends deserves to be emulated by peers across the food and beverage space.

Write to Aaron Back at aaron.back@wsj.com

(END) Dow Jones Newswires

July 26, 2018 02:32 ET (06:32 GMT)

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