Flat or fizzy?
Coca-Cola and PepsiCo are being hit by the strong dollar
By C.R.
FIZZY drinks are known by scientists to be unhealthy. They contribute to obesity, encourage tooth decay and are full of sugar. And now, some analysts add that they are bad for your wealth too, if you happen to own a company that makes them. On February 10th, Coca-Cola announced that its profits fell by 55% in the fourth quarter of 2014. The next day, PepsiCo, Coke's rival, revealed that it performed only slightly better, with profits dropping by a quarter.
Many commentators point to falling sales of fizzy drinks in North America for Coca-Cola and PepsiCo's woes, as consumers become more interested in healthy eating and drinking. Indeed, sales of their flagship brands of cola have steadily fallen over the last decade (see chart). But this alone cannot explain their current problems. Sales of Coke in terms of volume started to rise last year, with revenues from fizzy drinks now growing at both firms due to the increased popularity of smaller (and higher priced) cans.
Like many other American multinationals, Coca-Cola and PepsiCo are both being hit by the strong dollar. Coke makes 75% of its revenues outside the United States and PepsiCo 42%, but these sales are now worth less in dollar terms due to other currencies weakening against the greenback. At the same time, many of their costs are rising with the dollar, producing a squeeze on profits. That goes some way to explain why PepsiCo is doing so badly, albeit less so than Coke, and in spite of its investments in healthier products such as Tropicana orange juice and Quaker Oats breakfast cereals.
But putting aside their currency-related woes and the shrinking market for carbonated drinks, many investors still see the two firms as smart investments. Warren Buffett, for instance, has called sugar-based manufacturers a "dream business" to be in—for their ability to sell addictive products without fear of regulation or taxation on the scale faced by the alcohol and tobacco industries. No wonder that Mr Buffett's investment firm, Berkshire Hathaway, still owns around 9% of Coca-Cola's shares in spite of the firm's current problems. Although it is a long-term bet, it is one which may well leave him with a sweet taste in his mouth.