Coca-Cola Co expects an improving economy to help North American results this year, but it may have less freedom to raise prices as it catches up to an overhaul by rival PepsiCo Inc .
Coke, the world's largest soft drink maker, reported disappointing first-quarter revenue on Tuesday, hurt by a worse than expected volume decline in North America.
The maker of Diet Coke, Sprite and vitaminwater said sales of its drinks were hurt by some pretty deep price reductions in the beginning of the quarter, but the environment improved toward the quarter's end.
First-quarter revenue rose 5 percent to $7.53 billion, but fell short of the analysts' average estimate of $7.72 billion, according to Thomson Reuters I/B/E/S.
Net income rose to $1.61 billion, or 69 cents per share, from $1.35 billion, or 58 cents per share, a year earlier.
Excluding items such as restructuring charges and the impact of the Venezuela currency devaluation, earnings were 80 cents per share. Analysts on average were expecting 75 cents.
For the full year, Coca-Cola Chief Executive Muhtar Kent said he expects rational pricing from all competitors in the critical North American market, where Coke and Pepsi are taking dramatic steps to return to sales growth.
Coke is buying the North American operations of its largest bottler Coca-Cola Enterprises Inc to streamline distribution, improve flexibility and cut costs. It sees the deal closing in the fourth quarter, following a similar purchase by Pepsi of its U.S. bottlers, which closed in March.
While both drinks makers are still benefiting from far stronger growth in emerging markets like India and Brazil, they are trying to transform a North American business that has suffered from changing consumer tastes and recession.
Growing here (in North America) is not optional, Kent said on a conference call. It is essential to the health and future of our entire global system.
Edward Jones analyst Jack Russo said investors will keep an eye on how aggressively Coke raises prices this year, though he said Coke may have a harder time capitalizing on consumers' improving moods.
Pepsi is going to get the benefits from their bottler transaction sooner than Coke, (and) my guess is they're going to try to stay pretty neutral on pricing this year, Russo said. That may force Coke to do the same.
Shares in Coke fell 1.6 percent on Tuesday to $54.46. Pepsi, which is due to report results on Thursday, slipped 0.3 percent to $65.92.
SALES VOLUME FALLS IN NORTH AMERICA
Overall volume rose 3 percent.
UBS analyst Kaumil Gajrawala, who had expected a gain of 3.3 percent, noted that sales in Latin America, North America, Europe and the Pacific region missed expectations.
Sales volume fell 2 percent in North America. Volume rose 4 percent in Latin America, 5 percent in the Pacific region and 11 percent in Coke's Eurasia and Africa division, driven by gains of 29 percent in India and 18 percent in Turkey.
Coke also cited double-digit growth in northwest Africa and the Middle East and a sequential improvement in Russia, where sales fell 1 percent from a year before. Volume in Europe was flat.
Emerging markets are recovering more quickly than mature ones, Coke said, a trend that is pressuring sales, since drink prices there are lower. Even in the closely watched North American market, lower-priced carbonated soft drinks such as Sprite and Fanta fell less steeply than more costly drinks, such as juices and teas.
We would expect to see a return to positive price/mix over the long term, as global consumer sentiment steadily improves, said Chief Financial Officer Gary Fayard, forecasting a neutral impact for 2010.
The company said it remains on track to achieve its goal of $500 million in annualized cost savings by the end of 2011.
(Reporting by Martinne Geller; Editing by Lisa Von Ahn and Gerald E. McCormick)