Chief Financial Officer John Murphy affirmed during the company’s first quarter earnings report April 19 that it expects a “relatively benign impact in 2021” from rising commodity costs due to its hedged positions, but he warned inflation will be more of a headwind in late fiscal 2021, early 2022.
He explained that Coca-Cola Co. is “closely monitoring upward pressure in some inputs such as high-fructose corn syrup, PET, metals and other packaging materials as they impact us, as well as our bottling partners.”
If inflation remains a long-term concern, he assured analysts that the company will take an “overarching holistic view” to manage the impact, but he acknowledged Coca-Cola Co. has a history of taking price in line with inflation, which “I would expect that … will continue to be adhered to as we move into the back half of ’21 and even into ’22.”
If Coca-Cola Co. takes price, it will not be the only major CPG player to do so. J.M. Smucker also warned of higher prices to offset rising commodity price pressure.
'Intelligently diverse price pack architecture...'
But price is not the only tool in Coca-Cola Co.’s inflation management toolbox, according to Murphy, who added that by employing a variety of options the company will try to minimize the impact on consumers who also may be feeling squeezed by higher grocery bills, un- or underemployment and other financial constraints related to the pandemic.
For example, “through an intelligently diverse price pack architecture, we can produce a range of options that meet the needs of consumers across the income spectrum, while also capturing value for our customers.”
During the pandemic, Coca-Cola and many other CPG players have shifted production to focus on bulk and multi-packs to accommodate increased demand for at-home consumption and consumer desire for value-oriented options that will meet the needs of multi-member households.
While these are more economical for consumers, CPG manufacturers often have better margins on smaller packages or single-serve options, which took a sales hit during the pandemic as fewer shoppers looked for on-the-go options.
'Great learnings' from 2020 'on how to be more logical and data-driven in our promotions'
Still, during tight economic periods, some consumers may prefer lower-priced items, even if not the best value, if it helps keep down total spend. Likewise, as mobility increases, Coca-Cola and others, including PepsiCo, predict that smaller, higher-margin packages will regain some of the popularity they had before economies closed to restrict the spread of the coronavirus.
The Coca-Cola Co. also will leverage “great learnings” from 2020 “on how to be more logical and data-driven in our promotions” to help take the sting out of any potential price hikes for loyal consumers, Murphy suggested.
He added the company revenue growth management strategy also allows it to “execute a pricing strategy in the most relevant and meaningful fashion, locally.”
To further manage inflation, Murphy said the Coca-Cola Co. is exploring supply chain and production efficiencies to unlock additional value – a strategy it has already begun implementing with bottling partners in the last six to 12 months.
“I would expect that momentum to continue into the rest of the year and into 2022,” Murphy said.
In addition, he noted, Coca-Cola’s “cross-enterprise procurement group,” which in recent years has worked to leverage the company’s global scale to “arrive at some of the most competitive pricing that we can guess, that anybody can guess, when it comes to key inputs.”
Finally, he said, Coca-Cola also is considering “new opportunities … as a result of the overall strategy we’ve been pursing during and after the pandemic.”
Positive momentum on an uneven recovery
Just as the company’s pricing strategy and inflation management strategy will vary regionally, so too will its overall revenue – reflecting the uneven global recovery from the pandemic broadly, Coca-Cola executives said.
However, they added, the fiscal year is off to a good start with volume demand in March reaching pre-pandemic level and quarterly earnings that beet market expectations.
Net revenues grew 5% to $9bn and organic revenues increased 6% -- the first increase in a year – beating street predictions of $8.63bn. Margins also expanded slightly to 30.2% versus 27.7% in the same period last year, according to the company.
This cautious optimism imbues the company’s outlook as it explores “clear opportunities to reaccelerate share positions as the recovery plays out,” and build on “early signs that our actions taken during the pandemic are helping us outpace recovery,” CEO James Quincey told analysts.
Still, he added, “It’s important to note that the path to a full recovery remains asynchronous around the world. Many markets haven’t yet turned a corner and are still managing through the restrictions,” which will impact that company’s business.