Coca-Cola Co. considers additional price increases ahead of potential recession

By Elizabeth Crawford

- Last updated on GMT

Source: Coca-Cola Co.
Source: Coca-Cola Co.

Related tags Coca-cola Inflation Price increases Soft drink

Bracing for an “asynchronous” recovery in 2022 with “many new chapters and challenges,” The Coca-Cola Co. is prepared to quickly respond to local market conditions with a mix of price adjustments, package differentiation and “ever-sharper” promotional strategies – all of which served the beverage giant well in its first quarter, according to CEO James Quincey.

He explained during the company’s first quarter earnings call yesterday that despite “an operating environment that is fast changing and increasingly complex,” ​The Coca-Cola Co. saw net revenues climb 16% to $10.5b, unit cases increase 8% and margins improve just over 2 percentage points to 32.5% in the company’s first quarter compared to the same time last year.

These gains came despite record-high inflation, continued supply chain challenges, a COVID resurgence in some parts of the world and significant geopolitical conflict. They were driven primarily by strong recovery in away-from-home channels and continued growth in the home channel, Quincey said.

“Volume growth was strong across all operating segments, driven by marketing investments and aided by an increase in consumer mobility as the impact of the pandemic abated in most regions,”​ he explained.

While the company’s away-from-home channels have recovered to its 2019 levels, Quincey noted it has not yet “fully recovered” in that it lost many outlets during the pandemic and has not fully regained them.

Marketing, innovation ties beverages to daily habits

Coca-Cola Co.’s success in the first quarter also was driven by its “accelerated agenda in marketing and innovation,”​ which Quincey said is “tying our beverages to daily consumption occasions.”

For example, Quincey said, the strong rollout of the company’s new global “real magic​” marketing campaign, which the company says focuses on “unexpected moments of connection”​ that happen when people get together and share common experiences. He also noted “a strong rollout”​ of the limited edition Coke Starlight, that claims to taste like space, helped to make the Coke trademark the fastest growing trademark in measured retail in North America in the first quarter.

Powerade’s power launch during NCAA March Madness is another example of the company’s marketing helping to drive growth in the first quarter as it generated more than 1 billion impressions.

‘There are going to be more pricing increases’

Pricing also played a powerful role in expanding the underlying gross margins despite rising commodity costs – a tool that CFO John Murphy noted the company will continue to leverage in tandem with expanded package sizes and configurations to help consumers offset the increases.

“There are going to be more pricing increases depending on where you are. I mean there are countries with inflation well into double digits, and you do see multiple price increases during the year as a matter of course when you’re in those sorts of circumstances, with cost pressures to push through as you seek to sustain margins over time,”​ he said.

But, he said, the company’s “highest level principle is the brand has to earn the right for pricing,”​ which includes offering different packaging and entry price points to keep affordability front and center.

Offering different sizes and value propositions also is essential because the elasticities that Coca-Cola Co. and others in the food and beverage industry have enjoyed so far likely will not sustain going forward.

“I expect elasticity to increase at some point in the future. Will that be next quarter? Or will that be next year? I can’t give you the answer to that because it’s very dependent on some macros and it’s probably going to vary by country. But, we are very attune to it,”​ which is why the company is investing in its brands to ‘earn the right for the price increases”​ and “so that we can minimize the elasticity and that we keep a sharp eye on affordability,”​ Quincey said.

Pre-emptive pricing

The company also appears eager to push pricing through ahead of a potential recession or serious margin crunch, at which point consumers may be less willing or able to absorb an increase.

“The margin structure of the system needs to be sustained. You definitely don’t want to get to a point where there’s been a substantial cost push through and that has not yet been passed on into the marketplace when any recessionary impact appears,”​ he said, adding: “Trying to catch up on pricing in a recessionary environment is very hard, and so we have a bias to action.”

That said, he reiterated multiple times that that company wants to earn the price increases with innovation, marketing and consumer engagement.

“We have to give the consumer and the retailer reasons for the price increase and for the vale of our brands, whether it’s the marketing, the innovation, the execution or the packaging options,”​ he said, adding: “We do that.”

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