Coca-Cola: Tariffs Bite Harder, "Liquid Gold" Gets Pricier?

$Coca Cola(KO.US) released its Q1 2025 financial report (ending March 2025) before the U.S. stock market opened on April 29, 2025, Beijing time. Under the heavy tariffs imposed by Trump, the high macroeconomic uncertainty has made Coca-Cola once again an ideal safe haven for funds. From the performance perspective, as the beverage industry typically experiences a consumption off-season in the first quarter, the slowdown in growth was anticipated. Specifically, the core information is as follows:

1. Slower organic growth: In Q1 2025, Coca-Cola achieved an apparent revenue of $11.13 billion, a year-on-year decrease of 2%, which is basically in line with market expectations. Organic revenue grew by 6% year-on-year. Breaking it down by volume and price, the sales volume growth of concentrate increased by 1% and price growth by 5% year-on-year. Due to the increasing health awareness in developed countries and last year's widespread price hikes by Coca-Cola globally, market expectations for Coca-Cola's sales were not high, so this time the sales actually exceeded market consensus expectations. Additionally, affected by the tariffs, the U.S. dollar index weakened in Q1, and the company's foreign exchange headwind impact narrowed from -6% to -3%.

2. Stronger resilience in the Asia-Pacific region: By region, all areas except the Asia-Pacific saw a decline in growth. The Asia-Pacific region performed strongly, partly due to the accelerated distribution of offline outlets in developing countries like India and the Philippines, which enhanced product market coverage. Additionally, the launch of more low-sugar and low-calorie healthy beverages in Japan has also led to a recovery in the Japanese market.

3. Better performance in health & nutrition categories: From a category perspective, under the trend of sugar reduction and health, sugar-free cola has become the core driver within the carbonated beverage category, with a year-on-year growth of 13%, significantly higher than classic cola (which only grew by 2%). Furthermore, benefiting from the strong growth of premium juice Simply and ultra-filtered milk Fairlife, the juice & other beverages category turned positive year-on-year. In the tea beverage sector, the company’s portfolio of over 80 tea products, including North American brands Gold Peak, Fuze Tea, and Japan's Ayataka, is further increasing its market share in the tea beverage market.

4. Continuous release of operating leverage: In terms of gross margin, on one hand, the price of Coca-Cola's core raw material, corn syrup, fell in Q1, and the widespread use of recyclable glass bottles globally effectively saved packaging costs. On the other hand, the company increased its ton price through direct price hikes and a higher proportion of high-margin products (such as sugar-free Coca-Cola and health beverages). Driven by both factors, the gross margin for Q1 2025 rose again to 62.6%, reaching a record high. On the expense side, thanks to the company's continuous application of AI in daily operations (including pricing decisions in different markets and creating marketing advertisements), the expense ratio decreased to 29.1%, and core operating profit also exceeded market consensus expectations 5. Performance Guidance: The company expects a growth of 5%-6% for the full year 2025 and the second quarter, consistent with previous expectations.

6. Overview of Financial Indicators

Dolphin Research Overall View:

In the first quarter, under the shadow of Trump's tariff policies, Coca-Cola's performance still demonstrated very strong resilience. Although in some developed countries (such as the U.S. and Western Europe) consumer confidence was damaged and sales did not meet expectations, the company maintained rapid growth in most emerging markets, offsetting the decline in sales in developed countries.

Dolphin Research believes that the most remarkable aspect of this quarter is Coca-Cola's deeper integration of AI into daily operations (including pricing decisions in different markets, creating marketing advertisements, and optimizing inventory management), which has continuously released operational leverage and further strengthened profitability.

Additionally, regarding the impact of tariffs on the company, Coca-Cola and Pepsi seem to be heading down two diverging paths, with the core point being the different locations for producing their concentrates. For Pepsi, as early as 50 years ago, it established its concentrate production location in Ireland, due to the lower corporate tax rate there.

While Coca-Cola also produces concentrated syrup in Ireland, the difference is that the concentrated syrup produced for the U.S. market mainly comes from Atlanta and Puerto Rico, which means Coca-Cola is almost unaffected by tariffs.

On the other hand, regarding packaging materials, Coca-Cola imports about 300,000 tons of aluminum from Canada each year for beverage can manufacturing. After the implementation of tariffs, the cost of aluminum cans will significantly increase. Therefore, according to the company's management during the conference call, after the tariffs take effect, Coca-Cola will minimize the use of aluminum can packaging and switch to plastic bottle packaging as much as possible. Coca-Cola announced that starting in February, it will launch 100% recyclable plastic bottles for brands like regular Coke and Diet Coke in states such as California and Florida, gradually replacing the common 550ml Coke bottles and expanding to more regions over the coming months.

From a valuation perspective, Coca-Cola is currently at 27x, slightly above the average level of the past 10 years (25x). Therefore, Dolphin Research believes that this position does not offer good value for money. However, if the yield on 10-year U.S. Treasury bonds continues to decline in the future, investors may consider Coca-Cola as a high-dividend and defensive asset, provided that overseas consumers do not boycott American goods. After all, Coca-Cola is considered part of American culture, and if a boycott does occur, it could also impact Coca-Cola.

1. Investment Logic Framework

According to Coca-Cola's disclosed data, the apparent revenue growth can be broken down into five major sectors: Europe, the Middle East & Africa (EMEA), Latin America, North America, Asia-Pacific, and bottling investments. The revenue growth of each sector can further be decomposed into organic revenue growth, structural impacts (mergers and acquisitions), and foreign exchange impacts (1) The four divisions of Europe, the Middle East & Africa (EMEA), Latin America, North America, and Asia-Pacific are categorized by geographic region, with most revenue coming from the sale of concentrates to franchised bottlers, and a small portion also coming from the sale of certain finished beverages.

(2) The Global Venture Capital Department is a newly established department of Coca-Cola in 2019, focusing on acquiring potential brands globally to expand its business scope. Currently, the department's revenue includes the performance of acquired businesses such as Costa (coffee), innocent (health drinks including plant-based milk, coconut water, NFC juice, etc.), and doğadan (tea), as well as revenue from the distribution agreement with Monster. The performance of the Global Venture Capital Department is no longer disclosed separately.

(3) The Bottling Investment Department consists of bottling operations that Coca-Cola holds globally, with most revenue coming from the manufacturing and sale of finished beverages. Since this department is capital-intensive and has relatively low profitability, Coca-Cola has been gradually divesting it globally since 2015.

We will focus on Coca-Cola's organic revenue growth in the following sections, breaking it down into two driving factors: concentrate sales volume and price combination analysis.

II. Overall performance growth slows as expected

In Q1 2025, Coca-Cola achieved an apparent revenue of $11.13 billion, a year-on-year decrease of 2%, which is basically in line with market expectations. Among them, organic revenue grew by 6% year-on-year. Looking at the volume and price split, the growth rates of concentrate sales volume and price increased by 1% and 5% year-on-year, respectively. Since the beverage industry experiences a consumption off-season in the first quarter of the year, the slowdown in growth is within expectations.

By region, growth rates have declined in all areas except for the Asia-Pacific region. The strong performance in the Asia-Pacific region is partly due to the accelerated distribution of offline outlets in developing countries such as India and the Philippines, which has improved market coverage. Additionally, the launch of more low-sugar and low-calorie health beverages in Japan has also contributed to a recovery in the Japanese market.

Volume: In Q1 2025, concentrate sales volume increased by 1% year-on-year. Due to the rising health awareness in developed countries and the significant price increases implemented by Coca-Cola globally last year, market expectations for Coca-Cola's sales volume were not high, so this time the sales volume exceeded market consensus expectations (which anticipated no growth in sales volume) From a category perspective, under the trend of sugar reduction and health, sugar-free cola is the core driver in the carbonated beverage category, with a year-on-year growth of 13%, significantly higher than classic cola (which only grew by 2%). Additionally, benefiting from the strong growth of premium juice Simply and ultra-filtered milk Fairlife, the juice & other beverages category has turned positive year-on-year. In the tea beverage sector, the company’s portfolio includes over 80 tea products such as the North American brand Gold Peak, Fuze Tea, and Japan's Ayataka, which is further increasing its market share in the tea beverage market.

Price: From a pricing perspective, thanks to Coca-Cola's strong brand power and pricing authority, Coca-Cola achieved a year-on-year price increase of 5% in Q1 2025 through direct price hikes and product structure optimization, which is basically in line with market expectations.

Taking China as an example, according to channel research information, three branches of Swire Coca-Cola Beverage in Hubei, Jiangxi, and Zhengzhou disclosed notification letters indicating price increases for multiple products in Q1 2025, including soft drinks, juices, and dairy-flavored beverages. Zhengzhou mainly adjusted the prices of six 500ML soft drink products, including cola, Sprite, and Fanta, with a price increase of about 16.6%. The adjustments in Hubei and Jiangxi are broader, covering multiple categories and capacities (300ML-2L) for soft drinks, juices, and dairy-flavored beverages, with overall increases ranging from 7% to 25%. (Under the new pricing system for Coca-Cola concentrate, the price of the concentrate is set based on the percentage contribution of the bottlers to the company's revenue, so a price increase by bottlers is effectively equivalent to a price increase by Coca-Cola)

Amid foreign exchange headwinds, influenced by tariff impacts, the US dollar index weakened in Q1, and the company's foreign exchange headwind impact narrowed from -6% to -3%.

3. Optimizing Costs + Improving Product Structure, Gross Margin Hits New Highs

In terms of gross margin, on one hand, the price of corn syrup, a core raw material for Coca-Cola, fell in Q1, and the widespread use of recyclable glass bottles globally effectively saved packaging costs. On the other hand, the company increased its ton price through direct price hikes and by increasing the proportion of high-margin products (such as the rise in the share of sugar-free Coca-Cola and health drinks). Driven by both factors, the company's gross margin in Q1 2025 rose again to 62.6%.

4. Continuous Release of Operating Leverage

On the expense side, thanks to the company's continuous application of AI in daily operations (including pricing decisions in different markets, creating marketing advertisements, and optimizing inventory management), the expense ratio further decreased to 29.1%. From the perspective of operating profit margins by region, except for a decline in the EMEA region, the operating profit margins in other regions improved significantly due to enhanced operational efficiency.

The decline in the operating profit margin in the EMEA region is mainly due to the company's continued use of a heavy asset model in regions like Africa, where a large amount of investment was made in Q1 for infrastructure construction, including production facilities and supply chains.

Dolphin Research [Coca-Cola] Past Research:

Earnings Season

February 12, 2025 Earnings Report Review “Coca-Cola: Still Buffett's Sharp Eye, Happy Fat Water Wins Big!”

In-Depth Research

Coca-Cola: Why is Happy Fat Water the Favorite of the "Stock God"?

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