Thursday, July 17, 2008

Have a Coke, a smile, and shut up as we charge you even more after Labor Day

You better stock up on your Coke for this summer. Because after Labor Day, the price is going up. From MSNBC News:

ATLANTA - Coca-Cola can expect to pay more starting this fall after the company's biggest bottler said Thursday that it would raise prices.

The issues at the bottler also hurt Coca-Cola Co.'s bottom line, since it owns about 35 percent of that business. The world's biggest beverage company said its profit fell 23 percent in the second quarter as it took a charge because of the bottler's woes.

Coca-Cola Enterprises, which has about 80 percent of the U.S. market for Coke, said it would raise prices in September because of higher commodity costs and declining U.S. soda sales. Bottlers set prices for retailers like grocery stores.

At Coca-Cola Co., the results were again led by the international operations.

The company is facing declining soda sales in the U.S., and managed to keep U.S. sales volume steady in the second quarter thanks to a boost from Glaceau's Vitaminwater, which it bought for $4.1 billion last June. International sales rose 5 percent even as they were hurt by natural disasters in Asia and labor strikes in Europe.

The Atlanta-based drinks company earned $1.42 billion, or 61 cents per share, down from $1.85 billion, or 80 cents per share, in the year-ago quarter. The results included a charge of 40 cents per share related to Coca-Cola Enterprises. Excluding one-time items, the per share figure came to $1.01. Revenue rose 17 percent to $9.05 billion from $7.73 billion.

Analysts polled by Thomson Financial had expected a profit of 96 cents per share on revenue of $8.93 billion, on average. But the company's shares fell about 4 percent.

I would say that Coke is facing the same problems that a lot of other food manufacturers are also facing--higher commodity prices, such as corn syrup, and higher energy prices, such as gas. In fact, I'd say that Coke is getting hit with a double-whammy regarding energy prices. Coke uses corn syrup as a sweetener for its concentrate. However corn prices have jumped due to increased ethanol production, and higher gas and oil prices. Coke has been absorbing those higher costs due to the higher corn prices, but has refused to raise the price on their signature soda. The second energy whammy would be higher gas prices, also due to the spike in oil prices, as Coke transports its products from their manufacturing centers to retail outlets, such as grocery stores. Again Coke has absorbed these higher costs without passing them down to consumers. As for declining U.S. soda sales, I'm wondering if the same high food and energy prices are causing American consumers to cut back on sodas. According to this story:

Chief Executive Officer Muhtar Kent, who took over Atlanta- based Coca-Cola this month, said consumers had less money to spend on Diet Coke, Minute Maid juices and Dasani bottled water because of rising food and energy prices. The amount of Coca-Cola drinks sold worldwide rose 3 percent, less than the 4 percent increase some analysts estimated, an indication that slowing sales in North America may expand elsewhere.

``When the fuel price is sky high at the pump, you really don't want to go into the store and spend another couple of bucks on snacks and pop or soda,'' Mariann Montagne, an analyst with Thrivent Asset Management in Minneapolis, said in a interview on Bloomberg Television. Montagne's firm manages $70 billion in assets, including Coca-Cola shares.

What we may be looking at here is inflation's effect of rising commodity and energy prices squeezing profit margins on Coke, forcing Coke to pass on those same inflationary pressures on consumers. This is just one food manufacturer--consider the thought that all the food manufacturers may be raising prices on their food products to cover their own increased energy costs. Remember that producer prices have jumped 1.8 percent in June, mainly due to the rising energy costs. We're in a situation where, if energy costs are not stabilized, we could see inflation spiral out of control here for this year. And inflation will hit us all--especially as consumers.

No comments: