Weak jobs market could fizzle Coke

By Melanie Lindner, reporter


(Fortune) -- On Tuesday, all eyes will be on the Coca-Cola Company as the world's largest soft drink maker reports its first quarter earnings. Though analysts are predicting solid year-over-year gains, all is not sweet for the Atlanta-based soda company, as the weak job market is likely to weigh on its top and bottom lines.

Morningstar analyst Philip Gorham told Fortune that high unemployment in the U.S. and Europe continues to keep would-be customers at bay. "The out-of-work construction laborer isn't stopping at a convenient store for a soda when he doesn't have a job," says Gorham.

Lucky for Coke, higher unemployment doesn't necessarily mean lower profits. In Coke's fiscal first quarter of 2009, unemployment averaged at 8.2%, and the company made sales of $7.2 billion. In the first quarter of 2010, 9.7% of job seekers were out of work, and analysts are predicting Coke will make sales of $7.8 billion. The missing link in the equation is growth overseas.

"We expect growth in most emerging markets will show accelerated strength, and believe recent data points from China support our estimate of 18% volume growth in the first quarter," UBS analyst Kaumil Gajrawala wrote in a recent note to investors. According to UBS, Coke has a dominant position in emerging markets around the globe, reaping as much as 75% of its revenues from markets outside the U.S.

While industry experts have often touted Coke as the soft drink industry trailblazer, the company has recently been playing copycat to PepsiCo. During the first quarter, Coke's Miami-based rival rallied investor support when it completed its acquisition of bottlers Pepsi Americas and Pepsi Bottling Company. Coke announced a similar acquisition deal with its bottler Coca-Cola Enterprises in late February, but its stock hasn't gotten the same bounce. According to Gorham, Coke overpaid; judging by their reaction, investors seem to agree.

Investors aren't the only ones who are less than pleased about Coke's bottling deal. The Teamsters labor union, representing some 15,000 Coca-Cola Enterprises employees hosted a conference call on Friday slamming the Coca-Cola Company's plans to acquire its bottler.

"Coke's distribution experiment may look good in theory but will prove to be a costly mistake," says David Laughton, Director of the Teamsters Brewery and Soft Drink Workers Conference. Laughton claims that Coke has already fallen behind Pepsi in integrating its bottling operations.

The union leader lashed out against the Coca-Cola Company's plans to implement a new distribution program to 7-Eleven stores in southern California, which he says will cut jobs. "The new Coke plan will only complicate its distribution system," says Laughton. "[It will] hurt customer relations and provoke a work stoppage that could disrupt operations not only in Southern California but in other key markets as well." Gorham says a work stoppage would have minimal effect on Coke's share price.

"The landscape of beverage bottlers and distribution networks is changing," Gorham told Fortune, noting, that Coca-Cola is likely in talks with Dr Pepper Snapple to create a licensing deal similar to the one the Schweppes and Sunkist maker struck with PepsiCo for $900 million as part of its bottler acquisition.

Whether closing the deal with Coca-Cola Enterprises will have a positive effect on Coca-Cola Company's bottom line remains to be seen. For now, shares of the soda-maker likely won't get too much of a pop on the company's first quarter report, since the market is well aware that high volumes in emerging markets are the main bulwark against the negative impact of high unemployment here in the U.S. To top of page

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