Four US-based global consumer products giants have delivered an interesting message in their September quarterlies: things are going pretty well, notwithstanding Covid, along with labour shortages, inflation and continuing cost pressures.
The underlying message from the quartet – Coca Cola, McDonald’s, Kraft Heinz and Starbucks – was mostly positive for a sector that investors have steered away from as they continue to be besotted with megatechs and their outriders.
With combined sales in the quarter of just over $US30 billion, the four companies are big in their sectors, but tiddlers compared to the megatechs, especially those $US2 trillion plus behemoths, Apple and Microsoft and their close rivals, Amazon and Alphabet (Google).
Three of the four – Coke, McDonald’s and Starbucks saw record performances in the quarter.
It shows that, for all those investor concerns about weak growth, these giants are still dominating with rising sales of services and products, generating higher revenue and earnings from still very solid profit margins.
But the stories from the four also suggest the strength of global consumer demand remains solid and on a growth path.
All produced quarterly earnings reports that were better than expected, despite ongoing challenges with the global supply chain and pandemic restrictions in many parts of the world – higher raw materials – sugar in the case of Coke and coffee for Starbucks
Interestingly labour costs are not the big concern – its labour shortages, or availability in areas where demand is high. Covid continues to anchor millions of people.
Higher wages are being offered – Starbucks leading the way this week in the US.
Helping the trio was the way consumers paid up when confronted with price increases from four as they sought to recover rising costs for energy, shipping, packaging and raw materials, plus a continuing shortage of labour, overlaid by the ripples from Covid Delta infections.
In fact it was also the enormous global scale of each business, their ability to pass on price increases to consumers and the diversity of their markets that gave them protection against an unforeseen wave of negatives.
All four either lifted revenue and earnings or in the case of Kraft, saw a marginal fall of 1.8%. All Up their total revenues for the quarter topped $US31 billion.
For investors the solid results from Coke, Starbucks, Macca’s and Kraft are another reminder that old line value stocks can perform – indeed outperform younger, more brash companies and their promise.
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Coca-Cola reported a net revenue of $10.04 billion in the quarter, a solid 16% increase from the same quarter last years $US8.65 billion.
The number of cases it sold grew 6%, resulting in greater volume than in 2019, though the share of its business tied to restaurants and dining out has not recovered to 2019 levels because the sector globally remains disjointed with many outlets still closed, out of business or doing takeway only for limited periods of time.
Coke couldn’t escape Covid Delta as the coronavirus affected sales in several markets in August, but with movie theatres re-opening, especially in important markets like the uS and much of Europe.
In April, the chairman and chief executive, James Quincey confirmed that the soda giant would raise prices to cope with rising commodity costs, though the company has not yet disclosed specific details – but they are obviously happening.
Still the higher sales saw Coca-Cola lift its full-year profit forecast as the reopening of theatres and restaurants in the United States drove demand for its sodas.
Coke’s net profit jumped more than 40% to $US2.5 billion compared with $US1.7 billion,
That saw the company lift its full revenue growth of 13% to 14%, an increase from its previous range of up 12% to 14% and earnings are now forecast to rise by 15% to 17%, compared with a previous forecast of a 13% to 15% increase.
Coke’s sparkling soft drinks unit, which includes its Coca Cola, Fanta, etc soda, saw volume increase by 6% in the quarter. The nutrition, juice, dairy and plant-based beverage business reported volume growth of 12%. The hydration, sports, coffee and tea segment saw volume growth of 6%. Coffee grew 19%, driven by the ongoing reopening of Costa cafes in the United Kingdom.
Coke has started increasing prices to counter some of the impact from rising commodity and freight costs.
Coke said it saw strength in markets where coronavirus-related uncertainty has been easing.
Volume growth was up 8% in its Europe, Middle East and Africa region, led by markets including Russia, Nigeria and Turkey. Unit case volume in Latin America also rose 8%. Volume growth climbed 4% in North America and was up 3% in Asia-Pacific (which includes Japan, South Korea and Australia and NZ).
Analysts said Coke has made a significant increase in its marketing and advertising spending and the company said on Wednesday it nearly doubled its marketing budget from a year earlier, when Coke slashed costs to shore up cash – as did most other companies.
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McDonald’s sales rose 14% in the quarter to $US6.2 billion from the same quarter last year, helped by larger customer orders and menu price increases in the United States and fewer restaurant closings in Europe.
Same-store sales in the US – its largest – saw a rise of 9.6% in the third quarter ended above market estimates for 8.27%.
Global comparable sales also jumped 12.7% in the quarter versus estimates of 10.31% as international markets slowly recovered from the pandemic. Same store sales though fell in China in the quarter as sporadic lockdowns hit the country – and are continuing at the moment.
Net income rose 22% to $US2.15 billion.
“Our global comparable sales increased 10 percent over 2019, which was delivered across an omnichannel experience that is focused on meeting the needs of our customers,” said CEO, Chris Kempczinski.
McDonald’s says it has delayed some new restaurant openings into early next year in part because global supply-chain problems made it difficult to get kitchen and tech equipment.
That will see the burger giant open fewer new and revamped stores this year.
To attract staff in a tight labour market, McDonald’s US franchisees lifted wages 10% this year while company-run stores have increased pay 15%.
But the company still faces shortages that has seen service curtailed and, in some cases, stores closed early because not enough people can be found to work the hours and the shifts.
On top of that seating areas remained closed in about 20% of McDonald’s American locations – roughly 3,000 restaurants – in regions in states with high rates of COVID-19.
Despite these woes Maccas still expects to maintain a 6% increase in customers in the US this year to cover increased costs for labour and commodities.
Nearly 80% of the chain’s US eat-in outlets have reopened, but reductions in operating hours and capacity continue to weigh on its business. McDonald’s said its restaurants in China and Australia were particularly affected by pandemic lockdowns.
“Performance in Australia was impacted by significant stay at home restrictions affecting over half of the restaurants for nearly the entire quarter,” the company said in its earnings release.
“While comp sales were relatively flat for the quarter, the market was positive on a two-year basis and continued to grow its delivery channel achieving record delivery sales for the quarter.”
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Kraft Heinz reported a 1.8% in sales to $US6.3 billion in the quarter, partly due to the sale of its nut business to Hormel (The Spam company).
The company increased prices 1.5% in its global restaurant and retail sectors.
Kraft Heinz expects to enter next year “having executed the pricing plan that protects our profitability for current levels of cost,” the company said.
Net profit increased 23.2% to $US736 million, primarily driven by a $US300 million non-cash goodwill impairment loss in the the September quarter of 2020 which provided a low base for the rise this year.
Adjusted EBITDA fell 11.3% from the 2020 quarter to $US1.5 billion and increased 0.7% versus the September, 2019 quarter, with performance against each period including an unfavourable impact from asset sales of three percentage points.
“Based on strong performance to date, the Company expects Organic Net Sales growth in 2021 to be flat compared to an exceptionally strong 2020 period. In addition, the Company has increased its expectations for 2021 Adjusted EBITDA from at least $US6.1 billion to more than $US6.2 billion.
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Starbucks reported record quarterly sales thanks to solid growth in its core US market that helped make up for weakness in China and other markets.
The company said same store sales at its North American — or sales at locations open at least a year — jumped 22% in the September quarter.
But same-store sales in China fell 7% as coronavirus cases once again disrupted store traffic.
Globally, Starbucks’ same-store sales rose 17%, shy of Wall Street’s forecast of an 18.2% increase, according to data group FactSet.
Revenue jumped 31% to $US8.1 billion for the quarter, an all-time high. But that was still short of Wall Street’s forecast of $US8.2 billion.
Net profit more than quadrupled to $US1.76 billion.
Starbucks shares fell 3.7% in after-market trading because of those small misses.
Starbucks reported its earnings one day after it revealed it would offer pay rises to staff.
The company said workers in its stores will make at least $US15 and up to $US23an hour by mid 2022. Starbucks says it will also be giving raises to employees who have been with the company for at least two years.
Starbucks President and CEO Kevin Johnson said the company’s strong sales momentum and increased operating efficiency will help fund that investment in its workers.
McDonald’s and Starbucks operate in the huge, usually low-wage sectors (and use and sell a lot of Coke and Kraft Heinz products) and are finding it hard to maintain that very basic business model.
Because of Covid, labour mobility in the US has slowed and has made younger people a bit more careful, so businesses are going to have to pay more and improve conditions to not only hold but attract staff.
But coffee, burgers and fries and sodas are American staples and that is helping these three giants grow faster than they were before the pandemic and helping provide a weak Kraft Heinz a way back, which will make its 26% shareholder in Warren Buffett’s Berkshire Hathaway happier about its prospects.
