Margins under pressure
Margins of consumer stocks Coca-Cola (KO), PepsiCo (PEP), and Monster Beverage (MNST) have been under pressure due to rising input costs for aluminum and higher freight costs from a shortage of truck drivers. They have all been implementing cost-control measures to improve productivity.
Margin performance in the second quarter
In the second quarter of 2018, Coca-Cola’s gross margin increased to 63.6% compared to 62.3% in the second quarter of 2017. The improvement reflected the impact of the company’s decision to refranchise its low-margin bottling operations. Its operating margin rose to 30.5% in the second quarter of 2018 from 21% in the second quarter of 2017 as lower charges were recorded year-over-year. The company’s productivity initiatives had a favorable impact on its margins.
PepsiCo’s gross margin shrunk 20 basis points to 54.9% in the second quarter of fiscal 2018, which ended on June 16. The decline was a result of higher commodity costs and increased transportation costs. Its operating margin grew 20 basis points to 18.8%, driven by favorable foreign currency exchanges and a gain of $144 million related to the refranchising of its beverage business in Thailand. However, its operating margin was impacted by an unfavorable comparison with the second quarter of fiscal 2017, which included a gain of $95 million on the sale of a minority stake in Britvic.
Monster Beverage’s gross margin declined significantly to 61.1% in the second quarter of 2018 compared to 64.3% in the second quarter of 2017. The decline was caused by higher promotional allowances, the adoption of a new accounting standard, higher input costs (including aluminum can costs), an unfavorable product sales mix, and a rise in the proportion of international sales. Monster Beverage’s operating margin fell to 35.2% from 38.6% in the second quarter of 2017. Its operating margin was negatively impacted by distribution termination expenses and increased distribution costs.
Overall, Monster Beverage generated a higher operating margin in the second quarter compared to larger players Coca-Cola and PepsiCo. Energy drinks generally carry higher margins than conventional soda drinks.
Higher costs of aluminum and increased freight costs are expected to be a drag on the margins of nonalcoholic beverage companies this year. However, cost-control and productivity initiatives, as well as higher pricing, might help mitigate the impact of increased costs.