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Consumer Spending Still Bubbly, Notes Coca-Cola (KO) CEO

Posted on Wednesday, January 22nd, 2020 by Steve Anderson

Consumer Spending Still Bubbly, Notes Coca-Cola (KO) CEO

Consumer confidence is one of the great underpinnings of American economics. Sure, we have business-to-business (B2B) operations aplenty, but most of our stock in trade is focused directly on the consumer. So when consumer confidence is ebbing, so too do a lot of businesses' fortunes. New word from James Quincey, Coca-Cola (NYSE: KO) CEO, suggests that there's not a lot of worry on that front, nor should there be any time soon.

A Forecast as Effervescent as the Product Line

Quincey, while out at Davos 2020, expressed some of the reasons he can believe in a consumer that's ready to spend. After all, back in October, Coca-Cola beat estimates on revenue as consumers crowded into the healthier beverage options. Consumers spent big on new reduced-size cans, as well as on Coke Zero, which was enough to give Coke earnings a shot in the arm.

Quincey also noted some new investment coming, including some extra infrastructure development in France, where recent changes have made the overall environment more “business-friendly” for operations like Coke's. An expanded portfolio of new brands, and some warm reception from the consumer, have lent a little extra optimism to Coke's outlook.

With fourth-quarter earnings set for reporting January 30, it's a safe bet that Coke's fortunes didn't drop much while the consumer was off holiday spending. This makes a healthy bottom line for Coke look that much more likely. However, not even Quincey's remarks came without a few caveats.

Maybe Not as Bubbly as it Seems?

Quincey also noted that there were some potential impediments to the picture of consumer spending. While the US-China trade war has lost a lot of its teeth, there's still enough risk there to make a consumer skittish, Quincey noted. Moreover, there was still a potential for global economic weakness to be concerned about. Quincey even acknowledged that some sectors of the economy were “feeling the pressure,” especially manufacturing operations.

It certainly didn't help matters that the International Monetary Fund recently released a revised forecast that pushed expected growth downward. The news about slowing growth in India contributed to a large portion of that downward push, and uncertainties in global trade throughout the rest of the world left a mark as well. Just to round out the picture, doubts were expressed that a phase-two trade deal between the US and China could actually be struck before Trump ended his first term.

Uncertainty Is Always Part of the Market

One point that often goes unmentioned in any kind of look forward is a look at the past. A serious recession hasn't really been part of the picture for at least the last four years. Though it took long enough to shake off the disaster that was the so-called “Great Recession” of 2008—in some places a lot longer than others—the fact that we haven't seen much downturn since likely has some alarmed.

Yet we've also seen extraordinary, even unprecedented, measures taken in the interim. We've seen one tax cut come out of the Trump administration, and new reports suggest that a second one may be announced within the next few months, this time specifically targeting the middle class. We've seen record low-interest rates take hold, and in some cases, approach negative. We've seen a repo market that's on a tear, to say the least.

Normally the best way to make inferences about the future is to examine the past and see how it lines up with current trends, then extrapolate an outcome from there.  Even then, the result has to be taken with a grain of salt as there are always little differences between the two. Here, though, that's largely impossible; we've simply never seen conditions like these before, so there's no parallel to draw from to suggest an outcome.

Granted, it's a safe bet that people will still want a Coke at the day, or with their burger while eating out. The third-quarter returns for Coca-Cola make that much quite clear. But we've also seen a retail picture that's wavering wildly between success and failure, and in many cases, based on where most stores are located or what kind of online presence they're packing. Target (NYSE: TGT)  is making some serious inroads with the consumer to the point where they're opening new small-format stores at a good clip, but the Children's Place (NASDAQ: PLCE) can't get its Gymboree relaunch off the ground.

Quincey's look at the consumer may be a bit colored by his own Coke-bottle lenses—his company is doing well so surely the consumer is too—but there's enough word to suggest that there's still life in the consumer market yet. Whether it's still bubbly, or just about to go flat, however, is the real issue.

 


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