The Strong Dollar Is Weighing Down These Large Beverage Companies

June 15th, 2015 by Trefis Team
DPS: Dr Pepper Snapple logo
DPS
Dr Pepper Snapple

Organic growth in beverages (both alcoholic and non-alcoholic) is tougher in mature markets such as North America and Europe, which is why giants such as Anheuser-Busch InBev (NYSE:BUD), The Coca-Cola Company (NYSE:KO), and PepsiCo (NYSE:PEP) have looked to penetrate emerging countries in the recent past, and they now generate a considerable portion of their revenues from international markets. The strengthening U.S. economy has added to the growth for these beverage behemoths in the last few years, but the rising U.S. dollar index has also dented their international earnings, and could continue to do so. Here’s how:

  • AB InBev derived ~70% of its top line from outside the U.S. in 2014. Not only did the emerging market volatility dent volume growth for the world’s largest brewery, but depreciating foreign currencies also had a negative 5 percentage point impact on the net sales, which expanded 3.5% for the full year.
  • Markets outside the U.S. formed 49% of PepsiCo’s revenues in 2014, with over 22% of the net revenues coming from Russia, Mexico, Canada, the U.K., and Brazil. The company’s organic sales in emerging countries grew 9% year-over-year last year, however, net revenues fell 1% over 2013 levels on massive negative currency translations. The top line declined 3% last quarter, hurt by more than a  7-percentage-point unfavorable impact of foreign currency depreciation, which is expected to drag down full-year net sales and core EPS by 10 to 11 percentage points.

sales growth in Q1 2015

  • Currency is also expected to be a 5 point headwind on Coca-Cola’s net revenues this year, which derives more than 55% of its revenues from international markets. Depreciating foreign currencies were a 6 percentage point headwind on the top line last quarter (net sales rose only 1%).
  • While Coca-Cola and PepsiCo have lost sales recently due to the strengthening dollar, the perpetual third in the U.S. carbonated soft drinks market, Dr Pepper, has gained from the growth in the domestic market. The company is far less exposed to foreign currency risk, as the majority of its business is in the U.S. (~90% of the net sales). Negative currency translations (Mexico and Canada) dragged down net revenues by only 1% in 2014 for the company, and are expected to be a 1 percentage point headwind again this year. Dr Pepper’s stock has also done better than the other three stocks in the last 52 weeks. If the U.S. dollar continues to strengthen, Dr Pepper might be better placed than its globally omnipresent competitors.

See the links below for more information and analysis:

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