Warren Buffett's words may haunt Coca-Cola

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Posted: Thursday, February 20, 2014 12:00 am

Warren Buffett, speaking last April at Coca-Cola Co.'s annual meeting, warned that the beverage giant shouldn't get complacent about its success. Ten months later, those words could come back to haunt the company.

The world's largest soft-drink maker, facing sluggish growth overseas and concerns about the healthiness of its product at home, posted its fourth straight quarter of declining sales this week. The results sent the stock on its biggest one-day decline in more than two years — bad news for both Coke and Buffett, the company's largest shareholder.

The slowdown has raised concerns about the long-term plan of CEO Muhtar Kent, who has promised big revenue gains by 2020. Investors are looking for Kent to take bolder steps, said Ali Dibadj, an analyst at Sanford C. Bernstein & Co. While the company announced a $1 billion budget-tightening plan Tuesday, it doesn't go far enough, he said.

“There needs to be much more cost cutting,” Dibadj said in an interview. “There needs to be much faster innovation. There needs to be much more return of cash to shareholders.”

Coke's fourth-quarter sales fell 3.6 percent to $11 billion, missing the average analyst estimate compiled by Bloomberg. Net income slid 8.4 percent to $1.71 billion, or 38 cents a share, from $1.87 billion, or 41 cents, a year earlier.

Kent, 61, responded to the slump by pledging to cut $1billion in annual costs by 2016. With soft-drink sales slowing in markets such as the U.S. and Mexico, savings from the new cost-cutting program will be plowed into marketing its brands directly to consumers, Coca-Cola said.

Shareholders weren't encouraged. Coca-Cola's stock fell 3.8 percent to $37.47 in New York Tuesday, marking the biggest one-day decline since August 2011. The shares have dropped 9.3 percent this year, compared with a 0.4 percent decrease for the Standard & Poor's 500 Index. PepsiCo Inc., the company's biggest competitor, has fallen 5.7 percent.

Buffett, 83, has advised Kent to stay ahead of competitors by being proactive. At Coke's annual meeting last year in Atlanta, the executives shared the stage to help sell the company's message to shareholders.

“I like to study failure,” the billionaire investor, who has owned the stock since 1994, said at the time. “We want to see what has caused businesses to go bad, and the biggest thing that kills them is complacency. You want a restlessness — a feeling that somebody's always after you, but you're going to stay ahead.”

Buffett, the CEO of Omaha-based Berkshire Hathaway Inc., didn't immediately return a message left with an assistant seeking comment.

Coca-Cola and PepsiCo are facing an arrayof upstart competitors fighting for shelf space. That includes a host of energy drink brands, pressed juice makers and do-it-yourself appliances from companies like SodaStream International Ltd.

Coca-Cola has taken steps toward diversifying. Earlier this month, it agreed to buy a 10 percent stake in Green Mountain Coffee Roasters Inc. for about $1.25 billion and work with the maker of Keurig coffee brewers to introduce a system for producing single-serve cold drinks.

Kent also shook up his management team in December, aiming to improve the company's North American distribution system.

Kent often touts Coca-Cola's ability to offset troubles in one area of the world with gains in another — the benefit of operating in more than 200 countries. That advantage may be disappearing.

“The growth rates in emerging markets are slowing down,” said Jack Russo, an analyst at Edward Jones & Co. who recommends buying Coca-Cola's stock. That's not just a problem for Coke, he said. “Almost every company in the universe is telling us that.”

Coke's management will ask directors this week to raise the dividend for 2014, Chief Financial Officer Gary Fayard said this week.

The Omaha World-Herald Co. is owned by Berkshire Hathaway Inc.

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