Executive Summary / Key Takeaways

• The Coca-Cola Company demonstrated resilience in Q1 2025, achieving 6% organic revenue growth and comparable operating margin expansion despite a 2% decline in net operating revenues driven by unfavorable foreign currency and bottling refranchising impacts.
• The company's "all-weather strategy," emphasizing local execution, portfolio power (including 30 billion-dollar brands), and digital/operational technology, is key to navigating dynamic macroeconomic and geopolitical environments.
• Q1 2025 performance highlights included strong volume growth in Asia Pacific (+6%) and EMEA (+3%), driven by markets like India and Eurasia, while North America (-3%) and Latin America (flat) faced specific market pressures.
• Management reaffirmed full-year 2025 guidance, expecting 5% to 6% organic revenue growth and 2% to 3% comparable EPS growth, anticipating moderating inflationary pricing, continued FX headwinds (5-6% to comparable EPS), and productivity benefits weighted to the second half.
• Key risks include the significant IRS tax litigation (potential $12.0 billion+ liability for 2010-2024 if the Company does not prevail on appeal), ongoing foreign currency volatility, and potential impacts from global trade dynamics and shifting consumer sentiment, which the Company aims to manage through hedging and strategic agility.

The Enduring Power of the Coca-Cola System

The Coca-Cola Company stands as a titan in the global beverage industry, a position forged over more than a century of history and strategic evolution. At its core, KO operates a high-margin concentrate business, supplying syrups and bases to a vast network of independent and company-owned bottling partners worldwide. This capital-light model, significantly enhanced by a multi-year refranchising initiative that reduced bottling investments as a percentage of consolidated net revenue from 52% in 2015 to 13% in 2024, allows KO to focus on brand building, innovation, and strategic leadership while bottling partners manage the capital-intensive production, packaging, and distribution.

Operating in a resilient industry characterized by predictable growth, KO benefits from low barriers to entry but high barriers to scale. Its competitive moat is built on unparalleled brand recognition, a pervasive global distribution system, and a diversified portfolio spanning sparkling soft drinks, water, sports drinks, juices, dairy, coffee, and tea. This "total beverage company" approach, featuring 30 billion-dollar brands, allows KO to address diverse consumer needs and occasions across more than 200 countries.

Leveraging Technology and Local Execution

While not defined by a single piece of "hard tech," Coca-Cola's competitive edge is increasingly sharpened by operational technology and digital capabilities. The concentrate business model itself is a form of operational technology, enabling centralized production of high-value inputs with decentralized, local manufacturing and distribution by bottlers. This structure provides inherent flexibility and responsiveness to local market dynamics.

In marketing, KO utilizes Studio X, a digital ecosystem for producing tailored content at scale and speed, allowing real-time impact measurement. This enhances the efficiency and effectiveness of advertising spend. For revenue growth management (RGM) and execution, the company is piloting AI-based tools for price pack channel optimization and personalized messaging to retailers, aiming to improve offerings, speed to market, and drive incremental sales. Connected packaging initiatives also offer personalized digital experiences to consumers. These technological advancements contribute to KO's competitive moat by enabling more granular, data-driven decision-making, optimizing resource allocation, and enhancing execution in the marketplace, ultimately supporting top-line growth and margin expansion.

Navigating a Dynamic Global Landscape

The first quarter of 2025 demonstrated the strengths and challenges inherent in KO's global model. Net operating revenues decreased 2% to $11,129 million, primarily impacted by unfavorable foreign currency fluctuations (a 5% headwind) and the structural impact of bottling refranchising (a 3% headwind). However, underlying performance remained robust, with organic revenue growing 6%, driven by a strong 5% contribution from price, product, and geographic mix and a 1% increase in concentrate sales volume.

Operating income saw a significant 71% increase, reaching $3,659 million. This was largely due to favorable pricing initiatives and substantially lower other operating charges compared to Q1 2024, which included a $760 million BodyArmor trademark impairment. Gross profit margin saw a slight uptick to 62.6%. Selling, general, and administrative expenses decreased 4%, benefiting from refranchising and favorable FX.

Performance varied by segment. Asia Pacific delivered strong unit case volume growth of 6%, led by India (+16%) and Greater China and Mongolia (+6%). EMEA volume grew 3%, with Eurasia and Middle East (+11%) and Africa (+1%) offsetting a decline in Europe (-1%). North America volume decreased 3%, impacted by weather, calendar shifts, and weakening consumer sentiment, particularly among Hispanic consumers, though fairlife and Coca-Cola Zero Sugar saw continued growth. Latin America volume was flat, with strong growth in Brazil (+4%) and Argentina (+17%) offset by weakness in Mexico (-3%) due to cycling strong prior year performance, calendar shifts, and geopolitical tensions affecting sentiment. Bottling Investments volume decreased 17% due to refranchising impacts, but grew 1% after considering structural changes.

Financial Strength and Capital Allocation

The company maintains a strong financial position. As of March 28, 2025, cash, cash equivalents, short-term investments, and marketable securities totaled $13.8 billion, supplemented by $4.6 billion in unused backup credit lines. Net debt leverage stands at 2.1 times EBITDA, at the low end of the target range.

Operating cash flow saw a significant outflow of $5,202 million in Q1 2025, primarily due to the final $6,069 million payment for the fairlife contingent consideration liability. This contrasts sharply with the $528 million provided by operating activities in Q1 2024. Investing activities used $1,067 million, while financing activities provided $3,432 million, largely from net issuances of commercial paper and short-term debt. Capital expenditures were $309 million in Q1 2025, with a full-year expectation of approximately $2.2 billion.

Capital allocation priorities remain consistent: investing in the business, growing the dividend (63 consecutive annual increases), strategic acquisitions, and share repurchases to offset dilution.

Outlook and Key Risks

Management reaffirmed its full-year 2025 guidance, expecting organic revenue growth of 5% to 6% and comparable currency-neutral EPS growth of 7% to 9%, aligning with the long-term algorithm. Comparable EPS growth is projected at 2% to 3%. Key assumptions include moderating inflationary pricing, an anticipated 5% to 6% currency headwind to comparable EPS based on current rates, and productivity benefits weighted towards the latter half of the year. Bottler refranchising is expected to be a slight headwind.

A significant overhang remains the IRS tax litigation concerning transfer pricing for 2007-2009. The Tax Court predominantly sided with the IRS, resulting in a $6.0 billion total liability (including interest) as of August 2024, which the Company paid in September 2024 and is appealing. While the Company believes it is more likely than not to prevail on appeal, an unfavorable outcome could mean no refund of the $6.0 billion and potential additional liabilities for 2010-2024, estimated at approximately $12.0 billion as of December 31, 2024, increasing by about $400 million in Q1 2025. This represents a material potential adverse impact.

Other risks include ongoing foreign currency volatility, macroeconomic uncertainty impacting consumer sentiment and costs, geopolitical tensions, and potential impacts from global minimum tax regulations and tariffs. The Company utilizes hedging and local market agility to mitigate these factors.

Conclusion

The Coca-Cola Company's Q1 2025 results underscore the effectiveness of its "all-weather strategy" in delivering underlying growth and profitability amidst a challenging external environment. The company's core strengths—iconic brands, a powerful distribution network, and the efficient concentrate model—provide a durable competitive moat. Strategic investments in digital capabilities and targeted innovations like Simply Pop aim to capture emerging trends and enhance execution. While significant risks, particularly the IRS tax litigation, loom, management expresses confidence in navigating these challenges through financial strength and operational agility. For investors, KO represents a resilient consumer staple with a commitment to shareholder returns, albeit one facing complex global dynamics and a material tax contingency that warrants close monitoring alongside its operational performance and strategic execution.