The bets Coca-Cola has made on non-carbonated beverages are paying off in the United States.
On Thursday, the large soda manufacturer reported that results last year in North America were fueled by strong volume gains for bottled water Smartwater, flavored water Vitaminwater, the dairy brand Fairlife, and energy drinks. The key North America market—where Coca-Cola (KO) generates 25% of consolidated revenue—posted growth that outpaced the total global business. Wall Street analysts were pleased with the company’s performance in that region.
“Our flagship market of North America grew net revenue 8% for the quarter and 4% for the year, outperforming total retail value growth for both the North America nonalcoholic ready-to-drink beverage industry and U.S. consumer packaged goods companies,” said Muhtar Kent, the chairman and CEO of Coke who is stepping down from the latter position later this year.
The strong results in North America are impressive for Coke as it is highly exposed to the carbonated soft drink category, which has been stung by an 11-year slide in sales in the U.S. through 2015 (a trend that almost certainly continued in 2016) as consumers ditch sodas for healthier beverage options including bottled waters, flavored waters, and teas. Soda consumption has fallen to a 30-year low.
But Coke, like many other large food and beverage manufacturers, has invested in healthier beverages that consumers are buying instead of many major soda brands. Those investments include the launch of Fairlife, which helped Coke post a double-digit gain in the dairy category. “In the U.S., our investment in Fairlife milk is paying off,” James Quincey, who will succeed Kent as CEO, told analysts during a call with Wall Street analysts.
Coke is also still benefiting from a deal it made nearly a decade ago to buy Glaceau, the maker of Vitaminwater. Vitaminwater’s volume grew in the mid single digits in North America last year. Another brand that came with that acquisition, the premium water bottle brand Smartwater, posted a double-digit gain. Coke’s dominance in the growing premium water category is facing a stiffer challenge as top rival PepsiCo (PEP) has launched its own product in that segment, called LIFEWTR.
The growth from healthier beverages doesn’t suggest that Coca-Cola isn’t retaining a dominant position in the carbonated soft drink category, which is still a massive business. The namesake Coke, Diet Coke, Fanta, and Sprite all rank among the company’s “billion dollar brands”—meaning they generate $1 billion or more in annual retail sales. Keeping that business healthy is critical for Coke’s financial performance, even as consumers look to cut back on sugar and artificial sweeteners found in many sodas.
The company said that last year Sprite and Fanta grew along with energy drinks, al though Diet Coke declined—continuing a recent trend as consumers become increasingly skeptical of artificial sweeteners found in diet sodas. There are worries about the health implications of consuming aspartame, which is still deemed safe by the Food and Drug Administration.
But Coke has scored some key wins in soda as well, saying consumers are responding to the company’s sugar-free options and also smaller packaging that is more persuasive to some beverage drinkers that still want to drink a soda, albeit in smaller quantities.
“The game plan of smaller packages and zero sugar…is driving the revenue growth and we believe it will continue to do so,” Quincey said. He said that Coke’s no-calorie colas posted “solid mid-single digit growth” as the company exited 2016.
Looking ahead, Coca-Cola’s 2017 targets fell short of Wall Street’s expectations. Despite the growth in North America, Coke must confront challenges abroad. The performance in developing markets has been particularly mixed: strong in Nigeria, rebounding in China, but poor in Brazil, Argentina and Venezuela. Coke executives flagged that macroeconomic and geopolitical challenges this year would look similar to last year.
“We expect another year of volatility around the world,” Quincey said. “Some markets will get better, some will get worse.”
Muhtar Kent will step down as CEO later this year but remain chairman. An earlier version of this story said he would step down from both roles. The error has been corrected.