BOCA RATON, FLA. – Two years from now, The Coca-Cola Company will look very different than it does today.
Coca-Cola is evolving both strategically through a growth plan for sparkling and still beverages that focuses heavily on driving revenue, and structurally through an accelerated plan to refranchise company-owned bottling territories, senior executives explained Friday at a Consumer Analyst Group of New York (CAGNY) conference.
“We’re transforming the company,” President and Chief Operating Officer James Quincey said. “The numbers will look very different, but we think we and the system will emerge stronger and more successful in the coming years.”
By executing a set of strategic priorities established in late-2014, the company is adapting to macroeconomic realities and shifting consumer tastes, and returning to its core model of building strong brands, creating customer value and leading a global franchise system.
Here are five things we learned about where the company is headed:
1. Coca-Cola is poised for growth in a growing industry.
The value of the global nonalcoholic ready-to-drink beverage (NARTD) industry is projected to grow 5 percent over the next five years, thanks to a booming global population, rapid urbanization and rising middle class incomes. “We believe we have the opportunity not just to participate in the growth… but to gain share,” Quincey said, noting that Coke’s organic revenue growth in 2015 outpaced global GDP growth.
Coke is currently the leader in NARTD beverages with roughly one-third of global value share, but with plenty of room to grow. “Consumer demand is there, we have the marketing, we have execution in sales through our bottling partners, and we’re more dedicated and disciplined in our portfolio choices in where we look for revenue and where we invest marketing and merger and acquisitions dollars,” Quincey said.
2. The company is moving from offering choice to shaping choice.
This means ramping up innovation efforts to develop new products with lower sweetness levels, reformulating existing offerings and expanding its low-/no-calorie portfolio. “Consumers are concerned about sugar, and they’re concerned about artificiality,” Quincey said. “They also want greater control, they want choice, and they want products that are natural.
“We must adapt to where the future is going.”
Whether a consumer wants a Coca-Cola with or without calories or with or without caffeine, “this is about taking the idea of the brand up a level and saying everyone can enjoy Coca-Cola and stay in the franchise,” he added. “You want to stay with Coke Classic? Great. If you want Coke with no sugar, great. You can stay with the brand you love.”
“One Brand” pilots in several markets last year yielded higher sales of Coca-Cola Light/Diet Coke, Coke Zero and Coca-Cola Life. The company also will shape choice, Quincey said, by promoting smaller – and more profitable – packages that respond to consumer desire for portion control.
In the still beverages category, the company is taking steps to capture share such as building a “fit-for-purpose” juice supply chain. Since 2010, Coke has captured one-third of the juice and juice drink category value growth, driven by its four billion-dollar juice brands. The company will also continue to invest in the profitable premium bottled water category through brands like smartwater, which became a billion-dollar brand in 2015.
Going forward, Coke will do more to experiment with new products and ideas.
“We’ll be less focused on trying to find the perfect answer,” Quincey said. “We’re going to be more agile, always with a destination in mind, but trying more pilots in the short term.”
3. Sources of Coke’s growth are shifting by geography.
Growth in the developed world has offset recent declines in emerging and developing markets. Coke will accelerate its segmented approach to revenue growth in 2016 and beyond, Quincey said. “Leaning heavily on premium-ization and affordability will be necessary going forward given what’s happening economically,” he explained.
In North America, the company will continue to focus on growing revenue through a transaction-focused packaging mix. This strategy is anchored in the growth of mini cans and smaller glass and aluminum bottles, which currently only account for about 12 percent of brand Coca-Cola volume in the U.S. but are posting double-digit revenue growth as consumers move to these packs from 2-liter bottles and multi-packs.
“What we’re clearly seeing is the leveraging of premium and affordable packs to drive the business in transaction terms, letting go a little bit of the volume on larger, value-oriented packs,” Quincey said. “We see it’s possible to take this idea of premium-ization and affordability through a range of packages, priced appropriately, and drive transactions and revenue and, therefore, price.”
At the other end of the economic spectrum, in India, a new “Splash Bar” innovation is enabling Coke retail customers to sell small cups of beverages for 5 rupees apiece. And a soon-to-launch lightweight PET bottle will give consumers another affordable option in addition to returnable glass bottles.
4. Productivity gains are fueling marketing investments and shareholder returns.
In 2015, Coke invested an incremental $250 million in media, funded by $600 million in productivity gains. In addition to cost savings that can be reinvested, Quincey said the company’s approach to productivity focuses on “elevating the employee experience” by streamlining processes and launching new technology platforms.
“The acceleration we’re looking for is the nexus of efficiency and effectiveness, of savings and speed, and the employee experience… such that we’re building an organization for the long term,” he said. “Because, ultimately, it’s talent that will take us forward in future.”
5. Coke-owned bottling volume will go from ~18% globally to 3% once refranchising is complete.
By refranchising company-owned bottling territories in Europe, Africa, China and North America, the company will become a leaner, higher-margin enterprise, said Executive Vice President and Chief Financial Officer Kathy Waller.
To illustrate the financial impact of refranchising, Waller pointed to full-year 2015 financial metrics adjusted to look as if the pending bottling transactions had been completed in 2014. On this basis, Coke’s comparable net revenues would have declined from $44.3 to $28.5 billion, but its comparable gross margins would have expanded from 61 to 68 percent, and comparable operating margins would have expanded from 23 to 34 percent.
Additionally, approximately two-thirds of the company’s 123,000 global employees will transfer to franchised bottlers as the refranchising plans are completed.
“The core business of the company will start to emerge from this larger bottling operation,” Quincey said, crediting the company’s Bottling Investments Group (BIG) with helping to restore momentum over the last few years in the transitioning territories. “BIG remains an important strategic enabler for us. Success of the BIG over the last few years in fixing the bottling system and growing those markets it took under its care… has enabled the refranchising.”
In North America, the company recently announced plans to refranchise 100% of its remaining company-owned bottling territories, including all cold-fill production facilities, by the end of 2017. These efforts will drive efficiency by creating more contiguous bottling territories to both enable local execution and drive national scale.
“Before, it was a patchwork quilt designed by history and timing of when mergers and acquisitions had occurred, rather than a sales and distribution and execution logic,” Quincey said of Coke’s North American bottling footprint. “We believe we're setting up the system for future success.”
This article may contain statements, estimates or projections that constitute “forward-looking statements” as defined under U.S. federal securities laws. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will” and similar expressions identify forward-looking statements, which generally are not historical in nature. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from The Coca-Cola Company’s historical experience and our present expectations or projections. These risks include, but are not limited to, obesity concerns; water scarcity and poor quality; evolving consumer preferences; increased competition and capabilities in the marketplace; product safety and quality concerns; perceived negative health consequences of certain ingredients, such as non-nutritive sweeteners and biotechnology-derived substances, and of other substances present in our beverage products or packaging materials; increased demand for food products and decreased agricultural productivity; changes in the retail landscape or the loss of key retail or foodservice customers; an inability to expand operations in emerging and developing markets; fluctuations in foreign currency exchange rates; interest rate increases; an inability to maintain good relationships with our bottling partners; a deterioration in our bottling partners' financial condition; increases in income tax rates, changes in income tax laws or unfavorable resolution of tax matters; increased or new indirect taxes in the United States or in other major markets; increased cost, disruption of supply or shortage of energy or fuels; increased cost, disruption of supply or shortage of ingredients, other raw materials or packaging materials; changes in laws and regulations relating to beverage containers and packaging; significant additional labeling or warning requirements or limitations on the availability of our products; an inability to protect our information systems against service interruption, misappropriation of data or breaches of security; unfavorable general economic conditions in the United States; unfavorable economic and political conditions in international markets; litigation or legal proceedings; adverse weather conditions; climate change; damage to our brand image and corporate reputation from negative publicity, even if unwarranted, related to product safety or quality, human and workplace rights, obesity or other issues; changes in, or failure to comply with, the laws and regulations applicable to our products or our business operations; changes in accounting standards; an inability to achieve our overall long-term growth objectives; deterioration of global credit market conditions; default by or failure of one or more of our counterparty financial institutions; an inability to timely implement our previously announced actions to reinvigorate growth, or to realize the economic benefits we anticipate from these actions; failure to realize a significant portion of the anticipated benefits of our strategic relationships with Keurig Green Mountain, Inc. and Monster Beverage Corporation; an inability to renew collective bargaining agreements on satisfactory terms, or we or our bottling partners experience strikes, work stoppages or labor unrest; future impairment charges; multi-employer plan withdrawal liabilities in the future; an inability to successfully integrate and manage our Company-owned or -controlled bottling operations; an inability to successfully manage the possible negative consequences of our productivity initiatives; global or regional catastrophic events; and other risks discussed in our Company’s filings with the Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K for the year ended December 31, 2014 and our subsequently filed Quarterly Reports on Form 10-Q, which filings are available from the SEC. You should not place undue reliance on forward-looking statements, which speak only as of the date they are made. The Coca-Cola Company undertakes no obligation to publicly update or revise any forward-looking statements.
RECONCILIATION TO U.S. GAAP FINANCIAL INFORMATION
This article may include certain "non-GAAP financial measures" as defined in Regulation G under the Securities Exchange Act of 1934. A schedule is posted on the Company's website at www.coca-colacompany.com (in the “Investors” section) which reconciles our results as reported under Generally Accepted Accounting Principles and the non-GAAP financial measures included in this article.
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