Earlier today, Coca-Cola reported fourth quarter and full-year 2016 results. We spoke with James Quincey, the company's president and chief operating officer, about the report and the road ahead.
Last year was your first full year as Coca-Cola’s COO. How do you feel about where the year landed?
2016 was another year of big change for our company, our system and our industry, as consumer preferences evolve, technology and e-commerce transform the retail landscape around us, and global economic conditions, especially in emerging markets, remain challenging.
Despite all of this, we fast-tracked the refranchising of company-owned bottlers, further advanced our work to focus on revenue growth ahead of volume, introduced a new marketing approach for Trademark Coca-Cola to accelerate the growth of low- and no-sugar variants, and continued to scale and expand our brand portfolio to match changing consumer tastes around the world. It’s a credit to our people that we made a lot of progress in all of these areas, and ended the year with full-year profit growth in line with our expectations.
That said, we have to do more. In the year ahead, we are going to be laser focused on building and expanding our portfolio of consumer-centric drinks, including those with less sugar and calories; further evolving our approach to growing revenues from our global sparkling soft drink portfolio; and driving productivity through the organization to reduce complexity and redirect resources to drive revenue growth in a world with fast-changing consumer patterns.
What about the fact that reported revenues and profits declined significantly in 2016? Can you explain this?
The short of it is that we have a lot of moving parts in our business as we refranchise company-owned bottling operations in North America and around the world. As we sell these operations back to our aligned franchise partners, reported revenue and some profit goes with those sales, so we only seem to get smaller. Until we complete the refranchising process, we will continue to see these impacts to our reported results, especially in 2017 as we complete the biggest parts of the program. All this, though, is consistent with our growth strategy of returning to our core focus of building great brands and leading a strong global franchise system.
'The rate at which change occurs will be a function of our ability to innovate, market and execute so that we meet consumers’ needs with great tasting drinks with an evolving range of sweetness. If we do that, no matter the mix of drinks we sell, we will be successful.
Organic revenue growth was strong in the quarter, but volume remains under pressure. How important is increasing the pace of volume growth to future success?
Volume is just one piece of the equation that drives revenue. Our focus is to ensure we have a balanced approach to growing revenue between volume and price/mix. In the fourth quarter, we derived most of our global growth from strong price/mix rather than volume. Over time we have to do both in a more balanced way, but each quarter presents unique challenges that we must navigate.
In fact, in the fourth quarter, we saw good volume growth in both sparkling and other beverage categories in developed markets like the United States. But sustained economic recessions in markets like Brazil, Venezuela and Argentina weighed heavily on our ability to grow volume globally. While we could have intensified promotional activity to drive volume growth in these markets, we believed that it was not the best use of resources. Looking forward, our local teams are further adjusting our price/pack architecture in markets like Brazil to ensure our offerings meet the needs of consumers who are facing a tough economic situation.
Net net, we achieved strong organic revenue growth in the quarter while gaining global value share in total nonalcoholic ready-to-drink beverages.
You mention the need to create more drinks with less sugar and calories. How dramatically do you plan to change the mix of the products we make and sell?
We have been adapting our portfolio over the years to meet consumers changing needs and to be competitive in the market. This has been driven by broad change in our portfolio, including the addition of nine new billion-dollar brands and roughly 1,000 new products over the last decade.
Where we have to go now is to think holistically of the many beverage categories available to us for growth. The consumer doesn’t think about their drink choices as “sparkling” and “still.” They see a wide range of beverages that meet a variety of needs from energy to hydration to nutrition to simple enjoyment. What we see for the future is significant growth available to us across this wide variety of categories. The rate at which change occurs will be a function of our ability to innovate, market and execute so that we meet consumers’ needs with great tasting drinks with an evolving range of sweetness. If we do that, no matter the mix of drinks we sell, we will be successful.
'In our history, our biggest successes have come from products that inherently meet a consumer need.'
What about the North American business? It seems growing category headwinds are placing added pressures on the business in our largest market. Is this impacting our results?
The performance of our flagship North American business is strong. During 2016, North America again outperformed the retail value growth of both the North America nonalcoholic ready-to-drink beverage industry and total U.S. consumer packaged goods companies. This builds on the sustained growth we have seen for the last two years. We saw strong 4% net revenue growth for the year, on top of strong 6% net revenue growth last year. We have a great team of people in North America under Sandy Douglas’ leadership who have led a transformation of our largest market to deliver this type of sustained revenue and profit growth by evolving our offering of products and packages to reflect what people want.
Given the success in turning around North America over the last few years, what will it take to restore growth in emerging markets?
The trajectory of growth in emerging markets is very different than the strength we are seeing in our developed markets. This is primarily because emerging and developing markets have been disproportionally impacted by significant pressures on the disposable incomes of the consumers who enjoy our products. While our business once thrived on the roaring growth of emerging markets and a growing global middle class, many of these markets are now seeing subdued or negative GDP growth.
The good news is that we have been in this business a long time and have a number of strategies to employ to ensure we maintain the affordability of our products when markets are impacted by sustained recessions. This strategy includes the continued introduction of smaller, more convenient packages, which fits nicely with our broader strategy to help consumers manage their consumption of added sugars. This gives us confidence that growth will return.
You were recently named as Coca-Cola’s next CEO. What are the immediate changes on the horizon once you take the helm?
You’ll see us moving quickly to continue to introduce beverages and packages that are driven by what consumers want. In our history, our biggest successes have come from products that inherently meet a consumer need. In Japan, for instance, our popular green tea brand Ayataka meets the consumer need for authentic green tea just like you can brew at home but available on-the-go. In the U.S., mini cans of Coca-Cola respond to consumers’ desire for both convenience and less sugar and calories. Thanks to their direct connection to consumers’ needs, both of these products are growing volume at high single-digit rates. The simple truth is that our decisions can’t be made on what we want to sell to consumers, but rather what they want to buy from us.
This Q&A includes certain "non-GAAP financial measures" as defined under U.S. federal securities laws. Refer to our fourth quarter and full year 2016 earnings release issued on Feb. 9, 2017, available on the Company's website at www.coca-colacompany.com (in the “Investors” section), for full financial results and a reconciliation of non-GAAP financial measures.
This Q&A 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; an inability to be successful in our innovation activities; 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 one or more 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 marketing or sale 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; failure to adequately protect, or disputes relating to, trademarks, formulae and other intellectual property rights; 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 relationship with 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 our refranchising activities; an inability to successfully manage the possible negative consequences of our productivity initiatives; an inability to attract or retain a highly skilled workforce; 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, 2015 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.
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