We caught up with Coca-Cola President and COO James Quincey for a conversation about the company’s second quarter 2016 earnings report. Here are his key takeaways:
As you look at the second quarter results and company performance in the first half of this year, what are your main takeaways?
To get a clear picture of Coca-Cola’s underlying performance, it’s important to look at what is driving our business forward and what really is the engine of Coca-Cola’s future. This is what we call our core business – or what will primarily remain once we complete refranchising a significant percentage of our company-owned bottling operations around the world.
This quarter, we faced challenging macroeconomic conditions in several international markets where we own bottlers. While our reported revenues were down 5% primarily due to the impact of our refranchising efforts and foreign exchange headwinds, we grew organic revenues globally by 3% and, within our core operations, even better than that at 4%. In addition to this, profit was in line with our expectations.
So, once you clear out some of the fog from foreign exchange and changes driven by refranchising, you begin to see a clear outline of the company we are becoming. One that is focused on our core value creation model of building strong brands, enhancing customer value, and leading our franchise system. This is the engine of our future, and it is healthy and growing.
What is the status of the company’s refranchising efforts?
Simply put, we’re on track. Earlier this year we announced our commitment to refranchise 100 percent of our North American bottling territories by the end of 2017, in addition to accelerating our refranchising plans in international markets including China. Adjusting for these transactions, the percent of our 2015 volume sold through company-owned bottlers would have decreased from 18% to 3%, representing a significant transformation of the size and focus of our company.
Over the past few months, we successfully completed the Coca-Cola European Partners and Coca-Cola Beverages Africa transactions, and announced a plan to transfer certain territories in the U.S. to a new venture between Arca Continental and Coca-Cola United. We have also reached a new understanding with Coca-Cola Femsa regarding joint value creation in Mexico and certain territorial expansion opportunities for company-owned bottling operations, which was announced just this morning.
None of this would have been possible without the continuous investment and significant contributions of our Bottling Investments Group. When we’re finished, BIG will be smaller and more focused, but will remain a critical strategic growth enabler for our company.
Global volume was flat in the quarter and global sparkling volume declined. What is the company doing in response?
The outlook for sparkling should not be thought of as though the world is flat. We have been clear for a couple of years now that our primary focus is on growing revenue and profit ahead of volume. There are parts of the world where our strategy is to have more of a pricing-led approach, even if volumes are flatter. For example, in markets like North America, we are moving towards selling smaller packages instead of bigger packages. Thanks in large part to this strategy, our North America business had another strong quarter, reporting 4% organic revenue growth and the 25th consecutive quarter of value share gains in our industry. This is really good performance by our team in our flagship market. So clearly our segmented market strategy is working.
There are other parts of the world where, frankly, we were buffeted by the broader macroeconomic environment, such as China, Argentina and Venezuela. We had some concentrated declines in volume in a few places. But we’ve lived through cyclical downturns before and understand how to manage the business. It requires a disciplined approach to pricing relative to inflation and – where necessary – working aggressively to address consumer dynamics through adjustments in terms of affordability and new product innovation.
We also had other emerging markets like in Southeast Asia that continued to have strong growth in both total nonalcoholic ready-to-drink beverages and in sparkling. So we see a future where developed markets have much stronger growth in value – or dollars – and where emerging markets skew more to volume. But, in total, this all points to continued revenue growth for the sparkling category.
You now expect full-year 2016 organic revenues to grow 3%, which is lower than expected earlier in the year. Why is that and how is the company addressing it?
Our reduced expectation for organic revenue growth this year is driven primarily by international markets where we own bottling operations and are seeing broader macroeconomic challenges.
If you look at a market like China, we own a significant percentage of our bottling operations there. Because a bottler has about five times more revenue than our concentrate business, slowdowns in these markets disproportionately impact our revenues. So when the macroeconomic environment in a market like China weakens, it drives a lot of the difference we are seeing in our organic revenue growth of 3%.
That said, we are taking action in these markets to address this environment and remain focused on the long-term opportunities available. For example, in China, home to more than 1.4 billion consumers, we absolutely believe in the long-term opportunity that is available to us for growth.
It seems consumers are moving away from traditional sodas toward other beverages like water, tea, dairy and juices. How is the company positioned to capture that growth?
As markets grow and expand, it’s often the case that consumers desire, and have, far more choice in the array of available products in any given category. That is indeed true of beverages. However, it is worth saying that this expansion of variety does not equate to a decline in sparkling beverages. Sparkling continues to grow robustly in revenue terms in line with our segmented approach to growing revenues around the world. In fact, sparkling beverages remain the No. 1 driver of revenue growth for the entire nonalcoholic ready-to-drink beverage industry globally.
But we are also actively participating in the expansion of choice for consumers across the beverage industry. Since 2000, we’ve increased our business from about 10% of our volume coming from still beverages to almost 30% today. And just a decade ago, we were a company with only 10 brands generating more than $1 billion annually in retail sales. Today, we have doubled this to 20 brands. And, in our portfolio of billion-dollar brands, more than two-thirds are now still beverages such as juices, waters, coffees and teas. In fact, we are the world’s No. 1 still beverage company.
As we look ahead, we will continue to ensure we are innovating and adapting to offer products that are in line with – or even ahead of – where consumers are going. For example, we recently announced plans to acquire AdeS, the leading soy-based beverage brand in Latin America. And in the U.S. we invested in Suja, one of the country’s leading organic, cold-pressed juice brands, and fairlife, a premium, cold-filtered milk brand. And we continue to invest in growing exciting brands like Coca-Cola Zero Sugar in Great Britain, a new and improved sugar-free Coca-Cola which is replacing Coca-Cola Zero in that market; I LOHAS and Georgia in Japan; Simply, Gold Peak and Dasani in the United States; and many others.
Given the headwinds in the sparkling beverage category, how are you going about growing the Coca-Cola trademark?
The Coca-Cola trademark, which is the core of our business, absolutely can grow in many of the ways we measure it. We can grow volume. We can grow revenue. We can grow transactions. We can grow brand health. We can grow engagement with consumers.
We’re encouraged by our recent roll-out of our new "One-Brand" global marketing strategy that, for the first time ever, unites Coca-Cola, Coca-Cola Light/Diet Coca-Cola, Coca-Cola Zero, and Coca-Cola Life under the iconic Coca-Cola brand positioning in one global creative campaign, "Taste the Feeling." We’re early in this journey, but we believe the one brand innovations we are rolling out will build on the success we’ve already had in introducing new package offerings like the 7.5-ounce mini-cans and aluminum contour bottles. And, together, these initiatives will continue to position Coke as a preeminent part of the beverage landscape.
This Q&A includes certain "non-GAAP financial measures" as defined under U.S. federal securities laws. Refer to our second quarter 2016 earnings release issued on July 27, 2016, 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 press release 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 Report 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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