Beverages for Life
President and Chief Executive Officer
Good afternoon, everyone. Welcome to Atlanta. It’s been a while since we’ve had everyone here for an Investor Day. So welcome. Hopefully, you had an opportunity to see some of the stands out there, and dig into them, try some of the beverages, see some of the setups. If you didn’t, of course, there’ll be an opportunity in the breaks. I think, there’s some interesting products, some interesting ideas out there and of course a degree of openness about where we’re going and what we’re trying to do. So let me jump in and start setting up the day of the presentations. Of course, you’re all more than familiar with this statement, which you’ll see repeatedly through the day.
Okay. Let me connect us in a way back to where we were earlier the year. We set out strategies earlier in the year, we set out a destination, we set out an idea of beverages for life. And I want to connect you back to that and start filling in some of the texture and some of the ideas and some of the things that we need to do to bring it to life. The destination was clear, yes, it was beverages for life. I think that in itself is as I talked about at CAGNY, encompasses the shift to a total beverage company that we’re trying to push for. It’s not a journey that started this year, actually it started a while ago, over 10 years ago. But, I think, we’re being very decisive and assertive in saying we want to go for total beverages.
We want to be participating in each of the eight beverages people drink during the day and we want to round out that portfolio. So the first part of the destination that we set very clearly was accelerating the move to a total beverage company and we’ll talk about that today. We also set and thankfully we’re very close, as we closed obviously the U.S. at the end of last month, we’re returning to being a brand focused organization. Returning to the core of what we’ve always been able to do well, which is building, nurturing and keeping relevant brands for consumers.
And lastly and also make all of that happen in the 21st century environment, we’re driving culture change, we’re driving culture change in the way we operate, the way we engage with the bottling system and the way we go to market collectively. So, the destination of where we want to go is clear.
It is worth just pausing for a second to remind ourselves of the strong foundation from which we’re starting from. We are perhaps the envy of many companies in terms of our starting point, that foundation, yes, we’re number one in sparkling beverages, which of course everyone knows and expects. We’re also the number one company across any RTD, non-alcoholic ready to drink, with the number one juice, dairy plant company. We are the number one hydration company, we’re the number of tea and coffee company around the world. So we already have a great position. Not all those share positions were born equal, but we have a great starting point in terms of the portfolio, and we’ve been able to build those brands over time.
Since 2007, just a little before the last analyst meeting, since then we’ve doubled the number of billion dollar brands we have. We have a fantastic go-to-market system with our 250 plus bottling partners. We reach those 27 million customer outlets which I think (importantly) cover 20 different channels, and we have a balanced global distribution, balanced global portfolio. In almost rough terms, our profit come a quarter each from each of the operating groups. So fantastic strong foundation of brands, distribution and knowhow.
We also participate in a great industry. I think, firstly, it’s worth noting that this is an industry that has a diverse sales base. If you want to simplify those 20 channels down a little, to just the modern grocery trade, the traditional mom-and-pops and everything else eating and drinking, you will see that the industry of beverages is broadly distributed unlike virtually any other industry across multiple channels. So, there’s diversity in our business. There’s also strong growth in our business. In percentage terms, beverages are growing faster than many other consumer products. And finally, it’s not just a game of percentages; as you all know, it’s about the dollars, and that growth rate of about 4% across the world in percentages is really going to drive about $150 billion of extra growth through 2020. So it’s got a diverse customer base, it’s got leading CPG growth rates and it’s a lot of dollars. So, got a clear destination, a great foundation and we’re in a very attractive industry.
Of course, nothing in this world is without its challenges or opportunities depending on how you want to see them and that’s just as true of the consumer products industry. Consumer preferences are changing. They’re changing around ingredients, whether it be less sugar at times, whether it be more natural, whether it be organic, whether it be just really understanding the core provenance of where the product is coming from. Sometimes it’s about where they buy them, how they buy them electronically. The shift from the bricks-and-mortar – and maybe not to everything online for grocery, but the digitization of the total experience of shopping is part of what’s going on.
You can see it in your own lives, you can see it around the world; this is not just a First-World phenomenon, it’s across the developing and emerging markets too. Consumer preferences are changing fundamentally and that’s making the category shift, and it’s making the products within the category shifts. Of course, some of these could be representative challenges, but for an industry or for a company better said like ourselves, with a great foundation and the capabilities, we can turn those into opportunities to drive not just the growth, but the share gains for ourselves.
The digital evolution, I touched on it in the sense of the consumers’ preferences and how they’re changing their behaviors, how that’s affecting their interactions through social media, how that’s changing the way they shop, but that digital evolution will flow back through the system. We will have to partner in different ways with our customers. We will have to re-engineer our own supply chain to be even more digital.
And of course last, certainly by no means least, regulation and taxation. The food and beverage industry is certainly coming under the microscope for more regulation around the world. There are instances of taxation particularly on sugared beverages and sometimes broader, but including sugar beverages, and we have to confront these realities. We have clear points of view and beliefs about why and when taxation is a useful vehicle and how it should be implemented, depending on the objective, depending on whether the objective is to generate funds for the government, or to try and help solve the obesity problem. We are clear we need to be part of the solution. We have a clear strategy, we obviously have a clear view as well on narrow taxation not being effective, but we think we can help to solve the obesity problem. But we have to turn each of these challenges into opportunities.
And with that, we focused on five clear strategies: Accelerating the growth of our consumer-leading, consumer-centric brand portfolio; driving the revenue growth algorithm; strengthening our system’s value-creation advantage; digitizing the enterprise – or if you used the like the old phrase, “Our products need to be within an arm’s reach of desire,” maybe in the future that needs to include, they need to be within a click’s reach of desire; and then last but not least, unlocking the power of our people. And in doing that, we need to make the right choices and invest for growth.
So hopefully that’s connected a little bit back to where we’ve been talking about the story over the course of this year. The clear destination, the beverages for life, fantastic foundation, real growth industry, yes with challenges but with lots of opportunities. And so with our clear five strategies, let me take them – let me tell you a little bit about what’s happened so far, but also talk about each one, sort of as a platform to lay out the pieces of the rest of the afternoon and connect with the rest of the presentations that you’re going to see come along.
What have we done so far? We’ve done a lot. I mean, one of the principles we’ve been trying to live up to in this ever faster exponentially changing world is to move quickly. We’ve taken the bull by the horns – I’ll talk a little bit about culture as we get to the end of this presentation, but speed and not waiting for everything to be perfect is one of the things we’ve been trying to do. And let me just, perhaps, highlight a couple of the things that we’ve done so far during the year, to really try and push ahead with these strategies. Rather than perhaps, talk about Coke Zero Sugar, which we’ll touch on later, let me underline the bit on test and learn because I think that’s becoming really important for us as part of the culture.
In the past, we would see ourselves more like the set piece battles. You prepare for a very long period of time, for a product launch, you try and make it perfect and you go for it; and that means it took a long time and you did relatively few of them and you bet big on whether it will work or not. The future is not going to be like that. We must be much more agile, get things to market quicker, maybe smaller, test, learn; if they don’t work, they don’t work, move on. If they do, take them to the next stage. So, I think part of what’s embedded in that is the test and learn approach, and that’s even true in Coke Zero Sugar. It wasn’t one monolithic idea launched everywhere, there were waves that went through different iterations.
The next thing I’d perhaps underline in our journey so far this year is the revenue growth management acceleration. Of course, we’ve been trying to chase price, we’ve been trying to chase mix, we’ve talked about packaging strategy, and we’ve done a lot on revenue growth management over the years, but we’ve been refreshing the whole idea; and in some of the later presentations, we’ll talk about how we’re bringing that to life in new ways and also to places that perhaps haven’t done it as profoundly as perhaps we should have done in the past.
We’ll talk about the new re-energized bottling system; we’re not going to be talking – mercifully, we’re not going to be talking about progress on re-franchising; the map is finished, a couple of countries to go, but let’s say in big terms the map is finished.
So, what we’ll talk about is how this new system is energized to chase the beverages for life. Digital is coming, don’t worry; and then I’ll talk about unlocking the power of the people. You all know that we’ve done a number of things so far this year already, new operating model, the Lean Center, earlier this week we launched an update to our compensation approach, I’ll touch on those a bit more later on. So, we’ve got out of the door fast, trying to bring new energy and new life to the year against the five strategies.
Let me now connect to each of those strategies and try and just tease out a little more information, give you the overall story, but also provide some connection points to the presentations that are coming up. Let me do that firstly by taking the first two strategies, the consumer-centric portfolio and in a way the revenue growth management, because they’re kind of tied together.
On the kind of the top bit, to some extent, we’ve talked about that before; how do we drive our global portfolio? Clearly, a lot of it comes from our own internal innovation. We’ve talked at times over the years how actually the majority of those billion-dollar brands that we’ve got, the majority of them were actually created internally. So we have, working through our ecosystem of innovation partners, we have, between ourselves and those partners, an ability to generate new ideas and turn them into big brands. So, continuing to invest in world-class innovation, doing it in a different way, yes, we’re becoming much more open-source if you like, than proprietary, trying to leverage the scale of all the supply base rather than just do everything ourselves, trying to do it more in a test and learn approach than big few set piece battles. We’ve got a track record of innovation and we believe we can leverage that to drive more progress in the marketplace.
Clearly, we operate in 200 countries plus, having a success in one country, unless it’s a couple of countries frankly almost doesn’t move the needle. The needle only really moves when it’s a big success in more than one of the big countries. So, lifting and shifting, whether it ends up being the same brand or that idea reinterpreted under an existing brand elsewhere, our ability to lift and shift the best ideas and the most successful ideas around the world is absolutely critical to our ability to create these – more billion dollar brands on a diverse portfolio.
And yes, that was still be a role for bolt-on M&A. When Kathy talks, she’ll talk about how that’s reflected in the numbers, but we absolutely continue to believe there are opportunities to pick up some of the smaller companies, great brands, great companies, make them bigger where they are, and certainly make them bigger by taking them globally. So, bolt-on M&A will continue to play a role for us.
Now, to some extent, we said that before. I certainly said it in CAGNY and some of the other investor presentations. It’s about doubling down. What I want to connect to, which Francisco is going to talk a lot about is how are we going to be disciplined with that growth. Because, the more innovation you have in the more countries, in more categories, the opportunity to get anarchy and total destruction starts going up.
So we need to being more discipline to our approach of how do we make sure that in the big amount of innovation we create ends up in fewer successes not in a kind of jam-sandwich approach without it resulting in good results. So Francisco will come and talk, talk about the discipline of growth.
How we are very clear on the importance of everything ending up and having quality leadership, if it’s just a – also ran small few points of market share, it’s not worth the hassle. Quality leadership is key. He’ll talk about how we view, what needs to be done to build a brand on to the idea of quality leadership and how that’s different by the different stages of growth.
So, we have a clear idea of how we need to grow our portfolio, the sorts of ways we need to grow it and we’re super clear that, that only can be done if we’re very disciplined. And as I said Francisco, we’ll delve into that a little more deeply.
The third strategy was strengthening the system, system’s value creation advantage. Reality is, as I said mercifully refranchising has ended. You know, the system is unclear, it’s reenergized. In fact, we were, the Global System Meeting earlier this year in May, we were talking about what needs to be done to bring beverages for life, to life.
Now it’s not exactly the same everywhere. It’s the starting points different so as the group presidents come up and talk, they’ll talk about how their parts of the world are pursuing the journey towards beverages for life. And yes the journey is in different stages in different places. So there’ll be different mixes of how important is it to get into new categories at what speed, that the starting points are different. The role of our GM in that will be different.
So each of the groups will give a little more of a nuanced story about how that, where they are on the journey and how they go forward. But each of them will talk about how they’re engaged and how energized the bottling partners are to go with us on that journey, having got the map finalized and having largely reset and clarified how economics work going forward.
So, progress on the portfolio, progress on the revenue algorithm and engage with the system going forward.
Fourth strategy is around digital. Clearly, digital is our core component and I think it’s almost in danger of becoming everything and at times nothing. Therefore, I think it is really important we break it down and get specific about some different parts. Digital marketing, I mean everyone knows the consumer needs to be engaged with us in a different way. Enough has been said about that in terms of how millennials, how the world is changing in terms of consumption of media. Francisco will talk a little bit about how we’re starting to – how we’re adapting – the progress we’ve made and what’s left to be done in terms of engaging with consumer in terms of digital marketing. So that’s one bucket the way we see it.
The second one, is kind of eCommerce. We see ourselves predominantly working with our customers across all those varieties of channels, I talked about, to help those customers succeed and win against their strategies, and many of them have an eCommerce component or a digital component, not just the pure online players, but also the ones whether they’d be supermarkets who are going online, whether they’d be takeaway food delivery going straight to the consumer, our approach has been to work with them through their platforms to create value in their strategies.
We’ve tried a few experiments in going direct-to-consumer, whether that’d be in developed countries or in places like China, in the end I think the majority is going to – large majority is going to go through the customer platforms and we’re going to create value with them that way.
Obviously, we had to find somewhere in the presentation the room for a cute expression and so the next one is that, so the eKO system, the digital world needs a new eKO system. So, I don’t know who got the creative prize for that, but that’s the idea. We need an eKO system. Doing what needs to be done with the consumers in a new way, doing what needs to be done with the customers in a new way requires the system the bottlers and us to have a different set-up. We’ve got to be different, new eKO system. And Kathy will talk a little bit about some of the stuff, we’re doing internally.
We’ve made some good progress in the last couple of years, reformulating the way all our systems work with the way our processes work. We’ve implemented a whole series of things between software like Workday between some of the robotics, the automated intelligence. We’ve got more to do. We’ve got more to do. Because there’s no way we can aspire to help engage with our consumers and help our customers, if we ourselves can’t be at least on the front-edge in terms of how things work digitally. So we’ve made a lot of investment and we’re doing a lot of work to bring that up to speed internally. And we are working with our bottling system to do that. So digitizing enterprise three big buckets, the consumer, the customer, and the internal piece.
Last of the five strategies, but by no means least. We made a number of changes earlier this year to become even clearer on the operating model. Yes, part of that was in anticipation of the end of the refranchising. Simply put, a few years ago, we were a company trying to administer a 150,000-employee organization and by next year, we’ll be sub-40,000 employees. So, we just needed a smaller center.
Second, we took advantage of the digitization internally I just talked about, and embedded some of those new ways of working. And third, we made some choices about what needed to be done at the center. We clearly have some leadership and governance roles, but we wanted to push more empowerment to the field, more empowerment to the countries. If you’re in a process of divergence, if you’re in a world that’s becoming a little more local, you need the field to have more power to act and to move quickly.
So the sum of all that was we got clearer on what the lean center, corporate center needed to be. We’ve made some painful adjustments to the head count. We did it in a coat way with dignity and humanity, we got through that and we’ve got a smaller leaner center because it’s more fit for purpose going into the future. Got clearer on what are the services that are needed to support the field and the field to be more empowered to act in this new broader portfolio and more local world.
Supporting the structure, we made some updates to compensation. It’s not a 180 degrees change, it’s an update. But we made some updates earlier this week to our compensation approaches. We’ve got – we’ve made it simpler and I think clearer on how it supports growth. We took out volume as one of the metrics, revenues there.
Now in lots of parts of the world, volume is going to be the principal driver of the revenue, if you’re in the emerging markets in Southeast Asia or India. So it’s not like volume disappeared from the equation, it’s just let’s get clear. We want revenue and whether that’s places like the U.S. which is more price mix and not much volume or places like India, which is much more volume and less price mix; in the end we’re after revenue and we’re asking the countries to build the franchise. So we’ve made that adjustment.
We – in some of the long-term incentives we took out for example economic profit. Whilst it might have been the best mathematical or best theoretical answer, it’s not so easy to people to follow. So we swapped that into EPS and cash flow, making it simple because they can see those numbers in our quarterly reports.
To trying to simplify things, trying to keep people focus on the very simple idea. It’s about the top line, without the top line growth, we can’t generate the profit growth and it’s the profit growth which will help us drive our U.S. dollar EPS. So made some updates to compensation. And I think that will – and it’s got some flexibility in it to help support those in the organization who contribute the most.
The last element, culture. Culture, as you all know, is super important, doesn’t matter what you say on the structure should be, doesn’t matter what you say the strategy should be, if the culture drives it in a different direction, that’s always going to be a problem. So we need to continue to push on the culture. You, investment community, other people have given us feedback on our culture over the years, and it wasn’t where we wanted it to be, too big, too slow, too bureaucratic. Not all of it was bad, but those were some of the elements that were on the negative side.
We’re clear, we need to push it harder. We’re clear that in order to drive a total beverage company, we need to be much simpler with people in saying, look, it’s about growth, we need to have a growth orientation. And we can say there are lots of different pieces in the culture and culture can become very complex, it can become very nuanced.
Let’s start with a simple idea. It needs to be growth orientated. And if we have to call out a few things, then I think it’s about four. We have to be curious. If we’re not curious about how the consumer is changing, if we’re not curious about the customer strategy and how they create value, we’re not going to come up with the right ideas. And every large organization, every large institution, the natural tendency of getting bigger and getting successful, it tends to be less curious about the outside world. So let’s underline curious about the outside world. Let’s underline inclusive. It’s no point just being curious on your own if you’re not bringing in divergent ideas, if you’re not looking out across the broad world of Coke where something has probably already been done that you need, then you’re missing a chance.
We also need to underline empowered. In a large institution, a successful larger institution, sometimes people in the field think there are more rules than there actually are. They have just assumed that they can’t do things. Now we need to turn it around. We need them to think that they’re allowed to do things unless it’s very clear that they can’t rather than them only thinking they can do the things that are authorized. We need to re-underline empowerment which is part of the structural approach.
And then lastly, back to the Version 1.0, Version 2.0, Version 3.0, if we can’t become faster, more experimental, cycle faster through ideas, experiments, insights, learnings, on to the next iteration, we won’t be able to expand not just across the categories, but across the number of countries we need to succeed in. If I would underline those four things all in the service of a greater growth orientation.
So with that, I hope, that I’ve started to paint a picture of what the day is going to be about, what we’re trying to underline in these presentations we’re sharing. I kind of tried just to summarize here against each of the presenters, where that connects to the things I’ve seen – things you’ve just seen, whether it’s Francisco, who’s going to talk about the discipline of quality leadership, the group presidents whether they got a more advanced portfolio or they’re trying to catch up in terms of expanding out of sparkling and then of course, Kathy is going to come back at the end and talk about how we’re delivering on shareholder value.
And let me perhaps leave with one last page, which is our reaffirmation of our long-term aspirations in terms of the numbers. We believe we can get the revenue into the 4% to 6% growth rate range organically. It’s an industry that’s growing and we have a track record of gaining share with a clearer focus on what we need to do, being this leader in the growth industry with our footprint, the destination and the strategies we can drive the top line. Because in this new model, the brand orientated model, it’s the top line that drives the rest of the equation. Go get the top line. Yes, there’ll be some leverage. We’ve talked about the margin expectations, we’ve talked about the growth of operating income and we believe we can turn that into not just EPS, but into cash. So, I think it’s going to be an exciting journey, an exciting new phase of growth with a culture that underlines that expectation that we can turn this into a successful and growing future.