Coca-Cola Ends Its Transitional Year With Solid Organic Growth; Structural Changes To Alter Business Going Forward

The Coca-Cola Company (NYSE:KO) has ended its transitional year with solid volume growth across both sparkling and non-sparkling beverages. In the Q4 and full year results, announced on February 9, the company reported 4% year-over-year organic sales growth. Although the net sales declined 4% to $44.3 billion, due to a 7 percentage point negative impact of unfavorable currency translations, global volume growth of 2%, including a 1% rise in sparkling volume, reflects strong core performance. ^[1]

We estimate a $42 stock price for Coca-Cola, which is slightly below the current market price.

See our full analysis for Coca-Cola

2015 had been a transitional year for one of the world’s largest fast-moving consumer goods company, which is looking to restructure, consolidate some of its operations, and spin-off some others — all in a bid to drive operational efficiencies, reduce supply-chain costs, and improve profitability. Coca-Cola is moving away from a capital-intensive organization with its intended refranchising plans for North America, and now, China, and structural changes in Europe and Africa.

Coca-Cola is looking to refranchise two-thirds of its bottling territories in North America by the end of 2017, and a substantial portion of the remaining territories no later than 2020, in a bid to move away from the capital intensive and low-margin business of distribution. All this in hopes to improve operating performance. So far, the company has transferred or signed agreements for territories covering over 40% of U.S. bottle can volume, and announced the creation of the National Product Supply System, to strengthen and streamline U.S. production. In addition, Coca-Cola aims to close the combination of Coca-Cola Enterprises, Coca-Cola Iberian Partners, and the company’s subsidiary Coca-Cola Erfrischungsgetränke AG into one bottling company called Coca-Cola European Partners, and the combination of SABMiller, Coca-Cola, and Gutsche Family Investments (GFI) bottling operations in Southern and East Africa into Coca-Cola Beverages Africa, by the second quarter. What the consolidated bottling operations will do is trim the extra overhead costs, improve supply-chain efficiency, and leverage the best practices of each of the bottlers to improve service to customers and consumers across Western Europe and Africa — the company hopes.

Coca-Cola’s focus is on building strong, sustainable and valuable brands, driving system capabilities, and becoming less capital intensive, with higher margins and returns. The company’s refranchising plans and investments in small, yet budding brands, are testament to this strategy. There is the Monster deal and the premium milk brand Fairlife, which could add incremental sales going forward. The company signed a distribution agreement in the U.S. with Suja, a high growth organic cold-pressed juice company, last quarter, and recently announced an investment in Chi Limited, Nigeria’s leading value-added dairy and juice company. The company had also announced plans to expand into plant-based protein drinks through the acquisition of the beverage business of China Green Culiangwang Beverages Holdings in China. The news of JAB Holding buying Keurig Green Mountain, in which Coca-Cola held a 16% stake, also bailed out the beverage giant, which was nursing an unrealized loss of about $1 billion through its equity position in Keurig.

Coca-Cola remains committed to add to its already strong portfolio of twenty $1 billion brands, and other fast-growing strong regional brands.

What boosts the company’s strategy is the solid performance of its products, especially in North America, which formed half of the company’s top line in 2015. Coca-Cola achieved 3% growth in unit sales in the region in Q4, including a 2% growth in sparkling volume and a larger 6% growth in non-sparkling volume. North America sales growth carries significant importance for Coca-Cola not only because it’s the home market, where the company derives a substantial portion of its revenues from, but also because growth in this market is challenged by the ever-so-growing health and wellness concerns, so it becomes difficult to extract growth. Evolving customer preferences, and a shift to a healthier diet, present obstacles to growth for the company, which sells beverages that are often blamed for health problems and the widespread obesity concerns. However, Coca-Cola saw growth in its soda portfolio in the 4th quarter, which can be attributed to the positive economic environment, strong marketing and advertising, and branding.

The diets have fared even worse than regular soft drinks in the last couple of years in the U.S., as customers have grown skeptical about the safety of the artificial sweeteners used in these drinks. However, while Coca-Cola saw Diet Coke volumes decline for yet another quarter, Coke Zero grew. In fact, according to the company, in the 80% of its business which is the international business, variants of Coke, including the lights, diets and Coke Zero, outgrew Coke Classic. ^[2]

While Coca-Cola’s organic growth remains strong, negative currency translations have taken a toll on the company’s financials. A large 23 percentage point negative impact of weaker foreign currencies more than wiped out an 11% rise in organic revenues in Latin America. In 2016, Coca-Cola expects continued macroeconomic volatility, especially in Brazil and Russia, which will impact its financials. Organic revenue is expected to grow 4-5%, backed by the media and marketing investments made by the company to grow its brands.

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1. Coca-Cola press release [↩]
2. Coca-Cola earnings transcript, seekingalpha.com [↩]