Contribution Of U.S. Soda Sales In Coca-Cola’s Overall Revenue Could Decline To Less Than 15% By 2020

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The Coca-Cola Company

Although 73% of The Coca-Cola Company‘s (NYSE:KO) volumes are constituted by the core carbonated soft drinks (CSD) divisions comprising Coca-Cola, Diet Coke, Sprite and Fanta, and Coke Zero, Sprite Zero, and other drinks, these divisions combined to form 63% of the company’s value, as per our estimates. The U.S. alone formed 46% of Coca-Cola’s sales in 2015, and thus sales in the home market are significant in shaping the overall revenue for the company. CSDs have declined for the eleventh consecutive year in the U.S., but still form almost 40% of the overall liquid refreshment beverage market in the country. As customers continue to ditch sugary sodas for alternatives such as sports and energy drinks, carbonated water, and ready-to-drink teas and coffees, the decline in CSDs has proved to be detrimental for Coca-Cola — the world’s largest maker of sodas — 67% of whose U.S. volume is comprised by sparkling beverages.

KO Q&A 7

However, percentage contribution of U.S. CSDs to Coca-Cola’s overall sales could significantly decrease by the end of the decade. Here’s why:

  • 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. This will reduce the revenue to Coca-Cola from sales of its products, however, the operating margin will increase. Also, this could reduce the percentage contribution by the U.S. to Coca-Cola’s overall revenue. Refranchising in North America could be followed by mass refranchising in other parts of the world too, but these changes might be undertaken after the end of this decade. Till then, the refranchising in North America is expected to lower revenue from the country, but improve margins in the region.
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In this article, we will focus on the possible impact on revenue. Assuming that proportionate sales from the U.S. decrease to 40% of the net sales by 2020, and percentage revenue to Coca-Cola decreases to 35% (the rest to independent bottlers and distributors), proportionate sales of U.S. CSDs decline to 14% of Coca-Cola’s net sales by 2020, from 25% in 2015, as per our estimates.

KO Q&A 7-1

Revenue growth for Coca-Cola in the next five years is expected to come from developing markets and other beverage segments, such as sports and energy drinks and bottled water, which are growing faster than CSDs. Having said this, U.S. CSDs should continue to add value to Coca-Cola, as revenue will decrease from the region, but margin is expected to improve.

Have more questions on Coca-Cola? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Coca-Cola

 

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