Coca-Cola’s Structural Changes Dent Q2 Results

by Trefis Team
Coca Cola
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The Coca-Cola Company (NYSE:KO) reported its Q2 and half-yearly results on July 27, and as expected, negative currency translations and continual slowdown in the demand for sugary carbonated soft drinks (CSD) hindered top line growth. Organic revenue rose 3% year-over-year in Q2 on 3 percentage points of positive price and package mix, but currency pulled down the top line by 3 percentage points. However, net sales declined 5% year-over-year primarily on structural changes, including the impact of the refranchised territories in North America, the deconsolidation of Coke’s German bottling operations as a result of the formation of Coca-Cola European Partners, and the impact of the brand transfer agreement related to the transaction with Monster last year.

KO Q&A 12

Coca-Cola is moving away from a capital-intensive organization with its intended refranchising plans for North America, China, and structural changes in Europe and Africa. The company 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. Coca-Cola has completed the Coca-Cola European Partners and Coca-Cola Beverages Africa transactions, announced the transfer of certain territories in the United States to Arca Continental, and UNITED venture. The company expects organic revenue to grow 3% in 2016 but structural changes are expected to impact the net revenue by six to seven percentage points.

Coca-Cola might have missed revenue estimates, but this has been primarily due to structural changes, which are a one-time event. The company is in transition. A bottling business comes with four to five times more revenue per drink sold and the accompanying cost. Thus, any impact on the sales of the bottler is going to have a magnified impact on overall sales for Coca-Cola and much less on the company’s profits. This, however, doesn’t mean that the company’s core performance isn’t strong.

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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
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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