How Is Coca-Cola Turning Around Its Business? (Part 1)

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Substantial exposure to low-growth categories has hampered The Coca-Cola Company‘s (NYSE:KO) own growth in recent times, with the company not reporting an increase in revenues for a number of years. The company reported a decline in its 2016 revenues also, as expected. However, negative effects of currency translation and structural impacts were a significant deterrent to Coca-Cola’s top line growth last year. While organic revenue grew 3% year-over-year for the company in 2016, organic revenue for the company at core (what will remain post refranchising) grew 4% in the year. This reflects solid core performance by Coca-Cola, which has battled with slowing revenue growth, especially in the carbonated soft drinks (CSDs) segment, which forms almost two-thirds the net volumes for the beverage manufacturer. In this two-part series, we’ll highlight some of the changes the company has been undertaking in order to turn around its fortunes.

1. Digital Efforts

In an interview with Bloomberg, new CEO, James Quincey, stated that a slowdown in mall traffic has inadvertently affected the company’s sales as well. Retail stores, supermarkets, and vending machines at mall food courts are important distribution channels for Coca-Cola, and as consumers move away from shopping at brick and mortar stores, preferring the convenience of online shopping, these channels are being impacted adversely. Keeping this in mind, the company is aiming to adapt to these changing retail trends, and is attempting to use technology in its favor.

The company recently started using Google technologies in U.S. grocery stores to deliver personalized advertisements on customers’ smartphones. The beverage giant is also looking to reduce the number of vending machines installed at various locations, as traffic in these areas declines. However, the key for revenue growth would be to find newer distribution channels in line with the changing landscape. This might involve introduction of new packages which are easier to deliver, as customers look for online shopping and home delivery. In India, the company runs a website, Coke2Home, which delivers its products to 15 locations across the country.  Coca-Cola has also created a new function called Franchise Capability & Business Transformation which is aimed towards improving the supply chain technology and processes at the franchise bottlers to make them ready for digital selling. Moreover, the company is actively using social media platforms for the promotion of its products. Coca-Cola can potentially explore these platforms for selling its products which are increasingly becoming the “virtual hangout” destination for the younger population.

The company also has a unique program termed the “Bridge” which is aimed at bringing newer technologies to the company faster than competitors. This program is intended to be a bridge between technology entrepreneurs and global markets, with the target being software solutions which are on the verge of commercialization. Coca-Cola identifies start-ups which are important for its business and provides them with a platform where they can connect with investors and customers. In the past, the company has participated in funding rounds for these companies, and one of the start-ups under this program was acquired by social media company Snap. The current start-ups under this program include a social polling service for companies, a content management system for virtual reality, and a marketing solution for small and medium businesses.

2. Refranchising Bottlers

Coca-Cola is refranchising many of its bottling operations in a bid to move away from the capital intensive and low margin business of bottling, and focus more on the concentrate business as the consumption of carbonated drinks continues to slow down, especially in developed markets.

Coca-Cola’s net sales growth has been hurt in the last few quarters due to structural changes. The company is in transition, moving away from a capital-intensive organization with its intended refranchising plans for North America, China, and structural changes in Europe and Africa. By the end of this year, the company aims to refranchise two-thirds of its bottling territories in North America, and aims to refranchise a substantial portion of the remaining territories no later than the end of the decade, in a bid to move away from the capital intensive and low-margin business of distribution and improve its operating performance.

Coca-Cola was able to improve its operational performance in 2016, improve margin by 90 basis points year-over-year to 20.6% in 2016, boosted by increased pricing, favorable geographic mix, lower commodity costs, and productivity initiatives. Through the last year, Coca-Cola signed a definitive agreement with COFCO Coca-Cola Beverages Limited and Swire Beverages Holdings Limited to refranchise all existing Company-owned bottling operations in China, and announced that it had completed the Coca-Cola European Partners and Coca-Cola Beverages Africa transactions, and the transfer of certain territories in the United States to Arca Continental, and Coke’s UNITED bottlers.

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The refranchising efforts and other structural impacts are expected to cause as much as an 18% to 19% headwind to the top line this year, but what remains the silver lining for the company is the expected stable growth for its core business. Organic revenue is expected to grow another 3% in 2017, with a 7% to 8% growth in comparable currency neutral income before taxes (structurally adjusted) driven by strong operating performance.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such 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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