How Is Coca-Cola Turning Around Its Business? (Part 2)

by Trefis Team
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Earlier this year, The Coca-Cola Company (NYSE:KO) announced several senior leadership changes, including the shift of its President and COO James Quincey to its Chief Executive Officer.  These senior appointments also include a “Chief Growth Officer” and a “Chief Innovation Officer,” indicating that the company is looking at growth driven by innovation in its products. The beverage industry is faced with a daunting task, in the face of a move away from soda, which is Coca-Cola’s bread and butter. The company’s main rival – Pepsi – has its Frito Lay and Gatorade business to fall back on. However, for Coca-Cola, nearly 60% of its revenues come from carbonated beverages (including Diet coke), and with consumer preferences shifting towards “healthier” beverages, a heavy dependence on carbonated soft drinks for revenues can impact future growth negatively. In the second of a two-part series, we’ll highlight additional steps the company is undertaking to safeguard its future.

To read the first part, click on the link below:

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

Diversifying Its Portfolio

2016 was a big year in the shift away from carbonated soft drinks (CSD), as it was the first time in history that bottled water outsold CSDs, by volume, in the US, according to the International Bottled Water Association (IBWA) and the Beverage Marketing Corporation (BMC). Total US bottled water consumption increased by 8.6% in 2016, to reach 12.8 billion gallons, while individual consumption amounted to 39.3 gallons per person. In contrast, average consumption of carbonated soft drinks fell to around 38.5 gallons per person, the BMC figures indicate.

As the beverage industry undergoes a transformation, with CSDs losing their position, and consumers preferring “healthier” beverages, it appears that Coca-Cola is now looking to focus on innovation to introduce new/modified beverages which will attract consumers. It is focusing on flavored water, bottled water, and dairy beverages to diversify its portfolio. The new management structure is aimed at the company’s strategy to drive growth via newer products in line with changing consumer preferences.

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Keeping this trend in mind, Coca-Cola launched ready-to-drink tea lattes and coffees in the first quarter of 2017, under its Gold Peak brand. Gold Peak will join Illy in Coca-Cola’s burgeoning RTD coffee portfolio in the United States. Together, “they will be part of a multi-brand strategy to give consumers a variety of great-tasting options, and help the company become a major player in a beverage category that continues to rise in popularity.” The company also expanded its ready-to-drink tea portfolio in Canada in the second quarter. North America is the fastest growing region for RTD tea and coffee, primarily due to increased health concerns around sweetened carbonated beverages. Other factors driving this growth include rising disposable income, urbanization, and the functional nature of these beverages. By expanding into this market, Coca-Cola can reduce its dependence on CSDs and find new engines for growth as that market slows.

Similarly, the company has also introduced a cola version with “health benefits” in Japan. Aimed at the aging population in the country, this new drink, to be called Coca-Cola Plus, will have no calories or sugar, and each bottle will contain five grams of indigestible dextrin and other dietary fiber. The company claims that drinking one bottle each day along with meals will reduce the absorption of fat from food, and moderate the levels of triglycerides in the blood following the meal. This makes Coca-Cola Plus a “Tokuho Cola” which in Japanese means foods for a specific health use. This beverage is aimed at consumers above 40 years of age and has the potential to become the preferred beverage for lunch in the office. Coca-Cola is the number one beverage maker in Japan, but carbonated soft drinks are not popular in the country. Coca-Cola has an array of beverages on offer in Japan and its top sellers include Georgia Coffee, bottled water, I Lohas flavored waters, and Ayataka green tea. With the Japanese population preferring these healthier beverages, Coca-Cola’s strategy in the region is to introduce several versions of its drinks and a variety of offerings to suit the consumer needs. Aiming a drink with health benefits for the older population (which is fairly significant) in the country can enable Coca-Cola to create a brand identify associated with “health.”

Cost-Cutting Measures

The company has made a number of efforts to redesign its organizational structure, in order to make it faster and more agile. This is being done to support long term growth. Such measures would entail approximately 1,200 job reductions beginning in the second half of 2017, and carrying on to 2018. As a consequence of this new operating model, and productivity opportunities across its spend base, the company expects to achieve incremental savings to the tune of $800 million. This would bring the saving from its current productivity and reinvestment program to $3.8 billion, or $4.3 billion including the $500 million of productivity that will transfer to its bottling partners due to the accelerated pace of refranchising.

Given the phasing of these initiatives, the majority of the upside is expected to accrue in 2018 and 2019. About half of the $800 million in savings will be reinvested by the company. This additional investment is to be directed toward some of the newer categories, or certain other categories in order to drive growth, such as its sparkling category.

Recent actions, in this move, include implementing “zero-based” work, which is a disciplined approach to funding work that is essential to driving growth and eliminating less productive programs and tasks across the company’s corporate center and operating units; reducing marketing agency costs; and implementing a new approach to drive cost of goods savings across the board, from formulas to packaging to day-to-day plant operations.

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 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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