How Does Coca-Cola Spend Its Money?

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Coca-Cola (NYSE: KO) has its expenses largely clubbed under its cost of goods sold and SG&A expenses, which together accounted for about 87% of the company’s total expenses in 2018. However, this is a reduction from 92% of total expenses that these two cost heads accounted for in 2015. Over the years, despite a shrinking revenue base, KO has successfully been able to decrease its key expense items, such as cost of sales, selling and distribution cost, etc. and increase its net income margin from 16.6% in 2015 to 20.2% in 2018.

You can view the Trefis interactive dashboard – Coca-Cola: Breakdown Of Total Expenses – to better understand how the company’s total expenses have moved over the years and what is causing this change. In addition, here is more Consumer Staples data.

Total Expenses

  • Coca-Cola’s total expenses have decreased from $36.9 billion in 2015 to $25.4 billion in 2018, which marks a reduction of $11.5 billion in three years.
  • Most of this decrease was driven by a reduction in cost of goods sold (COGS) and selling, general, and administrative cost (SG&A).

Following is the breakup of Coca-Cola’s total expenses and how each expense head has moved over the years.

COGS

  • COGS, which contributes 46% to KO’s total expenses, includes cost of sweeteners, metals, juices, and bottles, along with shipping and handling cost.
  • COGS has continuously declined over recent years from $17.5 billion 2015 to $11.8 billion 2018, mainly driven by refranchising.
  • Since bottling is a capital intensive and low-margin business, KO began refranchising (turning corporate-owned operations into franchised ones) its bottling business in 2016, to cut down on costs.
  • This initiative has paid off in the form of lower COGS.
  • However, with most refranchising already done, COGS is expected to increase to $13.2 billion by 2020, still registering a decline of $4.2 billion between 2015-2020.

SG&A

  • SG&A expense, which forms 41% of KO’s total expenses, includes advertising and marketing cost, selling and distribution expense, stock-based compensation, and other general expenses.
  • The metric has steadily declined from $16.4 billion in 2015 to $10.3 billion in 2018, led by divestitures, reduction in expenses related to bottling business, and benefits from the productivity and reinvestment initiatives.
  • KO started a productivity program to achieve additional efficiencies in both supply chain and marketing expenditures, as well as to transition to a new, more agile operating model to enable growth.
  • With no further divestitures expected, SG&A expense is expected to see a slight uptick in the near term.
  • However, productivity gains in the form of lower selling and distribution cost, is still likely to help KO achieve a cumulative decrease of $4.9 billion in SG&A cost between 2015-2020.

Other Operating Charges

  • Other operating expenses, which form 4% of KO’s total expenses, include asset impairment charges, costs related to refranchising, severance, cost associated with implementation of IT systems, and tax litigation expenses.
  • The metric has been very volatile over the years, but has overall seen a decline from $1.7 billion in 2015 to $1.1 billion in 2018.
  • The cost is expected to see only a marginal decline going forward as the company is expected to incur costs related to the productivity program, offset by most of the refranchising related costs already incurred.

Interest Expense

  • Interest expense, which forms 4% of KO’s total expenses, increased in 2017 and 2018 due to an increase in short term US interest rates and longer debt maturities.
  • The metric is expected to increase, though at a slower rate in 2019, followed by a marginal drop in 2020, with interest rates expected to be lower.

Tax Expense

  • Tax expense, which forms 6% of KO’s total expenses, has decreased in 2018 following the implementation of the TCJ Act, which has reduced the statutory tax rate in the US.
  • Despite a low tax rate, tax expense is expected to increase in the next two years, driven by higher profit before tax led by an increase in revenues and better expense management.

Other Expense/(Income)

  • Other income, which forms -1% of KO’s total expenses, includes equity income, dividend, interest income, rental income, gain on sale of assets etc.
  • Equity and interest income outweigh any losses from asset sales or forex loss or discontinued operations for Coca-Cola.

Conclusion

  • Coca-Cola’s expense management strategy has paid off with the company managing to sustain margins despite a fall in revenues.
  • However, with most of the refranchising already accomplished, the company’s revenues and expenses are expected to move up going forward.
  • Revenue base is expected to expand by $4.6 billion by 2020, whereas total expenses are likely to increase by $3.4 billion during the same time.
  • The slower rise in expense levels is expected to lead to a rise in net income margin from 20.2% in 2018 to 22% in 2020.

 

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