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The Coca-Cola Company reported a largely positive quarterly performance this morning. After adjusting for foreign currency issues in 2015, earnings beat expectations and volumes seemed to demonstrate an improvement in most key markets, particularly in still beverages categories (water, chilled RTD tea and juice). From a longer term industry perspective, there are three important points to keep in mind as the world’s largest soft drinks company ends its fiscal year and looks ahead to 2016:
The big news to emerge from the quarterly earnings release was the accelerated refranchising timetable, a plan which now includes a commitment to complete North American refranchising of company owned bottling operations by 2017 – three years ahead of the original target date. This is significant, because it represents a very rapid realignment of the company’s operations. In the presentation this morning, the company claimed this shift would reduce the company’s directly owned share of case volume from 18% in 2015 to just 3% overall.
The large and fragmented bottling network in the United States has been the focus of this effort so far, but the refranchising of bottling operations to independent partners is part of a global effort for the company. This morning the company announced its intention to begin the refranchising of its operations in China to two key, longstanding bottling partners in the region. This also follows the creation of consolidated Coca-Cola European Partners last year, with Coca-Cola Enterprises finally taking on Coca-Cola’s company owned German territory and merging with Coca-Cola Iberia to form a new mega bottler for Western Europe. In partnership with SABMiller, the company created a new mega bottling entity for Africa as well – Coca-Cola Beverages Africa – at the end of 2014.
The intention of refranchising is to shed expensive, global bottling operations in order to make Coca-Cola a more nimble, less capital intensive and more profitable beverage business. But this is not simply about profitability. Widespread changes in consumer consumption of soft drinks – seeking new, healthier, functional and natural drinks – necessitate a companywide focus on the creation and marketing of its brands as well as aggressive new product development to satisfy these changing consumer needs. The company (and its investors) are happy to leave the bottling and distribution of its finished products to reliable independent partners, while Coca-Cola works on improving and expanding its future product portfolio.
The other interesting point discussed this morning is the extent to which higher prices for its existing products are successfully driving revenue growth for Coca-Cola’s brands even as meaningful volume growth – particularly in sparkling drinks – remains hard to achieve. With Coca-Cola, and indeed with its largest competitors, we see a new industry model developing: higher prices, smaller packages and premium brands achieving modest volume growth but greater profitability. This is achieved through mini-cans or smaller bottles and a focus on single-serve occasions, but also through an emphasis on expensive functional waters and energy drinks – as well as direct price increases.
In terms of the company’s main categories, bottled water, tea and juice are the growth areas in Q4 and FY2015. If we look globally, bottled water is the main driver of soft drinks volume growth for Coca-Cola in almost all markets, as Euromonitor’s latest data for 2015 confirms. Coca-Cola has benefited from this category shift but seeks a stronger leadership position with investments in brands like Smartwater, Dasani, Aquarius and others.
Carbonated drinks remain more of a challenge as the company responds to shifting consumer tastes and health and wellness needs. Unification of the Coca-Cola family of cola brands in terms of marketing is another new effort emphasized in Q4 reporting. In addition to potentially lowering overall marketing costs, the integration of struggling low-calorie cola variants into the wider Coca-Cola brand may help to support and clarify for consumers the specific advantages of each type of cola within the Coca-Cola banner. This unified “Taste the Feeling” approach may also help to introduce the Coca-Cola brand family to new consumers in markets where the low-calorie segment is currently underdeveloped.
One final development of note is the relative success of North America, which outperformed last quarter. Coca-Cola cites 4% revenue growth in Q4, the strongest performance in 3 years, with both transactions and case volume increasing. In a recent interview with MSNBC, Coca-Cola CEO Muhtar Kent recently called the United States his “favourite emerging market” – a tongue in cheek comment that nevertheless reflects the opportunities that arise from the fundamental shifts in consumption we are seeing in North America and other higher income regions. These include growth in higher value, single-serve occasions for beverages as opposed to lower value multipacks in the home. This can also mean much higher value functional beverages like Smartwater or healthier, premium beverages like teas, cold press juices or sparkling flavoured waters. These “emerging” categories in developed markets have been a major source of Coca-Cola’s successful Venture and Emerging Brands (VEB) segment over the past several years.