Coca-Cola: Cracking the code to achieve sustainable growth

by Eric Schroeder
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Guided by its 2020 Vision — a roadmap to winning together with its global system bottling partners — The Coca-Cola Co. entered 2013 “focused and on track” to reach its goals, said Muhtar Kent, chairman and chief executive officer.

Atlanta-based Coca-Cola, the world’s largest beverage company, is coming off a year in which higher global volume contributed to a 5% increase in income.

“Since the launch of our 2020 Vision at the beginning of 2010, we’ve increased daily servings by more than 225 million,” Mr. Kent said during an April 16 conference call to discuss fiscal 2013 first-quarter results. “We have lifted global volume and value share to the highest levels since 2003, and more than $48 billion have been added to the Coca-Cola Co.’s market capitalization. Across the system, we are continuing to invest together for a better tomorrow. In fact, we enter 2013 and the fourth year of our journey to 2020 from a position of real spend clearly focused, and well on track to reach our goals and objectives.”

For the year ended Dec. 31, 2012, the company had income of $9,019 million, equal to $2 per share on the common stock, which compared with income of $8,584 million, or $1.88 per share, during the previous year. Gross profit during the year was $28,964 million, up 2% from $28,327 million during the previous year.

The company said it had full-year global volume growth of 4%, led by a 3% increase from the Coca-Cola brand. The company grew global volume and value share in nonalcoholic ready-to-drink beverages with volume and value share gains across nearly every beverage category. Worldwide sparkling beverage volume grew 3% for the year with worldwide still beverage volume growing 10% and ready-to-drink tea growing 14%. Innovation has helped drive the growth.

Sales, earnings soft in first quarter

But structural changes, including the deconsolidation of the Philippine bottling operations in 2013 and acquisitions of the Vietnam, Cambodia and Guatemala bottling operations in 2012, weighed on fiscal 2013 first-quarter results.

For the quarter ended March 29, Coca-Cola had income of $1,751 million, or 39c per share, which compared with income of $2,054 million, or 45c per share, during the same quarter of the previous year. Net operating revenue was $11,035 million, down 1% from $11,137 million.

Despite the lower earnings and sales, Mr. Kent said he was “pleased” with the company’s performance against the backdrop “of a still uncertain global economy.”

Part of the reason for excitement was a 4% increase in global volumes. The company’s performance was impressive across all regions, ranging from a 15% increase in volume in Eurasia and Africa to 8% growth in two emerging markets: India and Russia.

And within each region, Coca-Cola has benefited from success in all its major segments, including ready-to-drink tea, nonalcoholic ready-to-drink and sparkling beverages. Coca-Cola even has been able to hold competition at bay in the energy drinks category, where volumes grew 9% in the first quarter.

Beverage partnership model excites

Another part of Mr. Kent’s optimism may be traced to the announcement of a new beverage partnership model in the United States. The new partnership involves five bottlers and new expanded territories. The bottlers include Coca-Cola Bottling Co. Consolidated, Coca-Cola Bottling Company United, Inc., Swire Coca-Cola USA, Coca-Cola Bottling Company High Country and Corinth Coca-Cola Bottling Works, Inc. The company and the bottlers will develop contiguous operating territories. In addition, the partnership will grant exclusive territory rights and the sale by Coca-Cola Refreshments of distribution assets and cold drink equipment. A finished goods model under which production assets will remain with Coca-Cola Refreshments, an improved, more integrated information technology platform and a beverage agreement that supports the evolving operating model are other benefits of the partnership.

“We are intent on ensuring that we make the necessary changes in the format and architecture of production to achieve … a coast-to-coast nationally run production system that generates the efficiencies, synergies, productivities that allow us to continue to win in the marketplace,” Mr. Kent said. “And again, there may be a future where our partners in the United States take certain ownership in the national production. I wouldn’t rule that out also, but it will be managed nationally from one, single point.”

The progress at Coca-Cola has not gone unnoticed by the investment community. Since the new year, the company’s stock has climbed from a 52-week low of $35.58 to as high as $42.96 on April 23.

New product success stories

Providing refreshing beverages for every lifestyle and occasion, while helping consumers make informed beverage choices is one of the pillars of the 2020 Vision of Atlanta-based The Coca-Cola Co. To that end, 2012 was a successful year.

Coca-Cola introduced 500-plus new products in 2012, including more than 100 low- and no-calorie choices, and made several targeted portfolio investments.

The company launched Fuze Tea, a new international tea brand, in 24 countries. In addition, the company introduced Glaceau vitaminwater in Chile and Colombia, and launched Blak Coffee in Costa Rica and Colombia. In China, a new 300-mL PET pack for Coca-Cola, Fanta and Sprite debuted, as did Guo Qing Xin, a fruit-flavored beverage under the Minute Maid brand.

Numerous tea formulations under the Nestea brand were rolled out across the European continent, while in France and Switzerland a new Sprite containing 30% less sugar was made possible through the use of stevia.

Another innovation effort in 2012 — the debut of PlantBottle packaging technology (PET plastic that contains up to 30% renewable material from plants) — became more widely used around the world. By the end of 2012 Coca-Cola said it had distributed nearly 13 billion PlantBottle packages in 24 countries.

Innovation has not slowed in 2013. So far this year Coca-Cola has introduced Fruitwater under the Glaceau brand. Fruitwater is a line of fruit-flavored, calorie-free carbonated water that is sweetened with sucralose and enhanced with B vitamins, magnesium and zinc. Flavors include black raspberry, orange mango, strawberry kiwi, lemon lime and watermelon punch.

The company also has expanded its Minute Maid offerings with four reduced-calorie juice drinks. The new products include a no-pulp orange juice beverage with 50 calories per serving and three fruit drinks with 15 calories per serving in raspberry with tea, peach with tea, and mango passion fruit varieties.

Three flavors also have been added to the Simply Orange Juice Co. brand: Simply Orange with Tangerine and Simply Orange with Banana join a family of orange juice blends that includes mango and pineapple varieties, while Simply Lemonade with Blueberry is the latest in the lemonade lineup that features raspberry and mango blends.

Muhtar Kent: Complacency not an option

ATLANTA — For a company turning 127 years old this month, The Coca-Cola Co. is anything but complacent. That was the message delivered by a top executive and a key investor as part of the Atlanta-based company’s annual shareholders meeting held April 24 in Atlanta.

Despite receiving several accolades over the past year, including being named the No. 1 global brand for the 12th consecutive year by Interbrand and being recognized as the No. 4 most admired company by Fortune, Muhtar Kent, chairman and chief executive officer of Coca-Cola, said there is no complacency at the company.

“You might get the sense from these kinds of results … that we actually are pretty content with our progress, that maybe we’re on the verge of taking a victory lap,” Mr. Kent said during the April 24 meeting. “But nothing could be further from the truth. In fact, I’d say that we’ve never been more constructively discontent now, as we are. We know there is so much more to do, so much more horizon, more space ahead of us. We’re constantly seeking new ways to refine, reinvent, refresh our business, around the world.”

Warren Buffett, a board member, Coca-Cola’s largest shareholder and a legendary investor, concurred. In an interview with Mr. Kent at the annual meeting he noted the biggest thing that kills businesses is complacency, and resting on laurels can be deadly.

“I see none of that with Coca-Cola,” Mr. Buffett said.

He added that one of the things he has liked about Coca-Cola is the fact it’s a “wonderful” brand, making it a “sure thing” that consumers are sure to enjoy.

“No business ever failed with happy customers,” he said. “Your (Coca-Cola) customers are happy.”

An area in which Coca-Cola claims not to be complacent is in the obesity debate. Mr. Kent said Coca-Cola wants to be a part of the conversation.

“We would like to mobilize our resources to raise awareness about the issue of energy balance, the issue of calories and how you spend those calories,” Mr. Kent said.

As the world’s largest beverage company, he said Coca-Cola has a role to play, but stressed it can’t be the only solution.

“We have to create that golden triangle between business, government and civil society to ensure we can mobilize our resources so that we can play a role,” he said.

Mr. Kent pointed to Coca-Cola’s heritage as a leader as a reason he thinks the company can pave the way.

“We have tackled so many issues in our history and we want to be part of this conversation,” he said. “Therefore we’ve made commitments to use evidence-based science, we’ve made commitments for continued innovation, we’ve made commitments for choice. Every one of our beverages has a role to play in an active, healthy diet. We have made a commitment about transparent information and labeling on our products. We have made a commitment about marketing responsibly and ensuring we honor the rights of parents with children below 12 years old. And we’ve made a commitment to promote active healthy living programs in every single one of the 207 markets where we operate. So we have made commitments, we want to ensure with bottling partners that we follow through on those commitments.”

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