Change is a key component of Coca-Cola's growth strategy

by Keith Nunes
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Coca-Cola beverages
The Coca-Cola Co. is shedding its image as a carbonated soft drink manufacturer and focusing on becoming a “total beverage company.
 

ATLANTA — A major transformation is under way at the Coca-Cola Co. The company is shedding its image as a carbonated soft drink manufacturer and focusing on becoming a “total beverage company,” said James Robert B. Quincey, president and chief executive officer, where new categories and premium segments around the world will play key roles in the company’s future growth

James Quincy, The Coca-Cola Co.
James Quincey, president and c.e.o. of Coca-Cola

“We are growing our portfolio in multiple ways whilst leveraging the strength of our core brands at its foundation,” he said during a conference call with analysts to discuss the company’s financial results for the third quarter of fiscal 2017.

A key component to Mr. Quincey’s strategy is bringing smaller brands to scale. An example he cited is Topo Chico, a premium brand of sparkling water from Mexico that the company recently acquired.

“Our Venturing and Emerging Brands (V.E.B.) unit will serve as an incubator for Topo Chico and will guide the development of the brand's distribution footprint,” Mr. Quincey said. “Within V.E.B., this approach has been highly successful for other investments, like Honest Tea, maintaining the essence of the brand and the entrepreneurial culture of the company whilst supporting its rapid growth phase within the power of the Coca-Cola system.”

Topo Chico mineral water, Coca-Cola
Coca-Cola's Venturing and Emerging Brands unit will serve as an incubator for Topo Chico.
 

Management is also in the process of scaling its V.E.B. model to other regions of the world.

“For example, in Central and Eastern Europe, we recently launched a unit in partnership with our bottling partner, Coca-Cola Hellenic,” Mr. Quincey said. “We will seek emerging brands for potential partnerships, but we will start by testing premium brands in high-value outlets and channels through a separate and dedicated sales force. Many of these, like smartwater, ZICO, Appletiser, will be lifted and shifted from other places. Products will follow the incubate, grow and scale path, with a goal to expand fast and discontinue quickly, if necessary.”

A focus on premium and sophisticated flavors will be a part of the equation. Examples of premium products cited during the call include a line of mixes sold in Spain called Royal Bliss and the extension of the Schweppes brand in Great Britain with the introduction of Schweppes 1783 mixers.

Barrillito Aguas Frescas, Coca-Cola
Coca-Cola plans to leverages its Barrilitos Aguas Frescas brand in the U.S.
 

“We're also building on a solid foundation in sophisticated flavors through brands like Blue Sky, Barrilitos Aguas Frescas in the U.S. and Appletiser and (BOBO) in Europe,” Mr. Quincey said. “And we plan to leverage these in the appropriate channels where these premium products can excel.”

The focus and execution against small, premium and sophisticated brands and products doesn’t mean the company is shifting away from its core carbonated soft drink strength. Initiatives are in place to grow the business through such innovation as the introduction of Coke Zero Sugar in markets around the world.

During the call an analyst asked how the introduction of Coke Zero Sugar may affect other components of the company’s C.S.D. portfolio.

Coca-Cola Zero Sugar
Coca-Cola launches its new Coca-Cola Zero Sugar beverage in July.
 

“It's lifting the whole franchise,” Mr. Quincey said. “Yes, it is cannibalizing at times either Coke Light or sometimes Coke Original, but in the net, there is additional volume and additional consumers coming back into the franchise. I think it's unrealistic to expect cannibalization to be zero, but obviously, the key is that to be a net positive.”

Management also undertook the relaunch of the Fanta brand in 2017.

“We did this with a 4-pillar playbook,” Mr. Quincey said. “That was a new look and a new integrated marketing campaign, a new recipe that tastes great and reduces added sugar, a new spiral bottle that differentiates Fanta on the shelf and improved execution and more media investment. Thanks to this work, we’ve seen a return to volume growth and an acceleration in revenue growth for Fanta.”

Fanta, Coca-Cola
Coca-Cola management undertook the relaunch of the Fanta brand in 2017.
 

The company is also in the process of refranchising its operations. Mr. Quincey said the company will complete the U.S. phase of the project in “the coming weeks,” and will conclude efforts in Canada and Africa in 2018.

During the third quarter ended Sept. 29, the Coca-Cola Co.’s net income rose 38% to $1,447 million, equal to 33c per share on the common stock. Sales during the quarter fell 15% to $9,078 million.

The refranchising of the bottling operations was the primary reason for the sales decline during the quarter, said Kathy N. Waller, chief financial officer. Adjusting for the divestitures, organic revenue rose 4% during the quarter, with positive performances from all business units, she said.

Kathy Waller, Coca-Cola
Kathy Waller, c.f.o. of Coca-Cola

“Comparable gross margin increased over 150 basis points, reflecting the benefit from refranchising our bottling businesses and strong price/mix, partially offset by increased commodity costs and a slight currency impact,” Ms. Waller said. “Comparable operating margin grew over 400 basis points, driven by the divestitures and continued productivity, including the ongoing removal of stranded costs in Coca-Cola Refreshments.”

Costs associated with the hurricanes that affected Florida and Texas will be accounted for in the fourth quarter, Ms. Waller said. She estimated the costs will be in the range of $50 million and reflect the disruption of the company’s supply chain. 
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