For Coke, international business is a tonic

Second in a series: The AJC looks at how the economic crisis is affecting some of metro Atlanta’s key companies and industries.

Enlarge this image

Curtis Compton / ccompton@ajc.com

Muhtar Kent, Coca-Cola Co. president and CEO, says the company?s business strategy remains in place despite the downturn in the U.S. economy, which he predicts could show positive signs by the second half of next year.

COCA-COLA'S PERFORMANCE
Coca-Cola sales and profits are growing this year, but not as fast as last year.
First nine months of 2008
• Revenue: $24.8 billion, up 15 percent
• Net income: $4.81 billion, up 1 percent
• Global case volume: Up 4 percent
• Friday stock price: $45.02
First nine months of 2007
• Revenue: $21.5 billion, up 19 percent
• Net income: $4.77 billion, up 8 percent
• Global case volume: Up 6 percent
• Year-ago stock price: $59.82
Note: Stock price adjusted for dividends.

COCA-COLA NEWS
Latest Headlines:
[an error occurred while processing this directive] • Coke photo galleries
• More Coke news
• Business news

The global economy is unraveling. Financial giants on Wall Street have collapsed. Automakers in Detroit are running out of money. And troubling signs are surfacing in Europe and Asia.

But in an interview in his Atlanta office last week, Coca-Cola President and Chief Executive Officer Muhtar Kent was optimistic. Kent sits atop what may be the most global of global companies. Consumers in more than 200 countries drink a combined 1.5 billion servings of Coca-Cola beverages each day.

Kent has one basic reason for feeling good, even when economic times look bad. It’s a lot easier convincing someone to buy a 65-cent can of Coke in a recession than a $25,000 four-door sedan.

People still need “moments of pleasure at cents at a time,” Kent likes to say.

Even beyond his own business, though, Kent sees reason for hope. The developing nations in Asia and Latin America could slow down their growth, but their long-term economic progress cannot be stopped, he said.

To be sure, the United States and Europe have bumps ahead, Kent said. This is not like the last major U.S. slowdown in 2001, when the troubles could be pinned on the dot-com boom and bust.

But the United States, in particular, will snap out of this malaise and could show positive economic signs by the second half of 2009, Kent predicts. The United States will bounce back because it has more flexible labor laws than Europe, an entrepreneurial spirit and a renewed vigor after the presidential election, he said.

“People act differently when they feel better,” Kent said. “The majority of the United States now, I believe, feels better as a result of what happened on Nov. 4.”

A drop in gas prices doesn’t hurt either. When people spend less at the pump, they have more money for buying Coke at the store.

“I saw it this morning, coming back from the airport,” Kent said. “It’s $1.98 [a gallon]. … $1.98 is not a price anyone has seen at the gas pump in almost two years. That’s a huge psychological shift.”

Big challenges ahead

The economic downturn comes just months after Kent became Coca-Cola CEO. Neville Isdell, who remains chairman, stepped down as CEO in July. Kent, 55, has spent much of his career traveling the world in Coke’s international operations.

Coca-Cola is more resilient than many U.S. companies in a downturn. Coca-Cola’s international sales, which account for 80 percent of operating profits, have offset weak results at home.

Growth in developing nations, such as China, Brazil and India, has slowed but not stopped. More people are still entering the middle class and becoming prime customers for Coca-Cola.

Coca-Cola, though, is not immune to the broader economic forces. Coca-Cola stock closed the week at $45.02 a share, down about 25 percent since the beginning of the year.

The company’s global case-sales volume is up 4 percent through the first three quarters of 2008, but that’s slower than the 6 percent growth through the same period in 2007.

Coca-Cola has been hit hardest in North America, where sales volume is down 1 percent so far this year. The company has a hiring freeze for most of North America.

Coca-Cola Enterprises, Coca-Cola’s largest bottler, has cut 1,000 jobs since Labor Day. Atlanta-based CCE accounts for most of Coca-Cola’s bottle and can volume in North America.

U.S. industry suffers

The economic downturn is taking a toll on the beverage industry, said John Sicher, editor and publisher of Beverage Digest. The overall sales volume in the U.S. beverage industry likely will be down 2 percent to 3 percent this year, he said.

Once fast-growing segments, such as water, tea and sports drinks, are slowing. Some people are drinking more tap water than before, Sicher said. They’re making better use of the beverages they buy, resealing the container for later use instead of tossing it, he said.

They’re also cutting back on consumption.

“People are simply drinking less,” Sicher said. “I think when the economy was stronger, some people drank more than they needed to hydrate themselves.”

While Coca-Cola’s profits continue to grow, the economic slowdown is showing through in parts of the Coca-Cola system. The system is built on Coca-Cola selling concentrate and syrup to bottlers, which make, package and sell the final product to the end consumer.

CCE, for example, has said a decline in sales for 20-ounce bottles has become a major problem. For a bottler, all sales are not equal. Bottlers typically make a higher profit margin on a 20-ounce bottle at a convenience store than a 2-liter or 12-pack at a grocery store.

In an economic downturn, consumers shift to more affordable options, said Mark Swartzberg, a beverage analyst for Stifel Nicolaus, a St. Louis-based investment services firm.

The challenge for Coca-Cola is driving volumes while also fielding a mix of packages that still gives bottlers profits, he said.

“The trick is making affordability for the consumer a win for the bottler and a win for the consumer,” Swartzberg said.

Affordable options key

Coca-Cola has not changed its overall business strategy because of the economy, Kent said. Coca-Cola renewed three years ago its commitment to spurring growth in carbonated soft drinks and in mature markets, such as the United States, Europe and Japan.

Coca-Cola also acknowledged the need to branch out to still beverages. It has since made key acquisitions, including Fuze and Glaceau, makers of Vitaminwater, in the United States, and juice-maker Jugos del Valle in Latin America.

“The strategy is still in place,” Kent said. “Are we fine-tuning and tweaking it because of the turmoil? Absolutely.”

Lower gas prices will help convenience store sales, he said. As an additional boost, Coca-Cola will launch new advertising in stores, outside stores and in supporting media, Kent said. Coca-Cola wants to remind customers of the purchases they used to make before gas prices spiked, he said.

The company and its bottlers also are testing different package sizes to provide consumers with more options, Kent said. Coca-Cola will offer smaller packages at lower prices to give customers more affordable choices.

In coolers around the world, Coke could be offered in smaller packages, Kent said. The 20-ounce bottle now dominates the U.S. cold-drink market.

At grocery store shelves, it might have more 1-liter bottles, Kent said. The 1-liter bottle provides a higher margin than the 2-liter bottle, but it also can benefit the consumer, he said.

“For each meal occasion, they will open a 1 liter, as opposed to having a 2 liter for two days,” Kent said. “And that will mean they have a better product.”

Opportunity to change

In addition, Coca-Cola is realigning its workforce, Kent said. The company wants to put more employees in jobs working directly with its customers and bottlers, he said.

This means Coca-Cola may need fewer employees in a support function, such as information technology, Kent said.

It will need more people working as customer account representatives or in market development and brand development.

“That will translate into a more effective, more productive Coca-Cola Co. that can generate more sustainable growth,” Kent said.

These changes already were under way before the downturn, he said.

The new packaging sizes are overdue, Kent said. Coca-Cola began work last year on realigning its workforce, he said.

“We started this process way before the crisis,” Kent said.

The downturn, though, reaffirmed the need to pursue these projects, he said.

“Every one of these downturns is a fantastic opportunity, a fantastic opportunity to change things, make them better and come out of the end the tunnel being much stronger than when we went into the tunnel,” Kent said.