Six years ago, Muhtar Kent promised that Coca-Cola would double its revenue by 2020.
But instead of marching relentlessly toward that goal, Coke in 2015 finds itself forced into internal transition and trying to regain its footing in North America, its biggest market. The soda business is struggling, and health advocates almost daily attack soft drinks as a chief villain in the obesity epidemic.
On Wednesday, CEO Kent will seek to convince shareholders at Coke’s annual meeting at the Cobb Galleria that steps to right the ship, such as cutting costs through layoffs and pumping more money into marketing, are working.
First quarter results, announced last week, suggest a mixed but improving picture. Worldwide revenue rose 1 percent — the first gain in several quarters — and 6 percent in North America despite flat case sales. Profit in North America was up 15 percent in the quarter.
Frequent critic and shareholder David Winters, CEO of Wintergreen Advisers, wants to hear more urgency from the Coke brass.
Winters, who has called for Kent to step down, said the company should follow the lead of H.J. Heinz’s restructuring in the last few years. The ketchup-maker is reported to have cut, through layoffs and buyouts, more than 7,000 jobs and closed several plants since it was purchased in 2013 by Coke’s largest shareholder, Warren Buffett’s Berkshire Hathaway, and private-equity firm 3G Capital. Heinz is merging with Kraft and could eliminate more jobs.
“Why isn’t Coca-Cola pursuing a similarly aggressive plan to revive growth, slash what we view as its bloated cost structure and unlock value for shareholders,” Winters said.
Cultural shift
After years of easily getting consumers to “Have a Coke and a Smile,” the Atlanta-based giant faces a changing culture in which its core soda products remain powerful brands but have lost some market power. Meanwhile, growing categories like water, tea, coffee and energy drinks are much more crowded and, in some cases, dominated by others, such as longtime rival Pepsi.
Unlike Pepsi, Coke does not have an alternate business to fall back on. Pepsi’s snack business, which includes brands such as Quaker and Ruffles, has helped the Purchase, N.Y-company’s stock outperform Coke’s.
With case sales falling, Kent last year reassessed the goal of doubling revenue by 2020. The focus is now on high-digit earnings per share goals.
Bonnie Herzog, an analyst for Wells Fargo Securities, said lowering expectations will help Coke, especially given”shifting consumer preferences” and currency challenges abroad.
“We continue to believe (Coke’s) best-in-class distribution and strong brand portfolio will allow it to retain its premium valuation despite the recent hiccups,” Herzog said in an analyst note.
But 2015 started with Coke looking inward.
In January it announced 1,600 to 1,800 job cuts globally, with about 500 in metro Atlanta. Those cuts are part of a multi-billion dollar, multi-year cost-cutting plan that also includes new marketing efforts to reinvigorate its brands and bring consumers back.
Last month, Diet Coke — the company’s second best-selling drink behind regular Coke — lost its No. 2 soft drink ranking among all beverages as health concerns over sugar substitutes sapped sales.
Despite strong pushback from Coke and other beverage makers through their industry lobbying group — the American Beverage Association — cities and government bodies around the country continue to advocate for taxes on sugary-products or have banned them from offices.
Kent’s reboot, however, has also shown signs of success. Groundwork laid last year to push higher soda prices and to vary package sizes — especially highly profitable 7.5-ounce cans — helped drive the first-quarter revenue gains despite flat overall case sales in North America, which included a 1 percent dip in carbonated drinks.
New focus on ‘value’
For years, Coke leaders have talked about how case sales, also called volume, is an important underlying measure because it refers to the actual number of bottles and cans sold — unaffected by price and currency shifts. But lately, executives have shifted the focus to “value,” or revenue per unit.
“You can put value in the bank,” Kent says.
John Sicher, editor and publisher for Beverage Digest, questions the move to use “value” as a metric.
“Both Coke and PepsiCo are talking a lot more about revenue than volume these days,” he said. “That makes sense, as they and their customers put dollars in the bank, not cases. But growing dollars in the face of falling volume requires steep price increases and how long the industry can do that isn’t clear to me.”
Sicher offered the industry more good news. While sales of carbonated drinks for all brands were down for the 10th consecutive year, their slip may be slowing because of better marketing and the growth of the energy drink segment, Sicher said. Coke’s carbonated sales slid 1.1 percent in 2014 compared to a 2.2 percent fall a year earlier, he said.
Recovery still distant
But, he said, a soft drink recovery is far off.
“I have no reason to believe that volume will turn positive any time soon, but it may not fall as sharply in future years as it did in 2013.”
Coke leaders point to other moves the company has made — including the launch of Fairlife milk, growing the number of $1 billion brands to 20 and tapping Marcos de Quinto as its new chief marketing officer — as proof it is investing in growth.
The company also hopes to release its carbonated products in its partnership with Keurig Green Mountain later this year. It also will close a deal giving it a 16.7 percent stake in energy drink Monster by the end of the second quarter.
Joseph Agnese, an analyst for S&P Capital IQ, said Coke can reach its turnaround goals through slow, gradual improvements in its brands. That includes opening up new markets with home sodas made using the Keurig machines or growing sales in dollar discount stores by finding a better mix of product and prices.
Agness said “much easier to expand your brand” through new opportunities to get products in consumers’ hands.
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