Coca-Cola's Structural Changes Eat Away At Profits, But Big Plans Ahead To Improve Efficiency

As The Coca-Cola Company ( KO ) continues to undergo the biggest re-franchising and bottling restructuring effort in its history, net revenue fell 11% year-over-year in Q1, with a 10 percentage point unfavorable impact of the structural changes. Organic revenue growth was flat in Q1, as the solid 3% impact of a positive mix was wiped out by fewer concentrate shipments, which, in turn, was affected by two fewer days in the quarter (2% impact) and other factors that the company says would self-correct over the course of 2017. So despite the one-time factors, Coca-Cola’s strong price/mix can be seen as a positive, which is expected to drive organic growth in the future. This is, in turn, expected to trickle down at the operating income level and help the beverage manufacturer create value at the bottom line.

KO Qamp;A 27

In Q1, Coca-Cola’s EBIT and comparable currency neutral operating margin grew by more than 90 and 220 basis points,  respectively. Coca-Cola is in transition, moving away from a capital-intensive organization with its intended refranchising plans for North America, China, and structural changes in Europe and Africa. By the end of this year, the company aims to refranchise two-thirds of its bottling territories in North America, and aims to refranchise a substantial portion of the remaining territories no later than the end of the decade. All this in a bid to move away from the capital intensive and low-margin business of distribution and improve its operating performance. The current CEO Muhtar Kent is making way for the current Chief Operating Officer James Quincey to succeed him as Coca-Cola’s CEO, and the latter has laid out plans to improve the company’s profitability that goes beyond its refranchising to laying-off workers.

Coca-Cola refranchised the majority of its company and bottling operations in China, while two of its largest bottlers in Japan completed their merger. The company also reached a definitive agreement with Anheuser-Busch InBev to acquire its stake in Coca-Cola Beverages Africa, which it acquired by way of acquiring SABMiller. This transaction is expected to close around the end of this year and Coca-Cola plans to hold these bottling territories temporarily until they can be refranchised to other partners. The company also plans to redesign its organization to make it faster and more agile, and as it creates a more focused, leaner corporate center and broadened enabling services, it could result in the laying off of around 1,200 workers beginning in the second half of this year and carrying into the next year. (( Coca-Cola earnings transcript ))

The new productivity plan means that Coca-Cola now has extended  its previous productivity plan to save $3 billion in annual savings by 2019 to achieve incremental savings of ~$800 million, bringing its current program to $3.8 billion in productivity savings. If the $500 million of productivity that will transfer to Coca-Cola’s bottling partners due to the accelerated pace of refranchising is added, the program extends to $4.3 billion in productivity savings by 2019.

Despite the drop in revenue and EPS this quarter, the steps taken by Coca-Cola in terms of refranchising and undergoing changes to become leaner could help it improve its profitability and achieve higher EPS growth in the next couple of years.

Have more questions on Coca-Cola? See the links below.

  • Why You Should Look Beyond Coca-Cola’s Declining Revenue
  • Coca-Cola’s Organic Revenue Grows 3% In Q3; Results Marred By Structural Changes
  • Coca-Cola Faces The Sugar-Tax Problem In South Africa
  • Coca-Cola Set To Enter The Coffee Market In Brazil
  • Here’s How Favorable Price Mix Is Helping Coca-Cola And PepsiCo Increase Soft Drink Revenue
  • Why Do Sodas Form 73% Of The Net Volume For Coca-Cola But Just Over 60% Its Value?

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Coca-Cola

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