Coca-Cola in need of refreshment
ATLANTA — Legendary investor Warren Buffett once was quoted as saying CocaCola was such a strong company, a ham sandwich could run it.
As new CEO James Quincey takes over from the outgoing Muhtar Kent, he faces challenges that have turned Buffett’s aphorism into a painful reminder of better days.
The Atlanta company is still hugely profitable, but increasingly under pressure. Soda sales stalled, and its core Coke brand slipped in the U.S. market as people cut back on sweet, fattening drinks in recent years. The beverage market is more fragmented, with new choices constantly materializing.
Coke is pushing to broaden its lineup with non-fizzy brands, but its lifeblood remains soda.
Behind its perpetually sunny marketing facade, Coke in recent years has spent enormous corporate energy rearranging internally and retooling operations to deal with new marketplace realities.
Onto the stage now steps Quincey, a British-born, 21-year Coke veteran who is expected to bring new ideas and vitality.
His tenure didn’t start quietly. In what was essentially his first act as CEO, Quincey used an earnings call with financial analysts to announce job cuts that will hit the headquarters staff in Atlanta hard.
The company plans to eliminate 1,200 jobs later this year from a pool of 5,500 corporate positions. The cuts are part of a plan to save about $800 million (all figures US) through 2019.
Quincey said the cuts are “clearly a painful process,” but necessary. He said job decisions will be made “as fairly as possible,” but also with “speed.”
“People don’t want this to linger on,” he said in an interview.
Quincey said the plan is to use about half of the savings to speed investment in new products and marketing, and to restore Coke’s revenue and profit growth to four to six per cent per year.
“There’s an acceleration we’d like to see,” Quincey said. “I don’t think we’re broken, but I don’t think we’re where we need to be.”
While soda sales are an obvious sore spot, they aren’t Coke’s only issue. Assessing the company’s fortunes from the outside has been complicated in recent years by an overhaul of bottling operations.
In 2010, Coke bought North American bottling operations from partner Coca-Cola Enterprises. It did the same with hundreds of bottlers around the world. Coke for a time took control of the operations, significantly enlarging the company. Now it’s spinning them back out to new partners under terms aimed at making that end of the business more efficient and nimble, while freeing Coke to focus on marketing and product development.
The bottlers were “brought into the hospital ward, if you like,” Quincey said. “We can see our new bottlers are stronger.”
Sandy Douglas, head of Coca-Cola’s North American operations, said the upshot is that the company and the bottlers will be focused on the same goal — making money rather than boosting volume.
“I could not care less about gallons (of sodas sold). I care about dollars,” Douglas said in a separate interview.
Coke cites evidence of success: despite weak volume stats, revenue in Douglas’s North America unit is up almost 11 per cent in the past three years. Pre-tax profits are up almost 15 per cent over that time.
The overhaul has been costly, though. Corporate debt has skyrocketed in recent years.
Coke’s revenue has slipped for the past four years — from $48 billion in 2012 to $41.9 billion last year — in part because of the accordion effect of the bottling overhaul.
The 130-year-old company’s star has also faded in other ways.
In 2007, Coca-Cola was the most valuable brand in the world, according to London consulting firm Brand Finance, which ranks brand values annually, based on its own calculations. Now it’s 16th in the U.S. and 27th in the world, according to the firm’s latest list, well behind companies such as Google, Apple and Amazon.com.
Quincey, who is fluent in Spanish, spent much of his Coke career in Europe and Latin America.
He is credited with diversifying Coke’s British business several years ago by buying Innocent, a “healthy” smoothie company. Before that, in Mexico, Quincey reversed market share losses to Pepsi and led the acquisition of juice maker Jugos del Valle, which Coke says now generates more than $1 billion in sales.
The biggest of the company’s problems is that people are simply less likely to reach for a soda than in the past, and there’s little indication that the trend is fleeting.
Coca-Cola’s “megabrand” sales volume — Coke and its variants — fell almost five per cent over the past three years in the U.S. and were down almost one per cent worldwide, according to company filings to the U.S. Securities and Exchange Commission. Those core brands account for nearly half of sales volume.
The decline is partly due to health concerns that sugary drinks contribute to obesity and diabetes. A number of cities and countries — including New York City, Philadelphia, Santa Fe and Mexico, one of Coke’s largest markets — have considered or enacted taxes or other curbs on soft drinks.
But more than soda politics are at work. Consumer tastes are shifting toward new products, experts say. They are being supplied by competitors popping up all over, they say, because it’s getting easier for small companies to launch new drinks and get them into markets.
Customers around the world face a dizzying choice of bottled waters, flavoured teas, iced coffees, smoothies, fruit juices, energy drinks and other concoctions.
This more fragmented market is requiring Coke to shift from its “have a Coke” mindset to a fast-moving, portfolio approach to the market, industry experts say. It has spent billions buying more brands around the globe, or developing new products itself.
Gold Peak tea, launched about a decade ago by Coke, passed $1 billion in annual revenues about four years ago, and is now the No. 3 tea brand in the U.S.