Coca-Cola Makes Strides to Ensure a Bright Future

Coca-Cola’s focus on innovation and increasing its marketing investment makes for an ideal business strategy

Jul 12, 2014 at 9:00AM

The beverage industry has been facing challenges in the carbonated soft drink (CSD) category, mainly in developed markets, because of obesity concerns as consumers become more health conscious. To address these challenges, especially the ones faced in the CSD category, beverage companies, including The Coca-Cola Company (NYSE:KO) and PepsiCo (NYSE:PEP), have been reinvesting in their businesses, focusing on innovation, and increasing marketing investments to strengthen their brand portfolios and increase sales volume. Also, the companies are undertaking cost reduction initiatives to support reinvestments and bottom-line growth. 

Consistent global performer
Coca-Cola is the world's leading beverage company, with large international exposure. The company generates more than 50% of its total revenues from outside the U.S. The company has delivered consistent growth across the globe over the years; however, recently it has been experiencing weakness in revenues and volume growth in developed markets. Developing markets remain strong, though, and are the main long-term growth driver.

In the recent first quarter, the company experienced 2% year-over-year volume growth, which was below its long-term volume growth target of 3%-4%. A 4% year-over-year volume decline in Europe pressurized total volume growth. However, 7% volume growth in Asia Pacific in the quarter, primarily driven by 12%, 6%, and 3% volume growths in China, India, and Japan, respectively, and 2% volume growth in Eurasia and Africa supported the company's overall volume growth. Developing markets remain an important growth driver in the long term, as population and per capita income in those regions is on the rise.

Trimming the cost structure
Furthermore, Coca-Cola is working to make its cost structure leaner and increase productivity in an attempt to improve its bottom-line results and support reinvestments in the business. The company is working on a four-year productivity plan, under which it hopes to generate annual savings of $550-$650 million by 2015, mainly through supply chain optimization and the integration of bottling operations. In the first quarter of 2014, to further enhance productivity, Coca-Cola introduced a plan to drive an additional $1 billion in productivity in the next three years.

Under Coca-Cola's ongoing productivity improvement initiatives, the company has completed operational excellence diagnostics for about 50% of its plants in North America, and the process is expected to be completed by 2015. Once the operational excellence diagnostics is completed, each location will be able to generate savings of $1 million. The cost saving measures undertaken seem to be delivering results, as the company was successful in expanding its gross margin by 60 bps year over year in 2013, and by 50 bps year over year in the first quarter of 2014.

PepsiCo, Coca-Cola's rival, is also working on cost control initiatives to support reinvestments and support earnings growth. The company's cost-saving initiatives seem to be on track, as it enjoyed gross margin expansion of almost 90 bps year-over-year in 2013. PepsiCo's cost-control efforts are mainly directed toward increasing automation, increasing shared services and optimizing manufacturing facilities. PepsiCo is expecting to generate annual cost savings of $1 billion in 2014. The company recently announced another cost saving program for the next five years, starting in 2015, which is expected to generate cost savings of $5 billion.

Major marketing investments
Coca-Cola is also ramping up its marketing activities and has planned to increase marketing investments by $1 billion by 2016 to support volume and innovation. The company will increase its marketing investments by $400 million in 2014. Only 5% of the planned marketing investments increased in the first quarter of 2014, which means marketing investments will accelerate in the remaining year and will bode well for volume.

Moreover, Coca-Cola has been focusing on innovation and portfolio diversification, which remain critical for the company's long-term success. Consistent with its innovation and diversification efforts, Coca-Cola recently increased its stake in Keurig Green Mountain (NASDAQ:GMCR) from 10% to 16%. Coca-Cola initially acquired a 10% stake in Keurig Green for $1.25 billion. Keurig Green and Coca-Cola are developing a machine that will make both non-carbonated and carbonated drinks. Moreover, Green Mountain will be Coca-Cola's exclusive partner for the manufacturing and sale of pod-based cold beverages. Green Mountain will also benefit from the transaction, as it will be able to use Coca-Cola's supply chain and consumer base to expand its presence in international markets.

Final take
Coca-Cola has a large developing market footprint, which will offset the volumes weakness in developed markets and provide growth in the long term. Also, the company has been taking the right initiatives by reinvesting in businesses by focusing on innovation and growing its marketing investment. Also, Coca-Cola's initiative of improving productivity will augur well for its performance in the future.

You can't afford to miss this
"Made in China" -- an all too familiar phrase. But not for much longer: There's a radical new technology out there, one that's already being employed by the U.S. Air Force, BMW and even Nike. Respected publications like The Economist have compared this disruptive invention to the steam engine and the printing press; Business Insider calls it "the next trillion dollar industry." Watch The Motley Fool's shocking video presentation to learn about the next great wave of technological innovation, one that will bring an end to "Made In China" for good. Click here!

Furqan Asad Suhail has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Keurig Green Mountain, and PepsiCo. The Motley Fool owns shares of PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information