Americans are drinking less soda, and that has been bad news for Coca-Cola (NYSE:KO).
Total sales volume for carbonated beverages in the United States fell 3% to 8.9 billion cases in 2013, according to Beverage Digest, the ninth straight year of decline and the lowest since 1995. Coke hasn't been immune to the decline, losing sales in what it defines as "sparkling" beverages, which dropped 1% in the third quarter after being even in the previous quarter, and down 1% in the first quarter.
There has been a specific weakness in Diet Coke sales, probably because other beverages with higher perceived health benefits are taking away market share.
Things are hardly dire for Coca Cola, but revenue had declined 2% as of the end of the third quarter, and CEO Muhtar Kent has laid out an aggressive plan to reverse the company's trajectory.
"We are taking decisive action to position The Coca-Cola Company to continue delivering long-term value for our shareowners," Kent said in an Oct. 21 press release. "We have taken a hard look at our progress to date and realize that while the strategies we laid out at the beginning of the year are on the right track, the scope and pace of our actions must increase."
Kent's strategy is part of the reason the company should be able to reverse its slide. Here's a look at what's planned.
Bottling plants will be sold
The bottling business is a high-volume, low-margin affair, and Kent plans to get out of it by "selling the majority of the company-owned North American bottling plants by the end of 2017 and a substantial portion of the remaining territories no later than 2020." The company had previously purchased its formerly franchised bottling companies in an effort to cut costs in 2010, but that plan failed. Returning that part of the business to franchisees should help the bottom line. As Euromonitor International beverage analyst Howard Telford wrote back in May:
The benefits to the Coca-Cola Company are primarily financial: The brand owner largely retains control over beverage production, sacrificing some margin but satisfying investors by reducing its direct exposure to the volatility of distribution costs. This strategy has been the historic strength of the tiered U.S. bottling system: sharing responsibility (and risk) across the supply chain.
Coke plans to cut $3 billion in expenses by 2019
While the CEO sees the need to cut expenses, he doesn't plan to do so by trimming the marketing or R&D budgets, which the company views as "required to deliver sustainable net revenue growth." Instead, Kent plans to reach yearly savings of $3 billion by 2019 by focusing on four areas:
- Restructuring the company's global supply chain, including manufacturing in North America.
- Implementing zero-based budgeting across the organization.
- Streamlining and simplifying the operating model.
- Driving increased discipline and efficiency in direct marketing investments.
Basically, Kent sees that the company has become bloated, and he wants to trim some of the fat.
The brands are strong, even if soda sales are not
Interbrand uses a complicated set of metrics to track the world's "Best Global Brands." Coca-Cola came in third in the 2013 rankings, down from the top spot in 2012. Its closest rival, PepsiCo (NASDAQ:PEP), ranked No. 22 each of the past two years. Coke even has its Sprite brand on the list at No. 69, while no other cold beverage company other than Pepsi makes the list at all.
While soda may currently be out of favor, Coke is an iconic brand and every move the company makes gets attention. That's a powerful tool even when your signature product is struggling. Lending the Coca Cola name to a venture gives its instant credibility and ensures a certain amount of sampling. It's a like putting Marvel or Pixar over a movie's title. It does not guarantee success, but it grants a high level of exposure and a much better chance in the marketplace..
Coke has such a well-known brand that its decision to replace its original formula in 1985 became major news, as did the reintroduction of the "Classic" version of the beverage 79 days later. Coca-Cola is an American institution.
Is Coke still it?
All of the moves Kent is making should enhance the company's bottom line, and the value of its iconic brand name should make pivoting easier. It's also worth noting that while soda sales in the U.S. have been cause for mild alarm, overall the company is very healthy. Globally, in 2013, Coke increased sales volume overall by 1%, growing its signature beverage by nearly 100 million cases. In addition, Sprite and Fanta each grew 2%, together adding more than 80 million cases.
More importantly, perhaps, the company's still beverages -- the ones not suffering from American consumers who are deciding that soda is bad for them -- grew 5%. Within that category, ready-to-drink tea sales grew 11%, while juices and juice drinks climbed by 5%.
Coke has its problems. It's never good when your signature products are slumping in their home market, but Kent has the company on the right path. Coke may not be quite as much "it" anymore. It may also be presumptuous to say "Always Coca-Cola," but the plans appear to be in place to ensure that "America's Real Choice" will regain its footing as a brand, if not as a beverage.
Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo, owns shares of PepsiCo, and has options on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. 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.