Let's give Coca-Cola's Co.'s (NYSE:KO) management team some well-deserved credit for its pragmatism, and for understanding that lofty and well-publicized goals must be shelved temporarily in order to fix more urgent vulnerabilities.
Of course, I'm referring to Coke's "2020 Vision," the ambition announced back in 2009 to double Coca-Cola's systemwide revenue by the year 2020. Management has recently been backpedalling from this milestone, preferring to call it an aspirational target rather than one "to be achieved at any cost over a fixed time frame."
In October of last year, Coke's management communicated revised strategic goals to position the company for long-term earnings-per-share growth in the high single digits. These don't replace the 2020 Vision; rather, they're shorter-term execution points to ensure that the world's largest non-alcoholic beverage company is on the right course moving forward. Before Coca-Cola can really ramp up systemwide revenues, it has to tinker with its beverage portfolio to meet evolving consumer tastes.
On the company's Fourth Quarter 2014 earnings call last month, CEO Muhtar Kent and CFO Kathy Waller updated progress toward the new benchmarks, listed below in a company-provided graphic:
Let's review these five "key actions" and the progress management reported on each via statements taken directly from the earnings call.
1)Target disciplined brand and growth investments
"...our incremental media investments coupled with our segmented price tag strategies drove revenue growth in our Sparkling portfolio through strong 4% price mix in the second half of the year." --CEO Muhtar Kent
In 2014, Coke announced that it would increase its annual marketing costs by $800 million to $1 billion, in part to kick-start sales of its CSD (carbonated soft drink) portfolio, which is generally referred to as the "sparkling" side of Coke's business. To translate the corporate speak in the quote above, Coca-Cola's CEO Kent points out that the increased media spends have enabled the company to grow sparkling sales profitably -- with price increases rather than volume increases.
What specifically are "disciplined brand and growth investments?" Over the last few years, a disciplined brand investment for Coke means taking a small brand with potential and scaling it through Coke's global distribution system, with a significant boost from the marketing dollars as discussed above. Take Fuze Tea, for instance, which Coke now sells in over 40 countries, and is one of the fastest growing brands ever in Coke's stable to reach the billion dollar mark, having done so in just three years.
2) Drive revenue and profit growth with clear portfolio roles across our markets
"...each of our markets has a specific role in order to sustainable revenue growth. Some markets focus on price realization, others on volume and the remainder on the balance of the two." --CEO Muhtar Kent
Coca-Cola is playing for the long-term as it balances opportunities for higher pricing with the always present need to increase market share. The idea of "clear portfolio roles" reflects Coke's growing realization that these often competing priorities of price and volume are best handled by assigning either one or the other to specific geographical markets.
For example, as developing economies have revised their GDP growth expectations downward in the last year, thus thinning out consumer wallets, Coke appears to be more focused on gaining market share through volume in markets like China and India.
Take the company's "Coca-Cola Splash Bar" experiment in rural India. This program is meant to extend opportunities to entrepreneurs, especially women, in under-served communities. The Splash Bar is a bare-bones refreshment stall from which the proprietor can dispense roughly 5 ounces of a soft drink for 5 rupees, or about 8 cents.
Coke's assistance to small business owners on the margins of developing economies is laudable. However, through the Splash Bar's extremely low price points, Coca-Cola also wants to engage a wide future customer base. It doesn't hurt that millions upon millions of these rural customers will see increased income and migrate to cities as the years go by. Coke hopes that they'll bring a taste for Coke, Fanta, and localized Coke brands such as "Thums Up" with them.
3) Refocus on our core business model
"...In North America we closed several refranchising transactions in 2014 and laid out a clear path and timeline to refranchise the remaining territories." --CEO Muhtar Kent
While Coca-Cola benefits from its massive bottling and distribution system, the company believes that owning as little of its bottling operations as possible will allow it to realize higher net profits over the long-term. In fact, Kent defines Coca-Cola's prime competencies not as bottling and distribution, but as "marketing innovation and franchise leadership." This is a way of saying that Coca-Cola should focus on marketing its brands and let others worry over the ultimate production and distribution.
To this end, Coke intends to refranchise, or sell off, nearly all of its North American bottling operations by 2020. But this doesn't mean that the company will become disengaged from the bottling and distribution processes, which are vital to Coke's survival and success.
Instead, the soft drink conglomerate will continue to work closely with its bottlers, and, where appropriate, form new joint ventures, such as the recently announced "Coca-Cola Beverages Africa." This bottler will exist as a joint venture between Coca-Cola, SABMiller, and the South African Gutsche Family Investments. Coca-Cola Beverages Africa will serve twelve African countries and handle roughly 40% of Coca-Cola's global African beverage volume.
It's hard to argue with Coke's logic in this business model tweak. While "Bottling Investments" as a segment contributed 15.2% of the company's overall revenue last year, its operating margin was essentially flat, at 0.1%. The bottling segment showed operating income of only about 1.5% in the two preceding years as well.
4) Aggressively expand our productivity program
"We analyze the cost savings opportunity in line with the business models in which we operate." --CFO Kathy Waller
This quote actually comes not from the earnings call but from a December financial modeling call with analysts, in which Chief Financial Officer Kathy Waller gave, among other things, a detailed overview of Coca-Cola's productivity plan. The company initially set a productivity target of $1 billion in early 2014, which was increased during the year to $3 billion, with all cost savings to be realized by 2019.
Productivity measures and associated cost-cutting can serve as a type of insurance for the management team. Should declining carbonated soft drink sales continue to mute gains in other parts of Coke's beverage portfolio, management can point to bottom-line profits in order to appease investors.
5) Streamline and simplify our operating model
"As you've seen in the press we've began work on reducing positions that are no longer aligned to our growth priorities or are deemed redundant as we streamline our operation." --CEO Muhtar Kent
One of Coca-Cola's actions to streamline its business has been to reduce "functional layers." Reducing hierarchy at the corporate level can lead to faster, decentralized decision-making -- a type of trimming an organization KO's size can usually benefit from. The company announced in January that it would cut 1,600 to 1,800 positions globally this year, with up to 500 employees to be released at its Atlanta headquarters.
Like the efforts aimed at productivity discussed above, there's another rationale for pruning personnel in a drive toward simplification. Coca-Cola wants to be seen by the markets as in touch with the urgency of its situation and sensitive to the shelf life of investors' patience as it tries to ignite high single digit earnings-per-share growth. Workforce reduction is a tried and true method CEOs of public companies have used to send the right signal to Wall Street, however bloodthirsty the method may same.
Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola. The Motley Fool 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.