Coca-Cola (NYSE:KO) is going through a difficult phase, as sales growth has been below expectations during the last several years. However, CEO Muhtar Kent believes the company is on track to produce solid performance on the back of healthy industry fundamentals, rock-solid competitive strengths, and increased efficiency. Let's listen to what Mr. Kent has to say about the soft-drinks giant and its strategy to deliver sweet and refreshing growth over the long term.
Industry fundamentals remain strong
While Coca-Cola's growth has slowed down, Muhtar Kent believes that investors should not mistake a bump in the road for the end of an era. Emerging market economies have decelerated in recent years, and this is hurting industrywide growth. On the other hand, long-term expansion prospects still look remarkably attractive for the industry, in general, and Coca-Cola, in particular.
Many consumers in developed countries are moving away from traditional sodas due to health considerations, and this is generating concerns among analysts regarding the potential long-term impact of healthier nutrition habits on soda demand. However, in spite of this factor, the retail sales value of sparkling drinks has grown in emerging, developing, and developed countries in each and every year since 2010.
Also, sparkling drinks have remained stable as a percentage of total nonalcoholic, ready-to-drink industry sales, in the area of 30% from 2010 to 2014. This means that slowing industry growth is not category specific, so carbonated drinks sales should accelerate once industry demand picks up steam, once again. Over the long term, Coca-Cola should be able to capitalize on rising income levels and growing demand, especially from emerging markets.
Retail value growth in the nonalcoholic, ready-to-drink industry is actually pretty well correlated to personal expenditure growth. More disposable income drives more convenience, and drives more packaged goods. Personal expenditure growth continues to be fueled by favorable demographic trends such as increased urbanization and the growing middle class. These global macro trends give us confidence that the global nonalcoholic beverage industry will grow by $300 billion in value between now and 2020, which represents an average annual compounded growth rate of 5%.
Coca-Cola estimates that the average household around the world consumes 26 drinks per day. Among those 26 servings, only 1.4 are Coca-Cola brands. This means Coca-Cola still has enormous room for expansion over the long term.
Coca-Cola has extraordinary competitive strengths
Industry conditions are important, but a company's competitive position within that industry can be even more determinant over time. Muhtar Kent believes Coca-Cola has what it takes to continue gaining share versus the competition in the coming years.
We're fortunate to compete in such a vibrant and dynamic industry. But for our model to work well, we must also drive value share and price realization in the marketplace, which we have done successfully over the last several years. In fact, we have outperformed the global industry and gained global value share for 30 consecutive quarters now. That strength ultimately comes down to three assets: dynamic brands, great marketing, and superior execution across our entire system.
The company has an amazing portfolio featuring 20 brands making more than $1 billion each in global annual revenues. Coca-Cola is also increasing its investments in marketing and advertising to strengthen those brands to reignite sales, and results look quite promising. In the words of Muhtar Kent during the company's latest conference call.
We increased our media investments in the double-digits in the quarter as we work toward fully funded brand plan in markets around the world, while at the same time enhancing the quality of our advertising. Great example of this is the new Coca-Cola marketing campaign during the Chinese New Year, which helped our China business grow brand Coca-Cola volume 9% despite slowing economic conditions.
Media investments take about 12 to 24 months to realize their full value. So while we are seeing initial positive results, we are even more encouraged by the knowledge that it's still early in the process and we have tremendous runway for continued improvement in our top-line growth.
Trimming fat and growing muscle
Coca-Cola is going through a series of restructurings and cost cuttings to improve operational performance and profitability. The company plans to deliver $0.5 billion in cost savings in 2015, and $3 billion in annualized savings by 2019. Coca-Cola is also refranchising its bottling operations in North America in order to achieve higher efficiency, more flexibility, and an increased focus on customer demand.
Muhtar Kent explained during the CAGNY 2015 Conference:
We're streamlining; we're simplifying; we're cutting costs to free-up capital and resources to reinvest in our business as well as provide us the needed financial flexibility. We're directing those investments against the greatest returns and we're focusing our company as well as our system against what we collectively do best. Simply put, these initiatives are assuring that we utilize our resources as effectively as efficiently as possible to drive share owner value through both the top as well as the bottom-line growth while remaining focused on overall returns.
The main game changer for Coca-Cola investors is the company's ability to deliver sustained sales growth. After all, cost cuttings can only take you so far in the context of stagnant revenues. However, it's good to know that management is running a tight ship and is focused on keeping operations as efficient as possible.