Is Coca-Cola Co looking back to move forwards?

Is Coca-Cola Co looking back to move forwards?

Ray Rowlands of Drinksinfo Ltd starts 2014 with a look at the latest attempts by The Coca-Cola Co to reverse declining soda sales in its North American homeland.

The New Year is firmly upon us and many people are in an upbeat mood in anticipation of better days ahead.

But, 2014 heralds the start of some shock changes within The Coca-Cola Co. Last month, the company confirmed that it is dismantling its North American operations in order to separate the two functions of concentrate manufacture and bottling. In so doing, the company is aiming to retain firm control over the production of its core business whilst offloading the cost of maintaining transportation fleets and storage.

The move marks a return to a more franchise-orientated bottling model, as in days gone by, and comes at a time when Coca-Cola is attempting to restore company fortunes whilst facing declining soda sales in the region. In announcing the changes, CEO Muhtar Kent reported that the split would allow the company to "intensify focus on key markets, streamline reporting lines and provide flexibility to adjust the business within these geographies in the future."

Persuasive rhetoric, but it was only three years ago that the firm took a totally opposite approach when it bought up the major chunk of its North American bottler base. This mirrored a course that PepsiCo initiated when it bought its two largest bottlers, the Pepsi Bottling Group and PepsiAmericas creating Pepsi Beverages Co. It was just a few months later, in October 2010, that Coca-Cola followed its rival’s lead and acquired the North American business of Coca−Cola Enterprises (CCE). The aim was to achieve cost savings and provide additional revenue opportunities. In the same month, the company combined the vast majority of its US and Canadian businesses into a unified bottling and customer service organisation called Coca-Cola Refreshments.

A year later, it also agreed to acquire the Great Plains Coca-Cola Bottling Co, thereby adding to its bottler control. Although Coca-Cola Refreshments became the company's anchor bottler, a large number of independent bottlers remained in operation. The bulk of the bottling business (reported at around 80%) came under direct company leadership.

The acquisition of the North American bottling operations of CCE enabled Coca-Cola to remould its manufacturing and distribution, whilst Coca-Cola Refreshments was able to follow a more controlled approach to the development of its customer strategies, including new packaging and brand-based activities. In theory, the move also helped to alleviate a rumoured long-standing conflict between Coca-Cola’s focus on expanding volume and its bottlers focus upon increasing profitability.

A key priority for the company following this consolidation policy had been to address the steady long-term decline in soda consumption. In volume terms, soda represents around 70% of Coca-Cola’s total soft drinks business in North America, a region that accounts for 20% of the company’s global soda volume. Unfortunately, the move failed to stem the consumer drift towards other soft drinks: North American soda volumes continue to shrink by 1% to 2% a year. Coupled with the more rapid development of the company's international business, the US and Canada account for a declining share of Coca-Cola's global sales volume.

After announcing big plans in July 2012 for a more streamlined corporate structure that would see the company divided into three global businesses, the goal posts have shifted once again.

From this month, North America will split its integrated operations into two units consisting of Coca-Cola North America and Coca-Cola Refreshments. The Coca-Cola Americas operating structure, which included North America, Central America and South America, will cease to be, with the Latin America Group becoming part of Coca-Cola International, instead of being tied to North America. Coca-Cola Refreshments, meanwhile, will fall under the company’s Bottling Investments Group, which includes international bottling operations. The move is partly being made to speed up the sale of North American bottling operations back to independent US bottlers.

Hints to the change in bottling organisation came to light in April 2013 when Coca-Cola reached an agreement to expand territorial distribution rights to five existing independent bottling partners - Coca-Cola Bottling Co. Consolidated, Coca-Cola Bottling Company United Inc., Swire Coca-Cola USA, Coca-Cola Bottling Co. High Country and Corinth Coca-Cola Bottling Works Inc.

But, contrary to previous distribution deals, Coca-Cola is not giving the bottlers continuous rights; instead they are to be given ten-year renewal licences.

So, just three years after deciding that selling concentrates to independent bottlers was disadvantageous in a world of declining soda sales, Coca-Cola has turned about face and now sees this approach as the way forward.

But is it a case of, if at first you don’t succeed, then re-organise? Can it really have the promised financial impact in an environment where market conditions remain severely unfavourable to soda sales? Bottling typically carries lower profit margins than concentrate sales, and selling off distribution rights could earn Coca-Cola a lot of money. But, it may take more than this admittedly bold move to appease investors. Meanwhile PepsiCo, which is also suffering declining soda consumption in North America, has yet to reveal its future plans.

It will be interesting to see if it also thinks a reversal in company structure is the way forward.