Neville Isdell's restructuring of Coke has paid dividends but in the coming year talk of reorganisation and transition will not be enough, writes Chris Brook-Carter. Execution and delivery will be the key as Coke sets out to convince the market that Isdell's strategy for turning the company around is working.

In sporting terms Blue versus Red has always been a fixture to raise the passions. But in February every year the colour-coded rivalry takes a leap into the beverage world as PepsiCo and The Coca-Cola Company both report their full-year results within a week of each other.

Analysts and company executives line up in the respective corners - blue of course for Pepsi and red for Coke - each year to give their opinions on the year's battle and shout support for their respective team.

In recent times, PepsiCo has fought back against years of perceived underachievement to give Coke one bloody nose after another. Coke, in the meantime, has done its level best to compound its own injuries with a few self-inflicted body blows of its own.

However, there are signs this year that Coca-Cola has stepped into the ring leaner and fitter than it has been in some while, buoyed by a new management team and full of new-found confidence.

Most encouragingly, revenues grew 7% for the quarter and 6% for the full year, with cash from operations increasing by 8% for the full year, to US$6.4bn. Worldwide unit case volume growth was 4% for both the fourth quarter and the full year, which was at the top end of the company's long-term growth targets. The company surpassed 20bn in annual unit case sales for the first time in its history.

"This quarter we made further progress toward achieving consistent top-line growth in our business," Neville Isdell, chairman and chief executive officer, said confidently. "It completes a transition year in which the company delivered solid unit case volume growth that was well balanced between carbonated soft drinks and noncarbonated beverages."

That Coca-Cola was still in "transition" in 2005 was demonstrated by the 28% fall in the fourth-quarter earnings. Coca-Cola said it earned US$864m, or 36 cents a share, for the three months ended 31 December, against the US$1.20bn, or 50 cents a share, it recorded in the same period a year ago.

However, this was partly explained by a 10% rise in the cost of goods sold and an increase in selling, general and administrative expenses for the quarter of 12% reflecting increases in marketing and innovation. These investments are important and necessary if Coke is to combat two problems that have plagued it in recent years - its over-reliance on its eponymous flagship brand in the face of changing consumer patterns, and some lacklustre marketing. Coke's supporters will hope their company can wrestle back some of the initiative taken by PepsiCo over the last two years on both fronts.

"Given our performance in 2005, including progress in key markets, and a well-developed pipeline of innovation and marketing, we will assess ourselves against our long-term growth targets beginning in 2006 and beyond," Isdell said.

But it is Isdell's efforts to restructure the company behind the scenes that seem to be reaping the greatest dividends so far. Since May last year, the company has made certain changes to its operating structure across a number of its international divisions, establishing three new operating groups, one covering the European Union, a second for North Asia, Eurasia and Middle East, and a third for the East, South Asia and Pacific Rim.

This was followed in January of 2006 by the setting-up of a separate internal organisation managing its consolidated bottling operations and unconsolidated bottling investments. And, most recently, Isdell announced the appointment of an executive position to head its international operations, with Muhtar Kent - the former head of Turkish drinks company the Efes Beverage Group - taking the position.

Isdell said: "As we focus even more intently on execution, it is appropriate that our international operations - which accounted last year for more than 70% of our total volume and close to 80% of our total operating income - be put under the leadership of a dedicated, full-time executive with extensive operational expertise."

The success of these changes is not only apparent in the rising volumes and revenues - particularly overseas where continued strong growth in key emerging markets, including China, Russia, Brazil and Turkey, is leading the company's overall progress - but in morale, which observers agree has improved considerably. As Isdell himself put it in an analysts' conference-call: "This business is finally starting to believe that it can win again."

And many outside the business agree. "We are beginning to see early signs of an execution-focused turnaround that is working," said analyst Mark Swartzberg of Stifel, Nicolaus & Co in a research note.

That said, praise is not universal. "Without a diversity of products, something that competitor PepsiCo has, Coke has its sled hitched to some tired-looking livestock. That's not to say there aren't opportunities in the canned-beverage space. Just look at Hansen Natural. It's just that Coke doesn't seem to be capitalising on them," wrote one investor website this week.

Only the successful implementation of Isdell's innovation programme, which he has been planning for the last 12 months, will silence this sort of criticism.
The company still has some way to go to catch PepsiCo on this front, but Isdell will have to be true to his word and deliver as the market won't accept 2006 as another year of transition.