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Will Coca-Cola’s (KO) Diversification Plan Rev Up Sales?

Zacks

The Coca-Cola Company KO has been aggressively diversifying its business to shift from traditional added-sugar fizzy drinks. It is well known that cola giants like Coca-Cola and rival PepsiCo PEP are seeing declining volumes in established markets such as the United States amid growing health consciousness. This is denting demand for carbonated soft drinks (CSDs), hurting other soft drink makers like Monster Beverage MNST and Dr Pepper Snapple Group DPS as well.

Among CSDs, the cola segment has been facing the brunt of consumer shift toward alternative beverage offerings. The diet drinks are also under pressure, thanks to increasing consumer awareness regarding the use of artificial sweeteners.

Though Coca-Cola has bumped up marketing investments and is driving package and product innovation to boost its carbonated beverage business, these efforts have not brought about any meaningful improvement yet. Sparkling beverage unit case volume was down 1% in 2017, which compares with flat volume in 2016. Sparkling beverage accounted for 69% of the company’s 2017 worldwide unit case volumes.

Resultantly, the company’s total sales fell 20% in the last reported quarter, marking the 11th consecutive quarterly decline. Coca-Cola’s shares have also lost 4.3% in the past six months, comparing unfavorably with its industry’s decline of 2.3%.



Efforts to Focus Solely on Beverage

The company has been firing on all cylinders to rejuvenate its portfolio. It has ramped up its effort to transform into a total beverage company with a broad, consumer-centric brand portfolio and an asset-light business model.

Coca-Cola is pursuing investments in newer revenue platforms to boost long-term sales and profits. In 2017, the beverage giant made an important addition to its portfolio beyond sparkling soft drinks with the acquisition of Topo Chico premium sparkling mineral water brand in the United States. Also, it entered the fast-growing U.S. ready-to-drink coffee category last year and closed the proposed acquisition of AdeS soy-based beverage business.

Importantly, the beverage giant has launched Coca-Cola Zero Sugar in 20 markets, with a reformulated product, evolved marketing, new packaging and upgraded execution. This product has been contributing to revenues in the United States since its launch in the third quarter of 2017.

Recently, Coca-Cola ventured into the liquor space with the plan to introduce an alcoholic drink in Japan. The company launched its first-ever alcoholic drink — Chu-Hi — made with a distilled Japanese beverage (shocho), sparkling water and flavoring.

Massive Refranchising for Higher Returns

Coca-Cola is in transition, moving away from being a capital-intensive organization. In 2017, the company achieved major milestones by fully refranchising bottling system in the United States. Its refranchising plans will help it focus on building its core brands and reduce its exposure to the low-margin, capital-intensive bottling operations.

Though this effort has been impacting sales/profits adversely, it will result in higher operating margins, lower capital spending, and improved return on invested capital over the long term.

Cost Saving to Boost Bottom Line

The company has initiated a productivity and reinvestment program to boost profits. These initiatives include restructuring the global supply chain including optimization of the manufacturing footprint in North America, investing in technology to streamline operations, implementing a zero-based budgeting program, headcount reduction and driving increased efficiency in direct marketing investments. Currently, the company plans to save $3.8 billion by 2019.

These initiatives are helping the company to come up with better numbers. In the fourth quarter of 2017, despite reporting flat soda volumes, the cola giant gained from its growing beverage portfolio and re-structuring efforts. Organic revenues grew 6% on growth across the board, driven by price/mix growth of 4% and concentrate sales growth of 1%. Again, lower SG&A expenses (down 21%), higher gross margin (up 480 basis points or bps) and higher operating margin (up 540 bps) helped it come up with better numbers.

Constant endeavors to foray into the other alternative beverage space, restructuring and productivity efforts are expected to lift revenues as well as profits for this Zacks Rank #3 (Hold) company. Earnings estimates for 2018 and 2019 have moved up 3.5% and 4.1%, respectively, over the last 30 days, indicating analysts’ optimism on the stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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