Share of Who's Stomach? $1 Billion in Cuts Planned as Coke's Profit Falls

A billion dollars buys a lot of jobs or raises or new products or facilities or openings into new markets. So when a company like Coca-Cola says they are cutting $1 billion, it signifies the need for serious readjustment.

That people are not drinking as much soda as they used to is a trend, not a surprise. The reasons are varied but have to do with aging populations concerned about weight and health, newer alternatives that satisfy other needs and, well, boredom with the status quo.

Coke has room to grow in emerging markets, but 41 percent of its business still comes from the developed world, so to some degree this is about pivoting away from soft drinks. That move is fraught. Pepsi has been trying to do so rather more explicitly than Coke for several years and has received nothing but grief for its efforts. Investors seem to believe the problem is management not trying hard enough rather than consumers tuning out the message.

However the company decides to address this challenge, it appears that the sort of incremental line extension approach to change will be insufficient and that it must prepare for the sort of change that has roiled so many other industries. JL

Duane Stanford reports in Bloomberg:

The company has been slow to react to health concerns about its drinks, as well as the growing desire for beverages that aren’t carbonated colas.
Coca-Cola Co. (KO), the world’s largest beverage company, dropped the most in more than two years after North American soft-drink demand shrank and its once-effervescent growth in emerging markets showed signs of slowing.
Fourth-quarter net income slid 8.4 percent to $1.71 billion, or 38 cents a share, from $1.87 billion, or 41 cents, a year earlier, Atlanta-based Coca-Cola said today in a statement. Sales fell 3.6 percent to $11 billion in the period, missing the average analyst estimate compiled by Bloomberg.
Chief Executive Officer Muhtar Kent, facing sluggish demand worldwide, embarked on a plan to cut $1 billion in annual costs by 2016, aiming to reduce supply and data-management expenses and overhaul marketing programs. Still, the company has been slow to react to health concerns about its drinks, as well as the growing desire for beverages that aren’t carbonated colas, said Ali Dibadj, an analyst at Sanford C. Bernstein & Co.
“The changes that the company is making just aren’t enough,” Dibadj, who is based in New York, said in an interview. “Many investors aren’t sharing the confidence that management does of the company’s future.”
Coca-Cola shares fell 3.8 percent to $37.47 in New York, marking the biggest one-day decline since August 2011. The shares have dropped 9.3 percent this year, compared with a 0.4 percent decline for the Standard & Poor’s 500 Index. PepsiCo Inc. (PEP), the company’s biggest competitor, has decreased 5.7 percent in that period.
Global sales volume grew just 1 percent last quarter, less than the 3 percent rate Coke posted a year ago. Sales volume in North America fell 1 percent. Excluding some items, profit was 46 cents a share, matching the average of 16 analysts’ estimates compiled by Bloomberg.
With soft-drink sales slowing in markets such as the U.S. and Mexico, savings from the new cost-cutting program will be plowed into marketing its brands directly to consumers, Coca-Cola said. About three-quarters of the company’s volume comes from soft drinks, with orange juice, water and other beverages accounting for the rest.
Coca-Cola gets 41 percent of its volume from developed markets, such as the U.S., Germany and Japan. Developing markets like Mexico and Brazil account for 37 percent, and the remainder comes from the emerging category, which includes China and India.

‘Multifaceted’ Strategy

Coke has implemented a “multifaceted” approach to try to reverse slower soft-drink sales, Kent said today during a conference call. The effort will target concerns that soft drinks cause obesity and feature innovation in sweeteners and packaging, Kent said.
Sales volume of carbonated soft drinks in Coke’s North America unit declined 3 percent in the fourth quarter. Sales volume in the Latin America division was little changed. China volume increased 5 percent, helping boost volume for Coca-Cola’s Pacific region by 4 percent.
Coca-Cola agreed earlier this month to buy a 10 percent stake in Green Mountain Coffee Roasters Inc. for about $1.25 billion and work with the maker of Keurig coffee brewers to introduce a system for producing single-serve cold drinks.
In December, Kent shook up his management team to speed efforts to improve the company’s North American distribution system. As part of the move, the company said that Steve Cahillane, president of Coca-Cola Americas, would leave and his unit would be dissolved.