Coke's capitulation to the 'new normal', and could a newly graduated MBA run the business? Analysts unpick Q3 2014

By Ben BOUCKLEY contact

- Last updated on GMT

Photo: Samantha Celera/Flickr
Photo: Samantha Celera/Flickr

Related tags: Volume growth, Coca-cola, Revenue, The coca-cola company, Coke

Coke appears to be capitulating to the ‘new normal’ operating environment by lowering its revenue and volume growth targets, according to one financial analyst, while disaffected investor David Winters claims there is 'failure and disarray' within the business.

Bonnie Herzog, senior analyst at Wells Fargo Securities, said yesterday in a note that she welcomed these moves – specifically Coke’s removal of its focus on volume growth.

Yesterday, the company lowered its net revenue growth target from 5-6% to mid-single digit, while it did not present a target for volume growth – previously this was 3-4%.

Finally, the company said it would now measure profit before tax (PBT) rather than operating income (OI) growth to reflect ‘equity income’ growth from partners such as Green Mountain and Monster Energy.

With CEO and president Muhtar Kent describing 2015 as a “transition year”​ for Coke, Herzog welcomed the measures announced on Tuesday​.

‘Ongoing headwinds and weak growth’

To recap, these include a streamlined operating model, productivity savings of $3bn/year by 2019, re-franchising of 2/3 of the North American bottling network, strategic brand and growth investments – targeting under-penetrated markets and categories, growing stills, leveraging equity partnerships with Monster etc.

Perhaps most interestingly of all, Coke has ditched its focus on global volume growth, and will now favor a more localized market focus to identify the right balance between volume and price/mix on a market-by-market basis.

“We believe the Coca-Cola’s strategic refinement in light of ongoing headwinds and weak growth is commendable,”​ Herzog wrote, adding that recent investments in Green Mountain and Monster were encouraging.

David Winters slams Coke’s weak earnings: ‘Failure and disarray at every level’

“We are somewhat relieved by the acknowledgment that doubling system revenues by 2020 may no longer be realistic,”​ she said, adding that while Coke’s second strategic reset this year was a “little surprising”​, the measures sketched out above could get the company back on track in 2016.

EXTRA ANALYST INSIGHT:​ "For developed markets, like the US and the EU, a heightened focus on price/mix is clearly the right approach as both regions have seen volume growth decelerate steadily over a number of years. However, we believe the company's ability to price is closely tied to food inflation, which unfortunately is outside of their control. In the U.S. food inflation has been accelerating, which has been helpful.

"However, in many of the EU's major markets, we have seen a notable deceleration in food inflation (and even deflation in some markets) resulting in a notable deceleration in price/mix realization. As such, mix shift will likely continue to be the primary driver of improved revenue trends. We think packaging offerings like the mini cans need to grow a lot more however to be big enough to move the needle just yet, though we firmly believe this is the solution to Coke's revenue woes." (Vivien Azer, Cowen & Company)

Herzog’s words were certainly kinder than those of disaffected activist investor, David Winters, whose company Wintergreen Advisers said Coke’s weak earnings “show failure and disarray at every level”​, and called for new leadership at the company.

On Monday Wintergreen asked Coke 'twelve urgent questions' – touching on the soda giant's $12bn purchase of Coca-Cola Enterprises' North American business in 2010, to a lack of ambition in terms of cost savings and even the company's decision to revamp its Atlanta HQ for a reported $90m+ (this figure was reported in the Atlanta Business Journal last July).

Rather cheekily, Winters suggests that a newly graduated MBA student could capably manage Coke, as he questions why Coke is rewarding a management team he claims have “failed to be good stewards of the business”.

Asked by BeverageDaily.com about Winters’ Tuesday remarks, The Coca-Cola Company did not respond to a request for comment.

Related topics: Beverage, Manufacturers

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