Coca-Cola to ‘reshape innovation pipeline to eliminate a longer tail of smaller projects’

By Elaine Watson contact

- Last updated on GMT

James Quincey: 'Fewer, larger, more scalable and more relevant solutions...'
James Quincey: 'Fewer, larger, more scalable and more relevant solutions...'

Related tags: Coca-cola, COVID-19, coronavirus

Like many CPG companies trying to maximize efficiency and streamline supply chains during this pandemic, Coca-Cola has been “ruthlessly prioritizing to deliver on core SKUs,” in recent weeks. But it’s also signaled plans to streamline the innovation pipeline and “eliminate a longer tail of smaller projects.”

Speaking to analysts on Coca-Cola’s Q1 earnings call Tuesday, CEO James Quincey said the immediate priority for the retail business is minimizing out of stocks and “maximizing share of visible inventory."

However, bosses are also “taking this opportunity to reshape our innovation pipeline to eliminate a longer tail of smaller projects and allocate resources to fewer, larger, more scalable, and more relevant solutions for this environment​,” said Quincey.

CFO John Murphy, who noted that core sparkling brands generate better margins, added: "It's been an opportunity to trim back significantly the long tail, which, as we've highlighted in previous calls, that tail is typically comprised of some of the more – the younger explorer and challenger brands, which by nature are lower margin."

Quincey added: "Will more choice, more innovation come back when​ [the] new normal and economy reestablishes itself? Yes, I'm sure it will. But in this period it's going to be a question of focus."

Half of Coca-Cola’s business generated from ‘away-from-home’ channels

While its exposure varies across markets, roughly half of Coca-Cola’s business is generated from away-of-home channels that have been badly hit by the coronavirus, with overall global volumes down 25% in April.

In some markets, drive-through operations and carryout have helped offset some of the declines (with Coca-Cola offering bundled offers), while restaurant partners have also been offered bottles and cans as alternatives to fountain drinks for pickup and delivery, “but most restaurants are operating on limited hours and are seeing overall trips decline sharply,​” said Quincey.

In the retail side of the business, the company has “seen some early pantry loading particularly in certain developed markets at the beginning of many of the lockdown phases," ​he said. "Then, as we get past the initial phases of the lockdown however, we are seeing levels normalize.”

Coca-Cola is ‘piloting several different digital-enabled initiatives’

On the plus side, Coca-Cola has enjoyed a significant increase in e-commerce sales, and is now “piloting several different digital-enabled initiatives using fulfillment methods, whether B2B to home or B2C platforms in many countries to capture online demand for at-home consumption in the future.”

It is also redeploying consumer and trade promotions toward digital, said Quincey. However, he stressed that, "It's certainly not the case that e-commerce is offsetting the losses from away-from-home... It's still a very small percentage of the total beverage category."

‘There is still a good deal of uncertainty around the trajectory of the pandemic’

So what do the next few weeks and months look like?

Right now, “there is still a good deal of uncertainty around the trajectory of the pandemic as well as the resulting macroeconomic impact​,” said Quincey, who noted that while consumption had increased again in China as outlets re-opened, and even with e-commerce sales up 50% year on year, sales overall are “still lower than the prior year.

"We expect the full recovery to take time especially as there are still limits on crowd sizes.”

‘The ultimate impact on the second quarter and full year 2020 is unknown at this time’

Through the end of February, Coca-Cola was growing volume 3%, excluding China, and was on track to achieve its previously provided full year 2020 targets… and then everything changed, said Quincey.

“The ultimate impact on the second quarter and full year 2020 is unknown at this time, as it will depend heavily on the duration of social distancing and shelter-in-place mandates, as well as the substance and pace of macroeconomic recovery. However, the impact to the second quarter will be material.”

In the three months to March 27, 2020 (Q1), net revenues declined 1% to $8.6bn as solid growth in North America (driven by growth in water, enhanced water, sports drinks, juice, dairy, plant-based beverages, and Coca-Cola Zero Sugar) was more than offset by a decline in Asia Pacific.

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