The Coca-Cola Company today reported first quarter 2017 operating results. We spoke with President and Chief Operating Officer James Quincey, who will become CEO on May 1, about the company’s performance and road ahead.
What do you see as the key takeaways from this quarter’s results?
At a high level, we delivered results in line with our plan and remain on track to deliver our financial targets for the full year. As we expected, organic revenue growth in the quarter was impacted by the fact that there were two fewer days in the financial reporting period than in the same period last year. When you consider that one day of revenue in the first quarter this year was worth roughly $100 million to the company, you can see how a couple less days can significantly impact our results. In addition, Easter shifted into the second quarter this year, which put pressure on our top-line results.
Beyond the mechanics of reporting, though, I would highlight that we are making progress in our transformation to becoming an ever-more consumer-centric, total beverage company. During the quarter, we completed the acquisition of AdeS, the leading soy-based beverage brand in Latin America. We continued to expand smartwater and Honest Tea in Europe. We saw excellent growth for Coca-Cola Zero with double-digit volume growth for the brand globally driven by especially strong growth in markets where the new Coca-Cola Zero Sugar recipe has been rolled out over the past year. The Gold Peak and fairlife brands also contributed strong growth in the United States.
The company announced that it expects job reductions in the coming months as part of efforts to accelerate growth. Why are these reductions necessary?
In February, we shared with our people that we are in the process of designing a new operating model to support our growth strategy as we transform our business into a true total beverage company. And that this new operating model would anticipate our being a smaller company post-refranchising, leverage new technologies and have a leaner, more focused corporate organization. This new structure we are putting in place is also part of creating the culture and speed necessary to support our new growth strategy. While there will be savings and job reductions associated with these changes, our first goal is to reduce complexity, simplify processes and speed decision making.
Today, we shared that we expect approximately 1,200 job reductions as we put in place the leaner corporate organization. While this will clearly be difficult for those impacted, these changes are critical for us to create an environment where we can accelerate growth and become the consumer-centric, total beverage company we need to be in a fast-changing world. As has long been our culture at Coca-Cola, we do not take decisions about jobs lightly and we are committed to treating our people with dignity, fairness and respect throughout this process.
'We are making progress in our transformation to becoming an ever-more consumer-centric, total beverage company.'
'We are making progress in our transformation to becoming an ever-more consumer-centric, total beverage company.'
The company also said it expects to achieve an additional $800 million in annualized productivity savings over the next few years. What is ‘productivity’? And why is it important?
Productivity means finding new, innovative ways to achieve more output with less input for any task or activity, or deciding to no longer do it because business needs or priorities have changed. This process of innovation or reallocation of resources is what creates economic growth for a country or a company if reinvested wisely. This is our objective, too – to free up resources to reinvest in growth as a consumer-centric total beverage company.
Consumer products companies across the board are finding it harder to grow. Beyond increasing productivity, what other actions are you taking to accelerate growth?
As we further transform into a total beverage company, we are shifting to what we are calling a “category cluster” model to focus on growth across five strategic beverage categories – sparkling soft drinks; energy; juice, dairy and plant-based drinks; water, enhanced water and sports drinks; and tea and coffee. While we’ve competed in each of these categories at various levels around the world for years, we are now being more disciplined about our investments across these categories globally in order to broaden our consumer-centric portfolio. This work includes launching new products through innovation, changing recipes for existing products to reduce added sugar, and acquiring new, on-trend brands in categories like tea, coffee and plant-based drinks. Together, these efforts will build a portfolio for the long term that closely matches what our consumers and customers want.
We also recently appointed a new Chief Growth Officer who will lead this work and bring together our global marketing, customer and commercial leadership, and strategy teams to drive a coordinated growth strategy across an expanding beverage landscape around the world.
As more consumers look for food and drinks with less sugar, how are you responding to these changing demands on your sparkling soft drink portfolio?
We’ve been clear that we need to reshape the growth equation for sparkling soft drinks. People still love the category, and it’s still growing in terms of revenue. But we know we need to do things differently to help people moderate their intake of added sugar. We support the World Health Organization’s recommendation that people limit added sugar to 10 percent of their daily caloric intake. That’s why we are implementing a number of programs focused on reducing the amount of sugar in our drinks. This includes reformulating drinks to reduce sugar and still offer people products they love that taste great. It also includes ongoing investments in sugar alternatives and a continued push to develop and promote smaller, more convenient packages with less sugar like our mini-cans and smaller aluminum and glass bottles.
We are also continuing to see strong momentum with our revamped recipe for Coca-Cola Zero, called Coca-Cola Zero Sugar, as it rolls out around the world. Volumetrically, the Coke Zero brand grew 3 percent in 2014, 6 percent in 2015, 9 percent in 2016 and accelerated further in the first quarter of 2017 with double-digit growth. The expansion of this product is a key part of our work to help and encourage people to moderate their overall intake of added sugar, and we’re excited about where it is headed.
Next week you will become Coke’s new CEO. What differences will people see under your leadership?
I’ve tried to lay out where we need to go for our next stage of growth, how we must organize differently and the changes in our culture that are required. To take one aspect – speed. To keep up with the fast-moving consumer landscape around us, our organization has to be ready and willing to change at a faster pace probably than at any time in our history.
Hopefully you’ll see that we’ve laid out a clear path to transform the company for the future to be bigger than our past – to be a company that is bigger than the Coca-Cola brand – to be a total beverage company that is well positioned across a wide range of beverage categories. While we’ve already been on a transformational journey under Muhtar Kent’s leadership over the last few years as we completely reshaped our bottling system, jumpstarted growth in the flagship North America market, increased productivity, and launched hundreds of new products and brands, we know there is even more we can do. It will be an honor to lead the organization during this significant time of change, and I look forward to working with our people around the world to accelerate our growth.
This Q&A includes certain "non-GAAP financial measures" as defined under U.S. federal securities laws. Refer to our first quarter 2017 earnings release issued on April 25, 2017, available on the Company's website at www.coca-colacompany.com (in the “Investors” section), for full financial results and a reconciliation of non-GAAP financial measures.
This press release may contain statements, estimates or projections that constitute “forward-looking statements” as defined under U.S. federal securities laws. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will” and similar expressions identify forward-looking statements, which generally are not historical in nature. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from The Coca-Cola Company’s historical experience and our present expectations or projections. These risks include, but are not limited to, obesity and other health-related concerns; water scarcity and poor quality; evolving consumer preferences; increased competition and capabilities in the marketplace; product safety and quality concerns; perceived negative health consequences of certain ingredients, such as non-nutritive sweeteners and biotechnology-derived substances, and of other substances present in our beverage products or packaging materials; an inability to be successful in our innovation activities; increased demand for food products and decreased agricultural productivity; changes in the retail landscape or the loss of key retail or foodservice customers; an inability to expand operations in emerging and developing markets; fluctuations in foreign currency exchange rates; interest rate increases; an inability to maintain good relationships with our bottling partners; a deterioration in our bottling partners' financial condition; increases in income tax rates, changes in income tax laws or unfavorable resolution of tax matters; increased or new indirect taxes in the United States and throughout the world; increased cost, disruption of supply or shortage of energy or fuels; increased cost, disruption of supply or shortage of ingredients, other raw materials or packaging materials; changes in laws and regulations relating to beverage containers and packaging; significant additional labeling or warning requirements or limitations on the marketing or sale of our products; an inability to protect our information systems against service interruption, misappropriation of data or breaches of security; unfavorable general economic conditions in the United States; unfavorable economic and political conditions in international markets; litigation or legal proceedings; failure to adequately protect, or disputes relating to, trademarks, formulae and other intellectual property rights; adverse weather conditions; climate change; damage to our brand image and corporate reputation from negative publicity, even if unwarranted, related to product safety or quality, human and workplace rights, obesity or other issues; changes in, or failure to comply with, the laws and regulations applicable to our products or our business operations; changes in accounting standards; an inability to achieve our overall long-term growth objectives; deterioration of global credit market conditions; default by or failure of one or more of our counterparty financial institutions; an inability to renew collective bargaining agreements on satisfactory terms, or we or our bottling partners experience strikes, work stoppages or labor unrest; future impairment charges; multi-employer pension plan withdrawal liabilities in the future; an inability to successfully integrate and manage our Company-owned or - controlled bottling operations; an inability to successfully manage our refranchising activities; failure to realize the economic benefits from or an inability to successfully manage the possible negative consequences of our productivity initiatives; failure to realize a significant portion of the anticipated benefits of our strategic relationship with Monster; inability to attract or retain a highly skilled workforce; global or regional catastrophic events, including terrorist acts, cyber-strikes and radiological attacks; and other risks discussed in our Company’s filings with the Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K for the year ended December 31, 2016, which filings are available from the SEC. You should not place undue reliance on forward- looking statements, which speak only as of the date they are made. The Coca-Cola Company undertakes no obligation to publicly update or revise any forward-looking statements.