Coke Announces Expanded Cost-Cutting Strategy

Coca-Cola“The Coca-Cola Company today announced actions to reinvigorate growth.”

The statement led off a lengthy release issued by the cola giant, which two minutes earlier published its third quarter results for 2014. Coke’s numbers for the three month period fell short of analyst expectations and elicited what company Chairman and CEO Muhtar Kent described as a “hard look at our progress to date.”

Coke’s third quarter revenue dipped slightly as compared to same timeframe in 2013 ($11.98B vs. $12.03B), net income was $2.1 billion, down from $2.4 billion a year earlier, while profit plunged by 14 percent. Coke had been expected to report revenue of $12.12 billion. Coke’s share price has taken a beating on the news: as of press time, the stock is down nearly 6 percent to approximately $40.75.

Amid declining sales of soft drinks, much of it driven by concerns about soda consumption and links to health-related problems, including obesity, Coke has faced pressure from shareholders to cut costs and increase productivity. Earlier this year, Coke had pledged to save $1 billion per year through 2016 and has continued to streamline operations by selling company-owned distribution territories in North America, the majority of which will be in the hands of independent bottlers by 2017, according to Coke.

Nevertheless, introspection (and agitated investors) has led to the expansion of a cost-cutting strategy that will now aim to save Coke $3 billion a year by 2019. The company said it would also refranchise “a substantial portion” of its remaining distribution territories (those not unloaded by 2017) no later than 2020.

Muhtar Kent, Chairman & CEO, The Coca-Cola Co.

Muhtar Kent, Chairman & CEO, The Coca-Cola Co.

“[W]hile the strategies we laid out at the beginning of the year are on the right track, the scope and pace of our actions must increase,” Kent said in the release.

Coke laid out four steps that it believes will improve productivity as a way to save $3 billion annually: restructuring the company’s global supply chain, including manufacturing in North America; implementing zero-based budgeting across the organization; streamlining and simplifying its operating model; and driving increased discipline and efficiency in direct marketing investments.

Despite its revised strategy, Kent noted that Coke expects “the macroeconomic environment to remain challenging through 2015” and that “the initiatives announced today will take time to produce results.” Accordingly, Coke has adjusted previously announced financial targets and projects its 2015 numbers to bear similarities to lackluster returns of 2014.

Amid a carbonated soft drink category that continues to face scrutiny and sliding sales, Coke has attempted to broaden its portfolio and holdings, having made major investments in Keurig, which manufactures at-home beverage machines, and energy drink powerhouse Monster Beverages earlier this year.

However, it’s unclear as to the long-term impact that the investments will have with regard to Coke’s bottom line. And while the company can point to some bright spots this year, including an expansion of CSD volume share, one largely credited to its “Share a Coke” campaign, as well as sales of the company’s still beverages — volume was up 2 percent in the quarter and 5 percent year-to-date — soda remains the largest part of Coke’s business. The writing on the wall is clear: the slow deterioration of CSD sales — something that Kent dubbed “the new normal” — is unlikely to see a turnaround now or anytime in the future.