The Coca-Cola Co. says it plans to take actions to reinvigorate growth, supporting the Atlanta-based company’s previously announced five strategic priorities to restore momentum and the company’s long-term growth target of high single-digit comparable currency neutral EPS.
“We are taking decisive action to position The Coca-Cola Co. to continue delivering long-term value for our shareowners,” said Muhtar Kent, chairman and CEO of The Coca-Cola Co. “We have taken a hard look at our progress to date and realize that, while 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. In addition to announcing an expanded productivity program, we are streamlining our operations and further aligning our incentive plans to deliver against our growth objectives. We are also evolving our 2020 Vision to reflect these changes. Within this context, we are maintaining our long-term high single-digit EPS growth target, while changing our operating income metric to profit before tax and adjusting our net revenue target to mid single-digit growth.
“While we expect the macroeconomic environment to remain challenging through 2015, we are confident in our ability to return to sustainable growth over the long term,” he added. “This confidence is supported by the attractive long-term dynamics of our industry and the unparalleled reach of our brands and our global system. We are fully dedicated to strengthening our position as the world’s leading beverage company.”
The company introduced the following initiatives to reinvigorate growth:
• Streamlining and simplifying its operating model to speed decision making and enhance local market focus. These organizational changes, along with the previously announced changes being made to long-term incentive metrics, will empower employees and link line-of-sight accountability to business results, the company says.
• Expanding its current successful productivity program by targeting annualized savings of $3 billion per year by 2019. This productivity program will focus on four key areas: 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.
As a result of these productivity initiatives, the company expects to fund the marketing initiatives and innovation required to deliver sustainable net revenue growth. These savings also will support margin expansion and increased returns on invested capital over time.
• Refocusing on its core business model of building the world’s greatest beverage brands and leading an unmatched global system of strong local bottling partners. This will include refranchising the majority of company-owned North American bottling territories by the end of 2017 and a substantial portion of the remaining territories no later than 2020.
• Strategically targeting brand and growth investments that leverage the company’s global strengths. This includes previously announced plans to improve the quantity and quality of marketing, as well as making future investments that will target markets and categories where brands remain underfunded relative to the opportunity. The company has a disciplined strategy for incremental investments, prioritizing spending in markets where the Coca-Cola system has the right price/package architecture and execution capabilities in place. The company says it also will continue to grow investments in its still beverages while leveraging its new partnership model.
• Focusing on driving revenue and profit growth across markets while providing local operations with a clear line of sight and aligned compensation targets. Beginning in 2015, revenue growth will be added as a metric in the company’s incentive plans. The company will adjust the relative importance of volume and price/mix in each market in order to drive the right behavior for each market type.
Long-term growth targets and financial implications
As described above, the company is maintaining its long-term high single-digit EPS growth target, adjusting its net revenue target to mid single-digit growth, and targeting profit before tax in place of operating income to account for increased equity income growth from its new partnership model. Going forward, the company will have a profit before tax target of 6 percent to 8 percent.
“While investments made in recent months are yielding early signs of progress, we recognize that our five strategic priorities and the initiatives announced today will take time to produce results,” Kent said. “We remain confident in the vibrancy of the non-alcoholic ready-to-drink beverage industry and are determined to make the necessary changes to sustainably meet or exceed our long-term growth targets. At the same time, we are cautious in our near-term outlook given challenging macroeconomic conditions. In this context, our 2020 Vision will remain focused on delivering value growth ahead of the industry for our system.”
The company expects to be below its long-term EPS growth target in 2014 and, based on the current outlook, does not expect comparable currency neutral EPS growth in 2015 to be significantly different from 2014. Further, the company expects fluctuations in foreign currency exchange rates to have an unfavorable impact on its results in 2015. Based on current spot rates, existing hedge positions and the cycling of 2014 rates, the company expects a mid single-digit headwind on profit before tax in 2015. Longer term, the company intends to return to delivering against its stated growth targets.