Coca-Cola’s Structural Changes Dent Q2 Results
The Coca-Cola Company (NYSE:KO) reported its Q2 and half-yearly results on July 27, and as expected, negative currency translations and continual slowdown in the demand for sugary carbonated soft drinks (CSD) hindered top line growth. Organic revenue rose 3% year-over-year in Q2 on 3 percentage points of positive price and package mix, but currency pulled down the top line by 3 percentage points. However, net sales declined 5% year-over-year primarily on structural changes, including the impact of the refranchised territories in North America, the deconsolidation of Coke’s German bottling operations as a result of the formation of Coca-Cola European Partners, and the impact of the brand transfer agreement related to the transaction with Monster last year.
Coca-Cola is moving away from a capital-intensive organization with its intended refranchising plans for North America, China, and structural changes in Europe and Africa. The company is looking to refranchise two-thirds of its bottling territories in North America by the end of 2017, and a substantial portion of the remaining territories no later than 2020, in a bid to move away from the capital intensive and low-margin business of distribution. All this in hopes to improve operating performance. Coca-Cola has completed the Coca-Cola European Partners and Coca-Cola Beverages Africa transactions, announced the transfer of certain territories in the United States to Arca Continental, and UNITED venture. The company expects organic revenue to grow 3% in 2016 but structural changes are expected to impact the net revenue by six to seven percentage points.
Coca-Cola might have missed revenue estimates, but this has been primarily due to structural changes, which are a one-time event. The company is in transition. A bottling business comes with four to five times more revenue per drink sold and the accompanying cost. Thus, any impact on the sales of the bottler is going to have a magnified impact on overall sales for Coca-Cola and much less on the company’s profits. This, however, doesn’t mean that the company’s core performance isn’t strong.
Have more questions on Coca-Cola? See the links below.
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