Coca-Cola's Productivity Program Boosts Earnings

Brand colossus: Just a few of the 500 brands the company owns and markets around the globe. Image source: Coca-Cola Company.

The Coca-Cola Company reported a fourth-quarter 2015 revenue decline but higher net income as the organization's multiyear productivity program enhanced operating margin during the period. Alongside its Tuesday morning earnings release, Coca-Cola also announced that it will speed up the refranchising of its North American bottling operations. Below, we'll run through highlights of the report and also discuss the refranchising news.

The Coca-Cola Company: The raw numbers

Q4 2015 Actual Q4 2014 Actual Year-Over-Year Growth (Decline)
Revenue $10.0 billion $10.9 billion (8.3)%
Net Income $1.24 billion $0.77 billion 61%
Diluted Earnings Per Share $0.28 $0.17 64.7%

Data source: Coca-Cola Company 8-K filing, Feb. 9, 2016.

What happened with The Coca-Cola Company this quarter?

  • The 8.3% revenue decrease was primarily attributable to 7 percentage points of negative currency effects.
  • Organic revenue declined 1%, which management attributed to the effect of six fewer selling days in the current quarter versus the prior year.
  • "Sparkling," or carbonated beverages, expanded volume by 1% in the fourth quarter. Flagship brands Coke, Sprite, and Coca-Cola Zero managed volume gains of 1%, 3%, and 7%, respectively. However, the sales volume of Diet Coke, which is still suffering from consumer misgivings over its ingredients, declined by 5%.
  • "Still," or non-carbonated beverages, continue to grow at a much faster rate than their sparkling portfolio peers. A still beverage volume increase of 6% in Q4 2015 was driven by bottled water (+8%), ready-to-drink tea (+6%), and juice-based drinks (+5%).
  • The company's multiyear, $3 billion productivity program is starting to visibly improve company profits. Despite lower revenue, fourth-quarter operating income margin improved almost 200 basis points to 15.2%.
  • Coca-Cola continues to push a strategy of gaining market share in emerging markets. In Asia-Pacific, one of the company's smallest segments but a management-identified growth area, operating income declined 23% from the prior year, as the company absorbed a 9% decrease in price and mix in order to scale volume. As an illustration of this process, giving up price points helped unit case volume grow by double digits in India during the quarter.
  • Coca-Cola announced that it would accelerate its plan to refranchise 100% of North American bottling operations. Management now forecasts that it will complete this initiative by 2017, three years ahead of schedule.
  • By gradually selling off bottling operations, Coca-Cola is attempting to shift its business model away from manufacturing and toward a higher-margin, higher-value existence as a licensor and distributor of brands.

What management had to say

In remarks accompanying Coke's press release on its refranchising acceleration, CEO Muhtar Kent provided insight into management's strategy as it dismantles its North American bottling unit and repeats a similar process on other continents :

This acceleration of our global refranchising marks a step change in our efforts to refocus The Coca-Cola Company on its core business of building strong, valuable brands and leading a system of strong bottling partners. When this transformation is complete, we will look very different than we do today.Expanding Coca-Cola bottlers in various regions will grow in terms of revenue, employment and reach as we transition Company-owned operations to the franchise system. The Coca-Cola Company will return to its focus as a higher margin, higher return and less capital intensive operation. With the accelerated refranchising plans announced today, we will move from a system where about 18% of our volume was produced by Company-owned bottlers in 2015 to about 3%.

Looking forward

Coca-Cola appears to be garnering small but meaningful successes from a multifaceted plan to protect its business from the decline of sweetened carbonated beverages. A focus on productivity and cost-cutting, greater marketing spends, and a shift from manufacturing to the "franchise system" Muhtar Kent mentioned above, are all targeted toward maintaining earnings-per-share growth while the organization finds new sources for top-line expansion. There's much hard work ahead on each of these programs. Yet management aims through its proactiveness to continue to build a buffer between the company's overall fortunes and the unclear destiny of trademark brands Coke and Diet Coke.

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Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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