Coke Tweaks Its Business Model Again

Company rushes to sell off manufacturing, distribution in order to focus on concentrate

Coca-Cola Co. has changed course yet again on a basic part of its business model: how to control manufacturing and distribution without having to own them. And this might be its last chance to get it right.

After years of snail-paced progress, the beverage giant is now racing to sell off its U.S. manufacturing and distribution operations by next year so it can focus on its much more profitable concentrate-making business.

This wholesale divestment push wasn't exactly what Coke had in mind when it acquired its largest bottler for $12.3 billion six years ago.

It initially planned to re-franchise delivery trucks and warehouses but hang onto its bottling plants. The goal was to close some, modernize others and create a national manufacturing footprint that would allow it to more quickly crank out new products to satisfy consumers with rapidly changing tastes. The new structure was also aimed at enabling it to negotiate directly with big retailers.

But Coke's bottling partners didn't want the trucks without the factories. Last September, Coke agreed to sell some U.S. plants. Last month, it said it would sell all of them.

Its investors were getting impatient after the beverage giant missed profit targets the last two years, making it a possible acquisition target amid speculation that beer-industry leader Anheuser-Busch InBev SA could try to buy the company in a few years. And Coke management knows it has to get moving to avoid becoming an acquisition target.

"The clock is ticking,'' said Carlos Laboy, a beverage analyst at HSBC.

Jettisoning asset-heavy operations will have a major impact on Coke. It estimates revenue will drop to $28.5 billion from $44.3 billion in 2015 terms under the stepped-up U.S. divestments announced last month. Operating margin will jump to 34% from 23% and head count will shrink to 39,000 from 123,000 as capital-intensive factories, warehouses and trucks come off its balance sheet.

Even so, Standard & Poor's Ratings Services cut Coke's investment-grade credit rating by one notch to AA- in late February, saying the asset sales should lower the company's debt levels, but not enough to keep its AA rating.

Coke isn't alone in pursuing an asset-light strategy. Hotel operators like Marriott International Inc. have taken properties off their books through franchise agreements or management contracts in recent years. Darden Restaurants Inc., prodded by an activist investor, said last year it would transfer hundreds of restaurants to a publicly traded real-estate investment trust.

Food companies, though, often use distributors while keeping production in-house to control quality and their ability to launch new products. PepsiCo Inc. has no plans to sell its two largest U.S. bottlers after acquiring them for $7.8 billion in 2010.

Coke says smaller U.S. partners historically have been better distributors because of their local focus, and that a new decision-making structure among bottlers ensures manufacturing will now benefit from national scale.

"The marriage of national with local is the best of both worlds,'' said Sandy Douglas, Coke's North American chief.

It isn't the first time Coke, whose main asset is its brands, has struggled with the problem. Coke created a giant U.S. bottler, Coca-Cola Enterprises, and retained a 49% stake when it went public in 1986. Yet Coke and CCE still clashed over pricing and strategy. When Coke acquired CCE's U.S. assets in 2010, CCE was already "a 25-year-old problem'' because of inadequate investments, Coke Chief Executive Muhtar Kent recently told analysts.

While Coke says it has made significant headway and achieved $350 million in annual cost savings, the company has closed only about one-tenth of the nearly 60 soda-making plants it owns, compared with the roughly one-third to half it had targeted, according to earlier estimates by some senior executives.

Coke has invested in infrastructure like the equipment to manufacture smaller cans. Last year it opened a new regional distribution center in Memphis, replacing two older ones that were located on opposite sides of the Mississippi River, requiring shipments across the river. It developed a common IT platform to share with its partners and a national product supply group.

But more extensive changes proved difficult, in part because about 25% of U.S. territory remained in the hands of dozens of small bottlers that weren't interested in selling or ceding control. Coke has 68 bottlers in the U.S. today, compared with 73 in 2010.

Now Coke is handing its distribution and manufacturing assets back to longtime bottling partners led by North Carolina-based Coca-Cola Bottling Co. Consolidated, Hong Kong'sSwire Pacific Ltd. and Alabama-based Coca-Cola Bottling Co. United. So far, Coke has signed deals with about 10 companies, refranchising nearly half of its distribution territory and 17 soda-making plants. It announced last month it would sell the rest by the end of 2017.




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