The Coca-Cola Company (NYSE:KO) Deutsche Bank dbAccess Global Consumer Broker Conference Call June 16, 2016 8:00 AM ET
James Quincey - President and Chief Operating Officer
Kathy Waller - Chief Financial Officer
William Schmitz - Deutsche Bank
Alright. Well, good afternoon everyone. We are heading into the home stretch. It is great to welcome Coke back to the consumer conference this year. James Quincey, newly minted President or not so newly actually, it’s been almost a year and the Chief Operating Officer of The Coca-Cola Company. So thanks very much, James, for coming.
Good afternoon, everyone. I put up the traditional forward-looking statement page, that is the post-lunch slot and in homage to the Internet trend of can you see an image within an image, there is actually a panda in there, a small prize for the one who can find it.
So with that, having dwelled a little bit on the serious page, let’s move to the serious business of what we are doing for growth. Well, I would like to talk about three things with you. One, just remind those of you or many of you will have seen me before, but just remind those of you who perhaps haven’t that we build from a set of indisputable strengths and that we have been pursuing an agenda over the last 18 months and we see based on our learnings, based on our insights, based on what’s happening, two things that we are doing, one around accelerating some of those actions and secondly, about evolving our strategies and our approach to certain issues. So, three simple chapters, I will go through them and I will attempt to leave a bit of time for Q&A.
So, firstly, building from our strengths. We, the Coke Company, the Coke system, we have an incredibly strong set of assets. You will have heard us talk about them before, but I think it’s worth remembering and therefore reminding about them, a fantastic portfolio of brands. We have $20 billion brands. We are #1 in nonalcoholic ready to drink, not just because we are #1 in sparkling, but we are #1 in stills as well and we do that through our over 500 brands. We would like to think that whilst our marketing can get better, we work from a platform of quality, from the right quantity and marketing that’s on strategy for our brands and our marketplaces. And thirdly and I know a number of our bottling partners have been here this week, we have an unparalleled bottling system that delivers superior execution. We work with those roughly 250 bottling partners around the world to drive in-store execution, visiting something like 24 million customers, 24 million outlets each week, and we collectively between all of us have 16 million pieces of cold drink equipment. So, a set of assets that I think gives us a great platform from which to look ahead for growth into the future.
Late 2014, Muhtar laid out a 5-point agenda, a set of priorities for us going forward. We talked about focusing on our core business, which meant refranchising. We talked about streamlining and simplifying our own organization and driving efficiency to drive aggressive productivity. We have learned a lot over the last 18 months and we have seen a number of places where we can accelerate our actions, because now we have proven how to go about implementing them and can see an ability to pick up the pace.
The other two parts of the 5-point plan are focusing on segmenting our markets to be more precise, more targeted in terms of how we approach getting revenue and the second one was the discipline around investments. There we believe we have made good progress. We have been making those decisions and we see in the light of market conditions and the ever-changing consumer, we see how those strategies can evolve to continue to support growth for the company.
So with that, let me dive into those two big parts. Firstly, the accelerating actions. Fundamentally, we are accelerating the actions on focusing our core business, because we want to transform the company and return to a new version of our core value creation model. That’s around the company building strong brands, driving customer value and leading our franchise systems. That will make the company as it says on the slide lower risk, higher return with ultimately a greater confidence in our ability to achieve our long-term growth model. That’s the company that’s going to emerge from the midst of all the change and the structuring and the latest refranchising, press release that comes out on a steady, planned rhythm. This is the company that’s going to emerge from all that midst of change.
How are we doing? On the principle dynamic of refranchising, we have talked about five geographies, particularly where refranchising is going on. In the U.S., which is by far the most complicated with the most moving pieces, we are still on track to end it, complete it by the end of the accelerated date of the end of 2017. We have so far got agreements that covers 70% of the volume that we are going to refranchise. So obviously, there is a bit of time from agreement to actual handover, lot of work to be done, but the team that’s focused on this is making good progress and remains on track.
Europe, I am pleased to say and they were here this week, Coca-Cola European Partners, that deal is closed and up and running. I think that’s a very exciting start for that bottler. Coca-Cola Beverages Africa, we are expecting to close that early in the third quarter. So that will be another one done. China is in process. It’s always going to – it was further in the pipeline or later in the pipeline. That’s going to take a little longer. We said that will take us through ‘17. And obviously, we are working on the Japanese possibility of merging the system there, talks ongoing. So, while a lot of our franchise system is in motion, we clearly are marching at a rhythm, an accelerated rhythm and meeting those deadlines successfully.
Once that’s done, our business and The Coca-Cola Company itself will look very different post the transformation. We are going to go from being about 18% of the global bottling volume to about 3% of the global bottling volume, concentrated largely in the Asian countries and in India. And that means that we are going to transfer a lot of employees to our bottling partners. We are going to go from about just over 120,000 employees to just under 40,000, and of those 40,000, half of them will be in the remaining bottling investment group territories that we still own. So, the core business will be somewhere around just under 20,000 employees. So, very different company, we believe focused on the core strengths and the ability to drive value.
And within that, in parallel with refranchising, the other thing that we are accelerating the focus on is our productivity initiatives. We have taken – we have tried to take some time in the midst of all the restructuring, try and just breakout where the productivity is and how it’s coming through. So just here, I know we have used a page like this before with the numbers on the left. But just to give you an idea of how we believe the productivity initiative is bold and forceful, you can see here the percent of the relevant spend basis that we are going off to in terms of savings and they are in the teens. So, there is some pretty meaty productivity targets against those three different spends buckets: COGS, SG&A, and with its OpEx and its marketing. And we are doing that by ultimately moving from it being an event to embedding it in the daily routines, the monthly routines, the annual routines and driving it further into the operating culture. We are on track. We are a little over halfway through realizing the savings and we are fully on track with realizing the benefits that come from this program.
So, those are the two things we are accelerating, the refranchising and getting the productivity done. The place we are moving to in terms of productivity is taking the system to the next level of its collaboration on productivity. We are recently at the global system meeting, where a large number of the bottlers come together with the company and we were discussing how can we take some of these areas and find new ways to collaborate as a system to capture even more productivity collectively, collaborative procurement for just one example. We currently have what we call the cross enterprise procurement group, which brings together most of the bottlers in the company and purchasing some key commodities. We have been discussing how can we expand that to other procurement category groups and buy more together and more effectively. And on into the other categories, whether it be digital, the route to market or the design to go. So, intensifying our efforts as a company and intensifying our TAM to connect the bottlers will also have their own programs, so that we can find even more as a system.
The second area that I just wanted to touch on is where we are evolving our strategies. Now as a backdrop to talking about this, let me just kind of underline for a second where we see the opportunities and why we are evolving our strategies. When we look at the opportunities, we continue to see a robust category growing into the future, the non-alcoholic ready-to-drink category depending on which projection you look at, how robust long-term growth potential. Some of the forecasters are even above five, but we see long-term potential in the five arena. Yes, as I talked about in February at another unnamed conference, I said in the short-term, it’s going to likely be less than that, so maybe it’s going to be in the four range in the short-term, in the near-term, so – but still robust growth for the industry. And on top of that, we ourselves only have about a third of the industry in terms of value share. So we at the company, we see long-term category growth fundamentally continuing to be there along with an opportunity for us to gain share as we have done consecutively and continuously over a large number of quarters.
And against this opportunity, we think we have the fundamentals of a growth strategy that works. There is this growing consumer demand that we can meet with our great marketing, with the base of the excellence and the execution from the system as long as we make the disciplined portfolio choices along the way and that will drive us towards our long-term growth model. So the opportunities are there. We have the strategy so how are we evolving. We are evolving because we are responding to what the consumer is doing. The consumer, some of these trends are – have been running for a number of years some are intensifying, but we are responding to whether consumers are doing, whether it’s personalization. I think Share a Coke was one of the best examples responding to personalization or the small packages and people wanting to control calories and we need to respond to some of the other trends that are out there with the consumer. And I want to touch on two of those, two buckets of those; one on sugar and choice and secondly, on income and quality.
So we are adjusting our approach to the sparkling category. We have made a shift in how we deal with the challenges and the headwinds around added sugar or total sugar consumption around the world. We realize that we need to go from offering choice to shaping choice. We need to use the ability of our system, our marketing, our designs, our reformulations to provide a portfolio of products that encourage and enable consumers to enjoy added sugar responsibly. Now some of that will be smaller packs of Coke classic or Coke original taste, but also some of it will be on innovation. We are investing more in R&D, so that we can reduce the aggregate sugar content across the portfolio and promote zeros and light products, all of which will need to meet the absolute entry price of being great tasting. There is no point us developing products with whatever level of sugar if consumers don’t like them because they are certainly not going to drink them. But we clearly see a vector here where more shaping of choice to help move the industry and innovation will provide a platform for sparkling growth.
Now along with that, we of course need to do a number of other things. They are not so much to do with the product, but there is a need for us to support and help lead on the promotion of facts. That’s takes different shapes in different countries given all the regulatory environments, but our north star is to promote clear facts. Marketing responsibly, we reinforced many of our leading policies on marketing to kids and other ways to ensure that, that is done in a responsible fashion and of course engaging with all sorts of stakeholders, so a different approach to sparkling.
I think what’s also worth underlining about this approach is it connects and integrates a number of other strands of what we are doing out there in terms of our sparkling approach. I just talked about how we are going to go from offering choice to shaping choice, how we are going to be proactive in trying to take the consumer somewhere. But that also integrates with our strategy choice of being less dependent on being volume led and being more focused on being value led. The two things can go together, because as I shift from trying to sell the extra 2-liter bottle with oversized discount to selling more beautiful, small glass bottles that is good from a revenue point of view, yet it’s also good from a shaping choice point of view.
And thirdly, the way that we are marketing the Coca-Cola brand, for example, by taking it from different brands and making it into the one brand strategy with a number of variants. As people, for example, someone who has loved Coke classic all these years at some point, when they wanted to have a little less sugar, we made them change brand. You either had to go to Diet Coke or Coke Zero, but these brands all had different personalities. And the reality is we used to lose people along the way. So what we have done through the one brand strategy is create Coke as one singular iconic brand with different variants, so that you can participate and always continue to participate in the Coke franchise, whichever the ingredients on which ever occasion you don’t happen to want to participate in. Of course, that needs to be underlined by what I talked about to do with the innovation, the transparency and to some extent, the leadership. So a different way of looking at category growth and integration of the strategy of shifting from volume to revenue and a new way of marketing brand Coca-Cola.
The second evolution of the strategy I just wanted to talk about was something on this revenue segmentation. And let me enter that through just an optic of what’s happening globally and with the macroeconomics. We have talked in the past about how we have seen yes, a slowdown macro economically in the developed and the developing markets, and that’s flow through into the NARTD value equation for the industry, but also – and not immaterially important for us, a pickup in the developed markets. And as we ended 2016 obviously, we saw a portfolio where the developed could continue to do well and some pressure in the developing and emerging markets, knowing that developed and emerging tend to be more volume or revenue focused and the develop being more obviously, revenue but also profit focused.
The reality is that this year has started and gone on economic forecasts and therefore, industry growth is starting to be impacted by a number of economies. You can see the latest downgrades to the GDP forecasts from the back end of last year to now. A lot of that is coming in the emerging markets. I think we all knew that some of them would be bad, not forgetting that some of them are doing very well and some of our businesses in some of emerging markets are doing very well, but we knew some markets will be bad. I think a couple have come in a little worse than people expected for the year, places like China, also Argentina is the government begins an economic correction. So some have come in worse economically and I think worse from industry point of view. The question is not to admire the forecast or lament the forecast but to talk about what are we doing about it? Clearly, as we approach the segmentation of revenue and giving different markets different roles in driving revenue and then ultimately, profits, we have really looked at these different – obviously, the countries within these three different buckets of developed, developing and emerging.
And not so much focusing on what where we are doing well in the developed and the strong and continuing focus on price and mix in a number of these markets that’s paying dividends. It paid dividends in ‘15 and we believe it still will in ‘16. Let me talk a little bit about the emerging markets. As I said, some are doing well, good growth in places like Indonesia, Philippines. Some are coming under pressure like the China, Argentina and when I get to business continuity maybe even Venezuela. But what’s important about these is not to stick with whatever the piece of paper said the plan was back in 2015. If there is a change, our experience and our game plan for emerging markets to go into problems is to get in there early, rip off the Band-Aid and get on with adjusting the business. And that’s generally speaking, get a real focus on driving execution and affordability, more disciplined around pricing and inflation because as these markets tend to go down in currency, there tends to be more local inflation, to get really disciplined on pricing, adjusting the marketing mix to follow the consumer where they are going, whether it’s some countries, the rich get richer and you need more premium and the poor get very impacted by devaluation and inflation and you need to get very focused on affordability. We have got to do that in some of these markets and we are pulling the Band-Aids off some of those.
Now having said that, there are a couple of other things that are important, one is we are not going to continue to invest in places where there is no good return in the short-term. We will reallocate the money from those that aren’t going to succeed in the short-term who don’t need to rebalance the markets to those economies and those businesses that are doing better. So we are doing a fair bit of reallocation to get that done. And secondly, the business continuity, of course some markets gets so bad that just say staying in business becomes the part. Clearly, this is a very small part of portfolio, but we are focused on it and we do know how to do it.
So in the round, emerging markets, still growing. Some of them are little worse than was expected and we have got in there and we are taking action to set the businesses for these new tougher environments and moving the money elsewhere. When it’s taken in the round, obviously, we are looking to do the right thing in terms of revenue for the long-term, but also leverage the total picture and the total pictures productivity, so that we can deliver what we said we were going to deliver in terms of delivering value for the business. Now, one way of doing that and I think it’s just worth underlining because of the importance to the business whether it’s some of those struggling emerging markets or whether it’s the growing emerging markets or whether it’s even the developed markets, I mean, here India, which certainly has been growing, a lot of the focus on affordability. You can see some of the splash bar, which is the cheapest, most accessible Coke you can probably buy in the world. We just launched, I know I talked about it before, but the entry pack PET, it’s a new technology, first in the world. The line is now up and running for 1 month. It’s running at full speed and we are selling what we can. What’s important about that package is the new technology radically extends the shelf life of small PET. Shelf life of small PET to reach rural areas has always been a problem for anyone in PET bottles, because it loses the gas. So, this is a way of really being able to extend the reach way further into the rural areas, so I think that’s a very exciting innovation.
And then the U.S., the U.S. continues to make good progress on its packaging strategy, and that’s not just affordability as it’s the case with India, but it’s also premiumization. There are whole set of markets around the world, where that trend of income inequality continues to play out and where the necessity becomes to move from the middle to more premium offerings and more affordable offerings.
The third area, where we are doing some evolution of our strategies in stills, as I said at the beginning, #1 in sparkling yes, but we are also #1 in juice and juice drinks, #1 in ready-to-drink coffee around the world and the strong #2 in most of the other categories within stills either through the energy partnership with Monster or in water sports drinks, and in fact, tea. The basic premise is we have got a 50% value share in sparkling beverages, but even that #1 in stills is only a 15% market share. So, on top of the growth of stills, which is continuing and which is robust, we believe there is an extra opportunity in terms of share gain. What we are seeing as that pressure from income inequality flows through into the beverage industry as in many other industries and the availability and the, in fact, the effectiveness of the supply chain offers new opportunities to premium and closer to nature type beverages we are seeing a wider spectrum emerging from premium to affordable offerings. There is growth on both ends of that spectrum. We see ourselves on the industry being able to offer more affordable entry and products on the bottom end of the price spectrum whether that’s juice drinks and teas, people do it in water, that’s not our focus though, but in the premium end, we see more growth. There is more growth in premium juices and plant-based drinks, the expansion of chilled and all sorts of new technologies and we participate strongly in those sectors.
Premium tea is growing. Gold Peak, which is one of our chilled brewed teas in the U.S., is growing well into double-digits, a lot of growth in the premium end of tea. Similarly, in value-added dairy and protein-based drinks, there we have made a number of bolt-on acquisitions in the recent months, most recently, announcing a deal not yet closed on that is builds on our Chinese deal, builds on our Nigerian deal, builds on the U.S. deal that was done around fairlife. We see opportunity for us to participate in the value-added end of dairy and plant based protein drinks.
And then coffee, we are ourselves premiumizing what was already a premium category in ready-to-drink coffee in Asia and our focus in water is largely in growing on the premium value-added end and the great success of smartwater and expanding that. So, lot of opportunity in stills, a lot of that occurring at both ends of the spectrum. And the way we are attacking it is how? We are attacking it by yes, are building some brands locally. There are some of our billion dollar brands that started off organically in one part of the world and we have just built it, built it, and built it until it’s successful, where it started from whether that’s Simply or Georgia and the latest upcoming one being something like Gold Peak.
We used bolt-on M&A. I mentioned a couple of the recent examples. And ultimately, we are not looking to just build lots of local jewels, but to scale brands globally. The nirvana is when we can find either one brand that can be scaled globally or a family of brands that can be scaled globally as though it were one master brand and that helps us drive value. It helps us dry value, because we get scale, value leadership and therefore we can participate profitably in many of these sectors. All of that underpinned by a realization and a further development of fit-for-purpose routes to market, whether that be chilled or different types of manufacturing or different types of selling we know we need to find the way that helps work for the consumer and the consumer, not prioritizing the fit with the base business.
So with that, let me summarize with a couple of pages. Post refranchising, we are going to look different, but we have greater confidence in being able to meet our long-term growth model. We are going to look different. I won’t go through these numbers, Kathy, Coca-Cola’s CFO is here, we will be able to take questions together in a minute, but we will look like a very different company, but I think the point worth underlining is not just the shape of the company that will emerge from the midst of the change, but the potential and the greater confidence in hitting our long-term growth model.
So, with that last page of summary, we have got a strong set of assets and some clear strategic initiatives. We are accelerating on those ones where we know how to execute and we are making a lot of progress, the refranchising, returning us to our lower risk, higher return routes, leveraging the effective revenue growth strategy in some of the volatility of the modern world yet underpinned by solid stability and growth in the developed markets, accelerating our stills, finding those country category price point spectrum positions, where there is value and growth. And then of course, last but by no means least, reshaping our approach to the sparkling category.
So with that, thank you for listening. I am going to turn the questions – Kathy, do you want to come up and we will take some questions?
Q - William Schmitz
While Kathy is walking up, James, can you just talk about what do you think the progress so far on the one brand strategy is? I am sorry I know it’s still fairly early days and the impact on the labeling laws and the sugar taxes. So, is it about choice or is it really about leveraging marketing investment or is it both?
I think it’s a representation of the various different elements of the strategy. I mean, the one brand strategy just to summarize for those that perhaps don’t know is bringing under, taking the different brands of Coke, whether it be Coke, Coke Zero, Diet Coke, Coke Light, Coke Life, Cherry Coke, Vanilla Coke, whatever and bringing them on the one integrating idea and brand proposition and saying look there is one Coke. You are going to enjoy it in lots of different ways, but the bottle is shared, the iconography is shared, the brand proposition is shared and bringing them under one brand and calling each of the rest barriers. I mean, it sounds like kind of a marketing piece of paper, but what is really driving that is allowing people to enter the franchise at any particular point and stay in the franchise if they have concerns about ingredient X or ingredient Y, they can stay in the franchise, because you can have a Coke Classic or you can have a Coke Zero Sugar. You can have a Coke Classic. You can have a Coke Caffeine-Free. We are providing the variance for people to stay in the franchise and that then connects with the all the work on the visual identity. So, how is it going? To be honest, it’s still early days. It only really rolled out a few months ago. The initial consumer feedback is very strong. The first – while the next iteration of the graphic representation of this on the packaging I think is going into Mexico right now. That’s the first place this representation is going. We had some 1.0 versions of the packaging we tested in Spain and in Northern Europe, both of them – and Chile and Russia. Both of them had the same basic reaction. It was a much stronger implementation and look for the brand in store. It drove extra sales and extra mix of lights and zeros and that’s the results from the tests. We are now moving to a larger scale with the 2.0 of the graphics. So, we are hoping to see equal and better results.
How far along are you in the price and mix journey in developed markets?
I think the price/mix journey we are not in the same place in each market. So, I think where they are is very different by market. Generally speaking, I would say we are further along kind of the rate journey in Europe, especially in the current kind of tough maybe not deflationary, but low inflation environment that is Europe. So I think we are looking for mix. Of course, we are looking for price, but we are looking for mix and I think Europe is a place where differentiation on packaging has still got more to go. In the U.S. we still got both levers. The premium to the rest of the industry in the U.S. is lower than it is in Europe. So I think there is space for both and the team in the U.S. has made consecutive quarters of good progress on price and mix. And we think there is plenty of runway left to go. I always say yes, there will be quarters when it won’t come through and when competitors or customers something will go wrong, but we see that we have got a track record of quarters and we see plenty of runway in the U.S.
You have been targeting in the U.S. for what percentage of sales, I think it’s what, 15% now, is that the right number of the sort of new packaging?
Yes, the new packaging.
Yes. Exactly so do you have a target for where that would get?
No because and the reason that we don’t have I mean we are all close to the business plan and there are targets of where it’s going to get to this year and next year and the year after. But in conceptual terms, over the long-term, it’s not we are trying to create – get to a specific number for those plants because what will happen in the road is we will think of new packs that need to be out there in the market because as consumers change, so as households get smaller, as retailing moves more towards convenience, away from the bigger boxes, you can find yourself wanting to have smaller packages. So maybe we will have to introduce other large PET packages. So there will be continuing package evolution to meet our needs to diversify and segment the occasions and the price points at that’s got plenty of room to grow.
Questions from the audience, I find you.
John, long-term, I have two questions. First one pretty easy long-term is a 2% to 3% price-mix top line contribution achievable globally once you kind of get things where they need to be?
I am going to guess I would answer that by if revenue is in the number in the long-term growth. Well, I mean it’s in that sort of ballpark because we are looking for price and volume in a broad mix. So as that’s roughly half of what we are going for in revenue. Then yes, it’s in the ballpark. Now we have been more in the 2% kind of end recently, but I mean I think clearly we are not going to want to go for 1% and I don’t think 4% is achievable. I am not trying to give a guidance that is 2% to 3%, but that’s clearly what’s implied and what’s kind of going on. Kathy?
Yes. As James said earlier a few minutes ago though, [indiscernible] of 1% to 2% is probably going to be what we get. And that’s actually perfectly acceptable and it depends on what else is going on in the macro-environment. But on a consolidated basis, 2% to 3% would be great, but sometimes you are going to be at 1% to 2% and that’s perfectly acceptable.
I understand. And just regarding Coke Africa, you have been accelerating all your refranchising globally, right. And it’s been on your timeline even though you have been pulling things forward a little bit. Coke Africa is a bit different because it’s on really somebody else’s is timeline, right. So when this ABI-SAB deal closes all of a sudden, Carlos Brito is going to be pretty good partner with you and I am just wondering how that kind of develops, I know that you could pull that partnership and give it – create something else or do you want to wait for that deal to close, where he then could from one minute after it closes, you could look at the books and just kind of see what you are doing or how are you thinking about the evolution of that relationship?
Well, of course we are thinking about where we are going in Africa, but unfortunately, given that there is not just one but two deals to not comment on, I have a double no comment. Sorry. Yes, that was a good try.
There is obviously a huge amt of consolidation of the bottling network everywhere around the world pretty much. If we sort of take a very long-term view maybe, I don’t know, 15 years, what’s the ultimate aim, is it one bottler per region, one bottler globally, no bottlers, is there – can you give us a bit more color in terms of the ultimate direction?
I don’t think there is a one answer for the future because the consolidation of the evolution of the bottling system obeys a whole series of dynamics and they are not static. And they are not just about who wants to go where and do what, but we have to steward a franchise system that responds to the opportunities to the consumer. And I don’t mean just consumers want X of that, creates a whole range of manufacturing and distribution opportunities for the system. Also, where is the customer going to the perfect shape of a bottler is not a static picture. So I don’t think that has – clearly, we have a view. Clearly, we have a plan as is represented in what we are doing in refranchising, but there is not a single destination point at which history will end.
James, can you just elaborate on the challenges no in China I know it was a pretty rough first quarter, it sounds like things aren’t great so far this quarter. And then do you think China could ever be a Cola market and I think it’s more of a Sprite market, is that right in terms of relative market shares?
Okay. Let me try both of them. I mean I think China is a bit rough at the moment. I think what’s macro economically, I am not going to give a number, I am not sure what the number is, so the GDP, but it’s clearly is slowing down. I mean I think you are going to see in Nielsen Fmcg or whatever category you want to look like, it’s kind of been stepping down over the last couple of years and this year it’s probably in the low single-digits to flat. I think the way the Band-Aid needs to come off is sometimes, it’s in an industry and the market is developing when the trend changes, you can kind of get whiplashes through the supply chain. So I think some of what you see for us is the effect of the inventory as the kind of distribution system, the wholesalers, the distribution partners accommodate a lower level of sales in the short-term that kind of own inventory whiplash effects. So there is some of that going on. But I think what’s important for us is to look through that kind of short-term it’s like one of those supply games you play at business school and look through again what is the consumer doing. And ultimately, it’s going to be a couple of things. There is more of a middle class emerging and they continue to go up the spectrum in terms of their demands for high quality, interesting beverages. So we will continue to push whether you want to call the premiumization or new higher end offerings. But the opportunity in the rest of China, whilst those people are more under pressure from the kind of economic shift that the government is making, there is a vast opportunity there that’s still untapped. I mean distribution in the rural and the lower socio-common areas is still not fully tapped.
So, we see ourselves, yes, adjusting to the kind of the short-term kind of whiplashing of the supply chain, but staying focused on where this is going long-term. And of course, for us it makes a difference which emerging market gets into problems because in only some of them do we have bottlers. And of course that magnifies the impact of our consolidated revenues. But given the emerging markets, it doesn’t make much difference to profits, so you got a bit of who goes into the – who goes through the ring and makes the difference in that sense. But we stay focused on where we are going, pull off the plaster, take action, get yourself setup for the new normal. So we think there is going to be a vibrant business in China the long-term. Now is it a Cola market, I think the Cola markets have been built in history. Most is – even Latin America, which everyone will call a Cola market, if you go back far enough in history, they were flavor markets and the Cola business got build over time and you can see that happening in some of the Asian countries, where they are Sprite, they are flavor markets. But they can become Cola markets and you can see that in China. Steadily over the last 10 years, Coke has narrowed and narrowed and narrowed and narrowed the gap towards Sprite, it hasn’t overtaken Sprite, but very often it’s the pattern whereby people come in on the flavors and over time it develops more into a Cola market. And you can see it’s going to be a long-term trend, but you can see that path being laid in China.
I have a whole list here. And also a question about agility speed of movement, lot of CPG companies talk about wanting to make their innovations expanding to where – territories as quickly as possible, if you want to speak to your sparkling business the speed at which Zero and Light rolled out, it still seems relatively measured compared to what we see from other businesses, is that something that’s special to the Cola market or to do with system or was that something that you would hope to see changes across the Coke system in the future?
Well, I am certainly not going to say I am happy that we are fast enough, but Kathy knows me. But those words are never going to pass my lips, because okay, you went too quickly while maybe they were doing better, no. So, do I think the Coke Zero could rollout faster? Yes, I do. Do I think Coke Light should rollout to more places? Not necessarily, because it meets a particular point of development in the cola category in a number of markets and responds to a set of consumer demands. So, I would definitely segment initiatives between which of those are targeted, intended to drive a specific purpose with consumers, and Coke Light is one of those I am not looking for it to be in every country, Coke Zero clearly and we will be calling it Coke Zero Sugar. Clearly, I would have liked to rollout. I think, clearly, we are focused on how do we move faster with the winning offerings those that clearly have resonance across many countries, whether it’s all of developed countries or all of the world how do we get that out faster absolutely and not satisfied and we are working on making that better.
Just one last one, do you think the organization knows what the new marching orders are, meaning that like if I ask sort of like lower and midlevel employees like they have done these volume, volume, volume, for instance, in the U.S. I mean, is it sort of cascaded all the way down like I think either those red score things I mean is that price mix such a big element of the red score that you sort of can’t avoid?
Yes. I mean, yes, I mean, do I think it’s – again it’s back to the previous one – am I satisfied is that where it has to be? I am going to say no, I mean, there is no question that I think in all situations, senior managers get bored with their messages before the messages reach the furthest reach of the organization. So, absolutely, we need to keep being clear on what the priorities are. There is no thing that’s more confusing to the organization than lack of clarity on direction. Clearly, sometimes we have to provide the framework, they have to act within it and we have to provide the direction. So, I would never give up on continuing to provide the direction, but yes, I do think it’s penetrating. Yes, I do think it’s reaching the middle and the frontline. I mean, whether it’s the red scores, which is more about the bottler frontline and the people in our operations helping to support them and a lot of that has always been very price mix. Now, the important thing is, are we changing it within red, which is the in-store execution tracking system? Are we changing what we are looking for to the smaller packages and the more price orientated packages, is there a big display of two leaders? And the answer is yes. Are we more focused on revenue inside? Yes, we have shifted from volume to revenue in the incentive system. So, people are starting to see that’s what drives the paycheck. Are we there on the complete culture shift? No, the fact they have got the message, it doesn’t mean that it’s all fully implemented. So, we will have to keep reinforcing it time and time again.
Well, I think we are out of time and thank you again for the beverages. It’s going to hurt the CCP incidence pricing I think, because people drink a lot of soda.
Good. Thank you.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!