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How Coca-Cola Benefits from Its Refranchising Efforts

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Recent refranchising transactions

In Part 1 of this series, we discussed Coca-Cola’s (KO) letters of intent, signed in May 2015, with two bottlers as part of its refranchising efforts. In April 2015, the company granted additional territories to three bottlers: Coca-Cola Bottling Company High Country, Coca-Cola Bottling Company United, and Swire Coca-Cola USA.

The company also granted territories to new, expanding US bottlers, including Atlantic Coca-Cola Bottling Company, Chesterman Company, The Odom Corporation, and Ozarks Coca-Cola Bottling Company.

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Rationale behind refranchising

Bottling is a capital-intensive, lower-margin business for Coca-Cola. Coca-Cola expects refranchising to boost its operating margins, bring down capital expenditures, and improve the return on invested capital. Coca-Cola is also implementing productivity measures to improve its margins to offset the impact of weakness in US soda volumes.

Coca-Cola’s 1Q15 operating margins declined to 21.4% in 1Q15 from 22.5% in 1Q14, due to the impact of currency headwinds as well as productivity and reinvestment charges. Coca-Cola’s productivity program aims to generate $3.0 billion in annualized savings through 2019.

By refranchising its bottling operations to independent bottlers, the company can take advantage of the local expertise that these bottlers have. Regional bottlers have a better understanding of local consumer preferences, demand, and marketing programs. Coca-Cola’s refranchising efforts will help make its bottling system more flexible and customer-oriented.

Coca-Cola handed back territories representing ~5.0% of its US bottler-delivered business in 2014. The company transferred four territories in 1Q15. Coca-Cola stated that it is slightly ahead of its schedule to transfer the Chicago and Central Florida territories in the second quarter of 2015. By the end of 2015, Coca-Cola expects to refranchise ~15.0% of its bottler-delivered business.

Distribution network

Coca-Cola’s extensive distribution network will be beneficial for Monster Beverage (MNST) with the completion of its deal with Coca-Cola, expected by the end of 2Q15. Dr Pepper Snapple (DPS) also strengthened its distribution network with the November 2014 acquisition of Dr Davis Beverage Group and Davis Bottling Co., which nearly doubled its distribution in Pennsylvania.

Coca-Cola, Monster Beverage, and Dr Pepper Snapple together account for ~1.8% and 1.1% of the portfolio holdings of iShares Russell 1000 Growth ETF (IWF) and the SPDR S&P 500 ETF (SPY), respectively.

For more updates and analysis, visit our Non-Alcoholic Beverages page.

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