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Can Coca-Cola’s Margins Improve in 3Q15?

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Margins under pressure

Coca-Cola’s margins have been under pressure due to the impact of adverse currency movements and structural changes. These structural changes include changes related to the company’s bottling and distribution operations.

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Margins in the previous quarter

Coca-Cola’s margins fell in 2Q15 despite the company’s productivity measures and higher pricing. Coca-Cola’s gross margin in 2Q15 fell to 60.9% from 61.7% in the comparable quarter of the previous year. The company’s 2Q15 operating margin declined to 20.9% from 25.2% on a year-over-year basis. Aside from currency fluctuations, margins in the quarter were adversely affected by structural changes like the expansion of distribution agreements with Monster Beverage (MNST) and the transfer of the company’s energy drinks brands to Monster Beverage.

Coca-Cola constitutes 2.2% of the portfolio holdings of the iShares Russell Top 200 Growth ETF (IWY).

The operating margin of Dr Pepper Snapple (DPS) in 2Q15 improved by 100 basis points to 22.3%, driven by higher revenue and a decline in selling, general and administrative expenses. The operating margin of Cott Corporation (COT) improved to 5.9% in 2Q15 from 4.8% in the comparable quarter of the previous year.

PepsiCo’s (PEP), which announced its 3Q15 results on October 6, reported an improvement in its gross margin. However, the company’s 3Q15 operating margin declined due to a $1.4 billion impairment charge related to the company’s Venezuelan operations.

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Productivity measures

Coca-Cola is on track to deliver $3 billion in annualized savings by 2019 under its productivity program. The company is also streamlining its supply chain. In the first half of 2015, the company consolidated three distribution centers and closed one plant in North America and began the installation of in-line blow molding equipment.

Under its productivity program, Coca-Cola is also implementing zero-based budgeting, streamlining processes, and simplifying the company’s operating model. The savings from the company’s productivity initiatives are being redirected toward marketing initiatives and innovation.

The company is also optimizing its bottling operations to improve margins. In September 2015, Coca-Cola announced its plans to sell nine production facilities to three of its independent bottlers. Coca-Cola is refranchising its bottling operations to reduce its exposure to this low-margin, capital-intensive business.

The favorable impact of these productivity measures might be impacted by currency headwinds in 3Q15.

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