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Coca-Cola Accelerated Refranchising Efforts in 1Q16



New initiatives

Aside from the announcement of its 1Q16 results on April 20, Coca-Cola (KO) also announced the addition of a new, independent bottler and the expansion of bottling territories for three bottlers as part of the company’s decision to refranchise its North America bottling operations.

The new bottler to join the Coca-Cola system is owned by former NBA player Ulysses “Junior” Bridgeman. Bridgeman will join the US Coca-Cola system by acquiring territories in the Midwest. Bridgeman has signed a letter of intent to acquire territory from Coca-Cola in Missouri, Illinois, Kansas, and Nebraska including the cities of St. Louis and Kansas City. Bridgeman will also acquire a production facility in Lenexa, Kansas.

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Progress to date

In February 2016, Coca-Cola announced that it was accelerating the pace and scale of its North America refranchising efforts. In North America, the company continues to make progress towards its goal of refranchising 100% of its bottling operations by the end of 2017. Including the territories announced on April 20, Coca-Cola has transferred or signed agreements on almost two-thirds of the US territories that the company originally acquired from Coca-Cola Enterprises in 2010.

Coca-Cola has been refranchising its bottling operations to reduce its exposure to the low-margin, capital-intensive bottling operations and to instead focus its attention on the high-margin concentrates business. Coca-Cola and PepsiCo (PEP) have extensive distribution networks. Coca-Cola and PepsiCo together account for 3.4% of the iShares Global 100 ETF (IOO). Smaller player Dr Pepper Snapple (DPS) relies on these two beverage giants for the distribution of some of its brands. With the closure of a strategic deal between Coca-Cola and Monster Beverage (MNST), Coca-Cola has now become the preferred global distribution partner of Monster Beverage.

Impact on margins

In the long term, Coca-Cola’s gross and operating margins are expected to significantly benefit from the company’s refranchising efforts. However, the company cautions that the existing refranchising of the North America distribution business will actually have a dilutive effect on both gross and operating margins until the company begins to increase the transfer of its production operations in North America. The company doesn’t expect the sale of production assets to significantly increase until 2017.

The next part of this series will discuss the movement in Coca-Cola’s stock price.


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