Gross margin in previous quarter
Coca-Cola’s (KO) gross margin improved to 61.3% in 2Q16 from 60.9% in 2Q15. This improvement in the 2Q16 gross margin was a result of increased pricing, lower commodity costs, positive geographic mix, and the company’s productivity efforts.
Operating margin expansion
Coca-Cola’s operating margin rose to 24.8% in 2Q16 from 20.9% in 2Q15 due to gross margin expansion, productivity initiatives, the timing of certain expenses, and the impact of acquisitions and divestitures. The increase in Coca-Cola’s operating margin in 2Q16 was also due to a favorable comparison with 2Q15. The 2Q15 operating margin was adversely impacted by a $380 million impairment charge related to the closing of a strategic deal with Monster Beverage (MNST), which included the discontinuation of the energy products in the Glacéau portfolio.
For 3Q16, analysts expect the company’s gross margin to expand to 61.1% from 60% in 3Q15. Analysts expect the company’s operating margin to improve to 23.8% in 3Q16 from 20.8% in 3Q15.
Coca-Cola’s rival PepsiCo (PEP) reported its fiscal 3Q16 results on September 29. The company’s operating margin rose to 17.6% in 3Q16 from 8.7% in 3Q15 due to its revenue management strategies and productivity initiatives. PepsiCo’s 3Q15 operating margin had been adversely impacted by impairment charges of $1.4 billion related to its Venezuelan operations. Coca-Cola and PepsiCo together constitute 14.5% of the iShares U.S. Consumer Goods ETF (IYK).
Coca-Cola continues to focus on enhancing its margins through several productivity measures. The company’s productivity initiatives include restructuring its global supply chain, implementing zero-based budgeting principles across the company, and streamlining its operating structure.
For fiscal 2016, Coca-Cola intends to generate $600 million in productivity savings. The company intends to reinvest its savings in marketing efforts and innovation. We’ll discuss the company’s soda volumes in the next part of this series.