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What Challenges Will Coca-Cola’s New CEO Face?



Challenges ahead

In the first part of this series, we looked at Coca-Cola’s (KO) CEO (chief executive officer) succession plan. We saw that the current CEO, Muhtar Kent, will step down, and COO (chief operating officer) James Quincey will become the new CEO on May 1, 2017.

Quincey has several roadblocks ahead of him, including softness in the company’s top line, currency headwinds, the imposition of a soda tax by several regulators, and macro challenges in certain markets.

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Weakness in revenue

With the exception of fiscal 1Q15, Coca-Cola’s revenue has fallen each quarter since the start of 2013. In fiscal 3Q16, its revenue fell 6.9% year-over-year.

Adverse currency movements have been one of the major roadblocks for revenue growth in recent quarters. Coca-Cola has a presence in more than 200 countries. This exposes the company to significant forex (foreign exchange) fluctuations.

Coca-Cola and other nonalcoholic beverage companies are also facing a weakness in soda volumes. This weakness is due to a shift in consumer preferences from carbonated soft drinks to healthier options such as ready-to-drink tea and bottled water. In 2015, sparkling or soda beverages accounted for 73.0% of Coca-Cola’s worldwide unit case volumes. In the United States alone, the company’s sparkling beverages contributed 67.0% of its total volume in 2015.

With such significant dependence on soda volumes, Coca-Cola is likely to have a tough time ahead. In fiscal 3Q16, its sparkling beverage volumes remained flat, while still beverage volumes rose 3.0% year-over-year. PepsiCo’s (PEP) soda volumes fell 3.0% in fiscal 3Q16, while non-soda beverage volumes rose 7.0%. Coca-Cola and PepsiCo together account for 14.3% of the iShares US Consumer Goods (IYK).

Quincey, Coca-Cola’s CEO-designate, will most likely have to continue with the company’s strategy to expand its still beverage portfolio. The company has been introducing several still beverages by way of internal innovation as well as bolt-on acquisitions. It has also been reducing sugar in its drinks and offering smaller beverage containers to provide healthier options for its consumers.

In the next and final part of this series, we’ll take a look at analyst recommendations for Coca-Cola stock.


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