uploads///KO Margin

How Coca-Cola Expanded Its Operating Margin in 4Q17

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Feb. 22 2018, Updated 9:05 a.m. ET

Gross margin in 4Q

Coca-Cola’s (KO) gross as well as operating margin expanded in 4Q17. The company’s gross margin expanded about 50 basis points to 64.2% in 4Q17. On an adjusted basis, the company’s gross margin increased to 64.2% in 4Q17 from 59.4% in 4Q16. The company’s refranchising efforts have helped it in transforming itself into a capital-light business and reducing its exposure to the lower margin bottling business.

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Operating margin expansion

On a reported basis, Coca-Cola’s operating margin increased to 17.6% in 4Q17 from 14.4% in 4Q16. The company’s adjusted operating margin increased to 26.5% in 4Q17 from 21.1% in 4Q16. The operating margin expansion in 4Q17 was driven by divestitures of lower-margin bottling businesses and the company’s productivity initiatives.

The company’s gross margin grew to 62.6% in full-year 2017 from 60.7% in 2016. The company’s reported operating margin expanded to 21.2% in 2017 from 20.6% in 2016.

Rival PepsiCo’s (PEP) reported gross margin contracted 40 basis points to 54.7% in 2017. Its reported operating margin expanded 95 basis points to 16.5% in 2017. This improvement in the company’s margin was driven by its productivity measures.

Initiatives to enhance margins

Aside from refranchising efforts, Coca-Cola’s strategy to promote smaller packages is also helping in enhancing its margins. Also, the company has been increasing the pricing of its products in certain regions to boost its revenue and margins. Through its enhanced productivity and reinvestment program, Coca-Cola aims to generate annualized savings of $3.8 billion by 2019. The company’s productivity initiatives focus on deriving efficiencies in areas like supply chain and marketing expenses.

However, the continued rise in raw material costs might put pressure on the company’s margins.

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