Company Trend Analysis - Refranchising Bottlers Will Boost Coca-Cola's Margins - AUG 2017

BMI View: A key pillar of Coca-Cola's turnaround strategy is to refranchise company-owned bottling operations around the world in an attempt to cut costs and make its global distribution networks more efficient. We believe this will help to alleviate some of the pressures placed on the company 's margins from declining carbonate sales over the medium-term.

The Coca-Cola Company produces concentrate, which is then sold to licensed Coca-Cola bottlers who hold exclusive territory contracts with the company. The bottlers then sell, distribute and merchandise the finished product to retailers, restaurants and vending machines within their specific region. Coca-Cola's plan is to reduce its existing stakes in the bottling sector. As of 2015, the Coca-Cola company was accountable for 18% of global bottling volumes; however, the aim is to reduce this to 3% by 2020.

We believe the refranchising plans will enable Coa-Cola to focus on value rather than volume growth, reducing exposure to low-margin, capital-intensive bottling operations in order to prioritise resources on the consumer-side of the business by developing its portfolio of brands. Moreover, the refranchising will involve the transfer of the majority of its workforce to its bottling partners, with the number of Coca-Cola employees expected to decline from just over 120,000 in 2015 to around 40,000 on completion. This will reduce overheads and enhance the company's profitability over the longer term. The company's operating margins showed early signs of improvement in FY2016, reaching 20.6%, up from 19.7% in FY2015, although there is still a considerable way to go to reach previous levels (2008/2009).

Change In Bottling Strategy To Relieve Some Pressure On Margins
The Coca-Cola Company - Operating Margin (%)
Source: Company results

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