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The Coca-Cola Company (KO) CEO James Quincey Presents at Bernstein 38th Annual Strategic Decisions Conference (Transcript) – Seeking Alpha

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The Coca-Cola Company (NYSE:KO) Bernstein 38th Annual Strategic Decisions Conference June 1, 2022 8:00 AM ET
Company Participants
James Quincey – Chairman & Chief Executive Officer
Conference Call Participants
Callum Elliott – Bernstein
Callum Elliott
Thank you everybody for joining us. I am delighted to welcome James Quincey, who is the CEO of Coca Cola joining me to kick off the start of our Bernstein Strategic Decisions Conference. James, thank you for joining us.
James Quincey
You’re welcome.
Callum Elliott
So look, as we discussed earlier this morning, one of the sort of resounding topics, I think, over the last couple of months has been around the health of the economy and the health of the consumer. And the Coca Cola Company is present globally, I think, all bar two countries. So can you give us a lens from your perspective on how the consumer is doing?
James Quincey
Yes, sure. And just to clarify, it’s gone from two to three this year. And you can work those three out yourselves. Look the consumer, I think there’s a lot of conflicting signals. You can find any scenario you want if you’re particularly inclined to think into the future. But the consumer is today in pretty good health. I mean US consumers, European consumers, emerging market consumers, perhaps more the oil driven, oil resource economies rather than the oil consuming emerging markets. I’m leaving aside the lockdowns in China, which are obviously very specific to those cases. And you talk to colleagues in the financial sector, and they will tell you bank balances are ahead of where they were pre-COVID. Money going into the accounts is ahead of what it appears to be in wage inflation in the government numbers.
So on one hand, the consumer has money and they’re getting more money. But when you look at what’s happening in spending, while the consumables sectors seem to still be fine, you can look at the Nielsen numbers for any given market. There are — there is noise around some of the more durable one-off discretionary large ticket items, depending on where you are in the world. And as interest rates change, you start to see some pressure coming through. So if you take a picture of the movie today, generally speaking, the consumer is in good shape. I think the question for everyone as we’ve discussed on previous earnings calls is, where is this all going? Because clearly there’s a lot of inflation in the marketplace, there’s a lot more money in consumers hands, there’s a lot of supply chain issues, interest rates are a question mark and somehow this needs to shake itself out into a more stable scenario.
And I think there are probably more opinions about how that’s going to happen, when and what the result will be, then there are people in this room. And that’s the great unknown in the downhill. How will the net of the headwinds and tailwinds look by the time we get to the end of the year.
Question-and-Answer Session
Q – Callum Elliott
Okay. So let’s move on to focusing on the things that we do know about. Since you took over as CEO, there has been a shift in the way Coca Cola operates and does business. Can you walk us through what’s actually changed and bring it to life for us some of these changes?
James Quincey
That’s going to be a long answer then, you’re going to have to stop me when you don’t like to — how long it’s going to take. A few things. Firstly, on the business strategy and the focus. We got very clear that we’re in the beverage business, the total beverage business. So the idea of beverages for life, we know that consumers in the leading markets, whether it’s New York or London, Shanghai, they’re consuming more commercial beverages, yhey’re spending more money on those commercial beverages, but they want more choice. So a well-designed portfolio is critical for long term growth. We also made clear over the last five — and we implemented it over the last number of years that we’re going to be a franchise business, we’re going to be a brand and innovation and strategic leadership business and we’re not going to be in the bottling business. Our aspiration was to be the world’s smallest bottler. We’re almost there, not quite, but we’re getting close. So very, very focused on — stick to what we’re good at and not try and be in areas where we’re not the best operators of the assets.
And then we had to obviously reform the bottling system, get the right partners. They’ve increased tremendously in capability over the number of years. So they are now great partners investing in the marketplace, commercial execution, RGM, the supply chain, thank goodness for the last few years. So there’s a lot of effort in reforming system. And then underpinning all of that with organizational and cultural evolution, because in the end you can write as many power points as you like on what the strategy is and give great speeches and blah, blah, blah, but the organization needs to execute it. And just having an organization with boxes isn’t the only answer. It’s a necessary feature, but actually it’s the culture that matters. And so driving the culture from being more — which is very typical of large organizations becomes very inward looking, the bigger you get to push constantly to look out, to look at the consumer, put the consumer at the center of things. We’re a brand business that needs to connect with the consumers and have a growth mindset and just drive four things very simply. Be curious about what’s going on, don’t think we always know the answer to be curious, be empowered. Curious is an intellectual observation, empowerment is doing something about it. Be inclusive, we have lots of people with lots of great ideas and we may well have tried that or something similar before and be quick. Don’t wait for the perfect. And there’s a — we can unpack each one ultimately.
And what does that has allowed us to do? If you go back five, ten years, our revenue was growing at 3% a year and our dollar EPS was stuck at $2 or less for a very prolonged period of time and we can argue about the foreign exchange and also some other things. But in the end, the revenue was growing 3% and the EPS was stuck flat at about $2. And since then, we have elevated the revenue growth rate up to like 5% to 6% once you look through COVID and it was pre COVID, it was that bad. And obviously, we’re growing faster than that now, but let’s just say we’re in the 5% to 6% range and the dollar EPS is starting to tick up nicely and we’ve cleaned up the balance sheet. So we’ve sorted out the house. We’ve got the right strategy. We’ve got the right organization. We’re focused on driving a culture that provides a top line led growth agenda for the value of the investors in Coke.
Callum Elliott
Changing culture is notoriously difficult to do. How do you think it’s going? Are we still scratching the surface or –
James Quincey
No. Scratching the surface would be dispiriting to think it was only that. I think we’re making good progress. You’re never going to get me to say we’re 95% of the way there. That’s like a philosophical, it can’t be true. So — but we’re making good progress. Culture change, as you rightly point out, is very hard. And the simple example I use is, for every time you reinforce the culture you want, let’s say that scores one point, every time you do something that’s consistent with the old culture or the opposite of what you’re saying, that’s minus ten. Because there’s — we humans are very loss averse. And if you do something — if you’re going to get shot at that or tolled off or you chuck someone out of the room because they did something stupid, people are going to pay tremendous amount of attention to that and they’re going to want to avoid that. So when you’re in a process of culture change, the need for consistency and coherence is tremendously heightened because every time you don’t comply with what you’re saying, you go back ten steps. And every time you do, you only go forward one. So you really have to be tremendously consistent, which is why, of course, culture change takes a long time, because it only takes a few hours for people go, this won’t last, they’ll give up soon. And so, we have to keep at it forever, but for a very long time to drive it through. So I think we’ve made good progress. I think it is — the changes we’ve made in the culture and in the organization have helped us emerge stronger from COVID, have helped us get back on the track of growth. I don’t think I’ve ever met a CEO who says they’re satisfied. So that’s by definition will never arrive, but I think we’re making great progress.
Callum Elliott
Okay. One of the other things that has changed, but maybe over a slightly longer period of timing, including, I think your time as COO, is the introduction of incidence based pricing and how that has changed the relationships with the bottling network. Can you talk a bit about how that impacts the system holistically and especially in today’s inflationary environment?
James Quincey
Sure. Well, let me define what we mean by incident pricing. So the idea of incident pricing is rather than saying, I’m going to sell you a big tank of Coke concentrate for a certain fixed amount of dollars and you make it into lots of different bottles. I’ll say, look, the price of this tank of Coke concentrate will be a percentage or whatever you sell all the bottles and cans for. And actually that was a system that was first implemented in Latin America many years ago, precisely because of the high inflation in Latin America, because if you’re selling something in a fixed price and there’s lots of inflation, all of a sudden the prices in the marketplace have shot up and you’re not charging nearly enough for the concentrate. So the easiest way in the old days to actually keep pace towards what was happening in the marketplace and say rather than the company trying to fix the price, we’ll just take a percentage of what the bottle does and the bottler will do what’s needed in the marketplace. That was why it appeared.
It has a number of additional benefits. And the principal one, which is why we implemented it in places like the US which were not characterized by high inflation, because why would you do it? And the reason is, you also get a greater alignment of incentives. Because in the US marketplace it used to be the case we would charge X dollars per gallon of concentrate. Now if the bottler then put that concentrate in a large two liter bottle, or in a 600ml bottle, the amount of value to the bottler of 600ml is many times two liter. So what would happen in a year is the company people, their incentive would be to sell more two liter bottles because it sells more concentrate, and the bottlers incentive would be to sell more 600ml bottles, because it has a higher price and uses less concentrate. So basically you set up a system that during the course of the year you’ve got two organizations trying to go in different directions, which is self-evidently counterproductive or introduces a degree of friction into the conversation. Whereas in incidents, while our economics are not the same we are philosophically aligned. In other words, under incidence pricing, if I’m taking X percent of the bottlers price, we both make less on the two liter bottle and we both make more on the 600ml bottle. Therefore, the organizations have a directional alignment incentives as to what to try and sell. And so that’s why we rolled out incidents pricing around the world, because we found actually over and above the inflationary benefits from [North America] (ph) it was the alignment of the organizations on focusing on the marketplace that became the most important benefit.
Why in the clock forward, today while now we’ve got the situation where we’ve got higher inflation. So actually, it’s a model perfectly designed for the current environment of following the inflation and keeping the two organizations aligned as we go through all the twists and turns of inflation and supply chain challenges etcetera, etcetera, etcetera, the incident system keeps the organizations focused on the same ideas and the same definition of winning and that helps drive us forward. So I think we’re in a great position with our bottlers around the world to use the [indiscernible] pricing methodology to address what needs to be addressed in each local marketplace.
Callum Elliott
Okay. One of the other things that’s changed and you touched on, this is around your marketing and brand building. You simplified the marketing structure. I think is the way you describe it. And I think you described what are benefits of that as being reducing the time from idea to execution. Presumably that drive some element of cost saving. But I guess what I’m more interested in is, are there benefits in terms of the efficacy of the marketing itself in terms of how it connects with the consumer and helps you build the brands?
James Quincey
Yes. All the changes we’ve made in marketing, and my go to strategy is always simplification, so that’s not surprising. But the benefits, yes, there is an efficiency play. We’ve greatly consolidated the amount of agencies, we made a much simpler structure and there are efficiencies inherent in the strategy, but that’s not the overall objective. Again, going back to the original story, Coke is a great stock if we can drive top line revenue growth, because that then flows down into profit growth. So we can’t cut costs to get our way out of a crisis over any substantive period of time. We have to grow our way into the future. And so, the marketing changes are about improving the effectiveness of the marketing going forward. And as we’re starting to see the model being applied, whether at a big scale with the real magic campaign on Coke or the Chinese New Year program, like as we’ve started to have campaigns come through the model, they are getting much greater resonance with consumers all the way down to some of the smaller example, we launched a couple of — we called them Coke Creations, a couple of strange flavors. So rather than it being your vanilla or your cherry or your lime or whatever, we launched a Coke Starlight taste of space and a Coke Byte, BYTE, pixelated Coke and with actually relatively little marketing, but done through social and through digital. And we’ve got a tremendous engagement with consumers. In fact, the Coke Byte was designed and launched in the Metaverse. And so it’s really moving to where the consumers are engaging and it had tremendous track. And if you look at the kind of the engagement on Coke Starlight, it’s like way above some of the more pedestrian flavors. And so the model has helped us both do the big things and get more bang for the buck and more contact with the consumers, but also shift the type of marketing to the things that generate more organic engagement with the consumer.
Callum Elliott
I think Coke Byte, you’re engaged with Fortnite and I live in London and you’ve recently just launched your — like a pop up store, like a clothing accessories that kind of thing in London. Are you finding it’s connecting with the sort of the younger consumer better, some of these initiatives?
James Quincey
Absolutely. I mean, the pop up store [indiscernible] can tell you much more about the pop up. So I mean, but it’s not merchandise or licensed product in the old idea where it’s kind of relatively low cost baseball cap or whatever. These are designer items with top designers, one sweatshirts with the Japanese designer. So it really is about the collectability and the niche value of the thing. So whether it’s the Coke Starlight or the Coke Byte or some of these merchandise items in the London store, there is a high degree of engagement with kind of collectability and limited editions. And that’s kind of where the consumer has moved to in terms of some of this engagement. Is it going to be a permanent store? No. Are those lines going to disappear in the next few weeks or months? Definitely. But I think it’s interesting that the way the consumer has moved and wants to engage with these kind of much more pop up type ideas and that is not — it’s not about selling the hoodie in the London store, that’s not going to do anything for the numbers in of itself of the Coke Company nor is Coke Starlight or Coke Byte. But it’s the reengagement with the consumers, with the brand and bringing them back to the big franchise that is the value of the initiatives. And if that’s what they want to engage with to come back to the big franchise, then that’s what we’ll be doing more of.
Callum Elliott
I would tell you the research will show us that consumers are going to be really disappointed when Starlight or we call it [indiscernible] in the UK. When it disappears, the consumers are going to be disappointed.
James Quincey
Yeah. So I’ll get some worry emails.
Callum Elliott
So maybe we can shift gears a little bit and you mentioned upfront total beverages and how that has become part of the strategy. Can you talk a little bit about how flavored alcoholic beverages fits within that? And specifically, I’d prefer to focus on the outside the US efforts on [FABs] (ph) where you’re doing the bottling yourselves amongst the bottling network rather than partnering?
James Quincey
Sure. Let me use two examples. We launched a hard lemon, it’s called Lemon-Dou or house of lemon would be the translation in Japan. That’s now in the Philippines. And that — we got into that experiment for some very specific reasons in Japan. There we face a series of local competitors for all in the soft drinks industry, they are also in all the other non-alcoholic categories, they’re also in the flavored alcoholic beverage categories and beer and wine and spirits. And whilst we don’t necessarily need to go head to head in bars, in things like convenience stores, this is our home turf. And when you look at the favored alcoholic beverages, unlike wine or many other types of alcohol these essentially can be made relatively straightforwardly in a soft drink plant or a soft drink factory and obviously on a soft drink truck. So we’re talking about we’ve got the same competitors, we’re going to the same retailer, it can be made on the same manufacturing line and it’s largely ingredients we buy anyway cans, water, lemons, we only needed to buy the alcohol. So if we basically — look, if we could understand if there’s a space with the consumer for something new, why would we not take advantage of this when everyone else can, when it’s got attractive margins. So we launched it in Japan. It did very well in Japan. Got good rate of sale, got some good market share, got some good margins. We said, well, okay, if it works there, not everything will travel from Japan somewhere else, but let’s try it somewhere else and we tried it in the Philippines and it’s doing really well in the Philippines. So I think there’s an example there, But yes, the knowledge about the consumer for these sorts of categories is close enough to what we know about and inherent business system is close enough to our hours and our bottlers that we can compete effectively. Here we’re not interested in just participating somewhere, I mean, having a toe in the water in lots of different places, it makes no difference to the Coke numbers. We need to do these experiments with a view to, if they work we can then scale them and it will be relevant for the Coke company. But the experiments themselves are not relevant to the numbers of the Coke company.
But if they work and we can imagine a vision that if it’s successful it can be relevant to the company, then we’ve got something that’s worth talking about. I do say that the people say, we don’t need to just have pictures on the PowerPoint to say that we’re in every category, that’s of no use to anyone. It makes no difference. We need stuff that’s going to be relevant to our total numbers if successful. So anyway, experiment in Japan works, it appears to have gone to the Philippines relatively well. So two different marketplace. And the other one, which is in Brazil is mixed cocktails. So Schweppes, Schweppes’s Ginger tonic, other different variants of premix cocktails, again, you’ve got a business system in Brazil, and Brazil is a place where the licensing laws are relatively soft, so there’s a big overlap in the distribution footprints between the soft drink industry and the alcohol industry. And obviously, we face a competitor that sells alcohol and soft drinks. And so, yes, we have an alliance out for beer. There is clearly a space for flavored alcoholic beverages. And so we’re launching there.
All of these experiments under the idea we’re not doing it just because we can sell a few cans, because it not ultimately going to make any difference to us or the bottlers, they need to be experiments that generate enough learning that creates a vision that this can be something bigger that actually if we executed this with our bottlers around the world it will be relevant to us and them. We have not reached that stage yet, but the experiments are interesting.
Callum Elliott
Okay. We had a question from the audience that ties in with this. And I should have said upfront, there are QR codes around the room that you can scan and submit questions that will come to me here on the iPad. And it sort of builds upon what we were talking about, but amongst the third bucket that you didn’t mentioned, around Hard Seltzer’s.
James Quincey
[indiscernible]
Callum Elliott
But you have been doing Hard Seltzer’s outside the US. And so the question around that is, how do you go about doing that in a category that’s completely new where you are outside of the US, Hard Seltzer is very nascent and you are essentially building from scratch.
James Quincey
Yeah. I think it all ultimately starts with consumer insight, we can see what’s happened in Hard Seltzers in the US and the US is much more heavily — so if I break down the flavored alcoholic beverages into three buckets, hard seltzers, which is a clear sparkling alcoholic drink with some flavor. Hard something, whether it’s hard lemon, hard tea, hard whatever, which is like the Lemon-Dou thing, to hard something which — and we’ve launched Simply and Fresca in the US and then there’s a premix cocktails. There is three buckets, I’ve talked about two and then there’s a last one. All of them require to start with consumer, right. You can’t just go — just because I can make it I’ll launch it, it has to start with an understanding of the consumer and a deep understanding of the consumer.
We can see clearly in the US hard seltzers are — have been very big and the other two buckets, not so big. If you look around the world that is not replicated everywhere else. You can see — if you go to Japan, it’s the hard lemons that are the biggest category, the hard seltzers is a much smaller and the premix cocktails is much smaller. So depending on where you are in the world you see very different patents. And so you have to think about the consumer and start with the consumer. So that’s what we’ve done. And as we’ve launched the Topo Chico Hard Seltzer around the world, it’s resonated in some countries, in some countries there is already a nascent hard seltzer category, so you don’t have to just launched the brand and teach about the category, in some other countries this category doesn’t really exist so you still — you’ve got to try and create the category at the same time.
Frankly speaking, it’s working better in some countries than others. In general, in Europe, where there is some degree of understanding of the category we are the clear number two and catching up on the number one in places like the UK or Ireland. And so, it really is — it really is starting to work. But again, working in one country is not going to cut it, we need to learn enough to think, okay, with these three buckets is it a big enough idea that it’s worth pursuing for the Coke Company.
Callum Elliott
Okay. And maybe we can shift gears again. Across all of these themes of change that we’ve spoken about, how much is your digital agenda, an enabler of these changes that we’ve seen. And I guess, I can build upon it by saying, I think at CAGNY this year and last year, you showed slides that spoke about your digital agenda on several fronts, from customer, consumer, system, enterprise, et cetera. And how much are these digital changes enabling the business to move forward?
James Quincey
Yeah. I think the first time I put digitize the enterprise in the CAGNY presentation could well have been 2016 or 2017, one of those two. And I say that because actually it keeps evolving, whatever the write-downs is today it’s going to keep evolving as the kind of ecosystem, the digit ecosystems keep moving and what’s possible keeps changing. Are we making progress? Absolutely, and we’re making progress internally, lots of legacy companies struggle to put together all their old systems to really extract value from the digital possibilities and we’ve invested money, people, resources, software in really driving that forward, there is more to do, but we’ve made good progress, whether it’s on the analytics, whether it’s just on running the business, we’ve kind of level set ourselves internally.
Externally there are two universes that are now connected — historically they never used to be connected really at the end of day, but now they are connected, which is really around the consumer and the customer or the retailers. In the old days the consumer watch TV and that was one universe and the retailers were physical stores and that was another universe and they didn’t really connect. Now of course, they two blend together [indiscernible] they can be digital. In the end, in general terms, with the consumer we’re trying to engage where the consumers are, so over the last 20 years, obviously, newspapers have disappeared and went to search, that wasn’t a big thing for us because we weren’t largely advertising Coke in the newspapers, we were doing it on TV. But now in the last few years and going forward, you’re seeing a reinvention of what is TV and what is the screen that people are going to look at and what sort of content are they going to consume. Of course, that means we need to engage with the consumers in different ways. So we’ve gone from TV to social media to kind of the mobile phone, to the mobile phone with a shorter video and where the consumers are changes every few years. I mean, everyone has got teenage kids can — will attest like in the space of a few years like the top platform changes every couple of years and so we need to follow the consumers where they are.
In some parts of the world we have deep B2C businesses. We have a lot of vending machines in Japan, we have 35 million people who use our outlets to connect with the vending machines, it’s kind of a essentially a digital ecosystem or all the way to Mexico, where we have a huge home delivery business, but those are more the exceptions to the general idea. We need to engage with the consumers where they are. And of course, as time goes on, the ability and the need to connect to that universe with what’s going on in the retail universe grows and the possibility to click to buy or click to add the bottles or click to have it sent to you within the consumer engagement just keeps going up. On the retailer side, divide the world — divide the retailers into two buckets, the modern retailers, supermarkets, large convenience store, they’ve been electronic for a long time, they’ve been digitized for a long time, electronic — lots of interchange of data. Yes, the software and the ways of doing it is getting more and more sophisticated as the processing comes up, but that world has been digitized for quite some time and optimized and people to — optimized category management.
The bit of the universe which for us is about half the business, which is the fragmented trade, this is un-digitized largely because these retailers didn’t have computers or smartphones. But that is changing, that’s changing rapidly. It has changed rapidly in the last few years, and it will change rapidly going forward. And so, what we see in that space is very clearly that we’re going to have to upgrade our digital connectivity with those types of retailers and we know from where we’ve already implemented it, where the bottlers have already implemented it. When we complement the sales person with a digital platform, so instead of the retailer at the Mom-and-Pop store having to wait for the salesperson to turn up to be able to order the Cokes and have a conversation, they can now wait for the salesperson or do it online through the mobile phone or whatever, like add to the order, they can register that their cooler need servicing, whatever is going — whatever is going on there is now a digital relationship with the retailer. When you combine the salesperson with the digital back up that allows them to buy product, that allows them to get service orders, request merchandising material that combination sells more Cokes, sells more of our drinks. And so, it’s self-evident that digitally enhancing and enabling the sales force with the platform is going to continue to drive the business forward and make it more successful.
Callum Elliott
Okay. I want to shift gears again and you spoke earlier about how 10 years ago the business was growing top line at 3%, you accelerated to sort of 5% or north of 5% prior to the pandemic, and today you’re above that. And we have another question from the audience that maybe is a good place to start this growth topic. And so the question is, your growth drivers typically generate lower margins than the legacy CSD business, how does the business balance this negative mix impact with the need to lean into growth categories?
James Quincey
Well, firstly, it over simplifies the equation. Firstly, the sparkling business is growing. I know whenever I come to an investor conference in the US over the last 10 years, no one believes me, but the sparkling category is growing, Coke is growing, Fanta and Sprite are growing. And that is an important feature of it. And even their growth when you look at it from a portfolio management point of view, whether it grows in the US or Europe or Japan it has a completely different monetary result than if it grows in Africa, India or in the Middle East, for example.
So the mix equation that we need to manage is not just sparkling versus stills, it’s — sparkling in developed versus emerging markets, it’s big bottles versus small bottles. All of that mix equation makes a huge difference just within sparkling. And then, similarly in stills, stills is not a thing, actually it’s the sum of many categories. And they themselves have a number of characteristics. There are clearly a set of categories which are inherently lower percent margin, they are often very attractive in dollar terms, they tend to be the ones with high costs. If you are in high protein milk like the Fair Life business or you’re in some of the chilled juice business, the input costs are very high. The price point of those categories is much higher than soft drinks, and so the dollar numbers can be good, but the percentages look ugly. And so you’ve got a mix effect from what business model you are in and what business are you in.
And then secondly in the stills categories what’s important is your market share. I mean, I know it’s business go 1-on-1, but when you compare Coke, which has got a clear leadership position with someone who is just about leader or number two, not only is the scale different but the margins are different. And they are not different because the cost structures are inherently completely different, they are different because they don’t have the same quality leadership that Coke does. And the same is true in the different stills categories, where we have stills brands in specific categories that have clear leadership positions, the margins in those businesses are equal to the sparkling margins. So the mix effect is a question of geography, it’s a question of category, it’s a question of business model, it’s a question of package size and it’s a question of relative market share. Our job is the take that whole bundle of the problem and drive it forward and manage it over time such that we continuously increase our degree of quality leadership by category for these different brands and produce a result for the company that is the same [OI] (ph) marginal or better. And so, when you look at the trajectory over the last number of years, on a like-for-like basis, the margin keeps creeping up, because we are managing the portfolio effect.
Callum Elliott
Okay. I guess, building on that, since we met last year you completed Coke’s biggest ever acquisition with Bodyarmor. Can you tell us a bit about Bodyarmor. What make sure you are excited about it? But then tying into what you were just talking about in building leadership positions, quality leadership positions, would you agree that Coke has become more acquisitive over the past few years, you’ve done quite a few deals now and how do you balance that M&A landscape with organic innovation?
James Quincey
Sure. Well, let me start on the Bodyarmor side. I mean Bodyarmor was great. I mean, as a brand it clearly did a company, it was — it brought new news to the sports drinks category, particularly obviously in the US where nothing has really happened for a long period of time. And therefore, it was both able to gain share from existing sports drinks brand, but also grow the category and bring new consumers into the category. So it was very disruptive, innovative and successful and we saw greater runway here in the US for it and we see opportunities for international expansion in certain parts of the world and we had already invested a number of years ago, I don’t remember the exact year when we invested in it. And so, when we had invested in it we had a fixed period which is obviously last year to buy the rest of it or not by the rest of it or do something which is of course, what we did. And so that’s continued with its momentum into this year and I think it will be an exciting addition to the portfolio.
Again, as you said, it’s all about, can I find things that resonate with consumers that give me leaderships in categories that gave me scale and the margin structure that I’m looking for. And I think Bodyarmor can help us make a big step change in the sports drinks category, particularly in the US and then in some other countries.
Then to the broader question of M&A. I’m not sure I would say we will more or less acquisitive, but we are focused on the right opportunities. And perhaps what has become clearer is, where we want to invest and what sorts of things we want to invest in. Actually I would say, we’ve become if anything has changed in the last five, 10 years, I think we’ve become more focused. Historically we bought smaller brands, we were in the — let’s expand out of sparkling and try a load of stuff, so we tended to buy more smaller things and a good example of that is all the juice brands that we bought that we then have to put together and try and create a brand out off. I think we are looking now for things that have a little more scale, not that we’re against small acquisitions, but buying lots of small things is a long road. So I’d say, more focused on filling gaps in the portfolio and being more targeted at consumers rather than kind of just a bigger collection.
What that will turn to and capital allocation, our capital allocation model is superclear. We are going to invest first in the organic business that will always give the highest return versus M&A and we will continue to invest strongly in the business, we continue to support the dividend, which has grown zillions of years. And then third the money you are left with and perhaps one thing has changed is, now we’ve got to a point where we are left with extra money. If you go back to that slightly darker period, when it was 3% revenue growth and flat EPS, the reality is, we were spending more money than we were making when you take about all the capital return together, which was unsustainable. So now we’re in a different position. We’ve got — we’re spending all the money we need to spend on the organic investments. We’re spending money returning through the dividend, which a lot of our shareholders like, and then we’ve got money left over. And then what we do with that, there is only three things you can do, keep the cash, give it back to the shareholders or spend it on M&A. And we do not feel the gun to our head to rush to make decisions on any one of those three. And so, on the M&A front, if things come up that we really think makes sense for the Coke company, of course, we have lots of capacity to do so.
Callum Elliott
One of the other categories where you’ve done M&A, maybe a little bit further back is coffee. And so you’ve spoken, obviously, about your desire to have those quality leadership positions. And I think you have Costa in about 40 countries now, do you see a pathway to leadership in coffee at the moment?
James Quincey
I think we still have the same vision we had when we bought it, unfortunately COVID was particularly unkind to that strategy as in the sense that most of the shops were shut for the last two years, I’m kind of simplifying it, but really we had a vision for coffee, which was about having some retail outlets, using the express machines, the digital coffee machines, about having ready to drink coffee and selling beans and machines, whether that’s through the HORECA channel or at-home. And we set our strategy and simply put, we didn’t have time to execute it before COVID turned up. And so the jury is still out, where we’ve executed parts of it, like in the ready-to-drink coffee, we’ve done very well. We did very well in China, when it opens, we are the clear number two. So the ready-to-drink coffee, it works. The vending machines work well, they’ve been quite hard to sell when everything is closed, because you’re trying to put them in locations. So I think the simplest answer is, we still have basically the same hypothesis, investment thesis, if you like, but the jury is out until we execute. And the last two years didn’t take us very far forward. And so we just need to execute.
Callum Elliott
Do you have a pent-up — pipeline of innovation in Costa that — because you haven’t been able to execute on two years that you’ve got whole bunch of plans that you now want to throw it or is it a case of just delaying the plans that you had two years.
James Quincey
No, we have — of course, we have learned over the last two years a whole series of things, whether it’s about the stores, about the digital — the Costa Express, what it takes, I mean, we have learned in each one of those four pillars what it’s going to take to win. So we have been able to refine our plans, we have innovations in each one. Within big terms what it takes is actually just executing the strategy. Okay.
Callum Elliott
May be challenging question to ask you, so how do you balance health and wellness goals, which you’ve started integrating now — sort of more integrated in your compensation metrics, I think, with a need to attract new Gen Z consumers to your categories. And do you see any friction between those two things?
James Quincey
Well, I think you have to be more specific on what you mean by health and wellness goals. We have clearly set out among our business priorities that we want to help reduce the amount of sugar, offer people more alternatives. And so, virtually all the drinks we sell have a low or no-calorie alternative. And with that, let’s take Coke as the simple example, we have Coke Classic, we have Coke Zero Sugar, we have all the little innovations that kind of circling around that. But with combination Coke is growing, Coke is bringing new consumers in. So I think sometimes people over rotate — somehow consumers want to become a seeked monks or nuns and that’s not the reality of what’s going on in the world, they want a bit of balance and choice in life. And by driving Coke Zero Sugar, which continues to grow at double digits globally, we are offering a portfolio that actually the consumer can engage in, whatever their motivation and needs happen to be at the time. And then, obviously you’re going to expand with all the categories.
Callum Elliott
Okay. And maybe when I tie all of these growth questions together and bring it back to where you started, which was used to be 3% pre-pandemic, 5% today, and in particular Q1, you were well, well above that, even on a three year stack basis versus 2019. And investors that we speak to are really struggling to disaggregate, how much of that growth is reopening, how much of it is strengthening consumer balance sheets that we also sort of touched on the beginning and how much, if any, is due to all the structural changes that we spoke about that you’ve made with the business over the past few years?
James Quincey
Is that another way of saying, am I going to take the targets up.
Callum Elliott
No.
James Quincey
Okay, just checking. I think it’s very difficult as we come out of COVID to know the precise disaggregation of some of those factors. I certainly I’m a proponent of looking at the three-year stacks. Last year I was a proponent of the two-year stacks, because that was comparing versus 2019, this year I’m a proponent of the three year stake, because comparing to last year or to 2020, it’s going to be very messy. And so I think it’s important whether on a volumetric basis or on a revenue basis that we look at some of those stacks to gauge the strength of the business. I tend to be of the bias that we are back to the sorts of growth trajectories we wanted pre-COVID. Now, does that mean five to six or a little bit more or whatever, the dust is not settled on the reopening — the reopening of economies, reopening in certain channels, there is certainly a lot more inflation coming through this year. So, are we seeing a temporary burst of pass-through inflation that’s just going to knock everything up a bit and then we’re going to hit new normality, that’s impossible to call at the moment. And so, I think the simple way of looking at it, notwithstanding that we spent many, many years commencing everyone to look at revenue and value, it’s actually just to look at the volume on a three-year stack basis and say what’s going on. And is that tracking at the sorts of volume growth rates that is consistent with us being in the five to six range in terms of revenue.
And then the price mix, where the price mix turns out to be slightly more for a few quarters because of all sorts of extraneous factors like reopening and inflation, but then it will be what it will be, but in the long run that’s not going to continue, but what if you can see momentum in volume through everything and then make a kind of assumption that the price mix is going to normalize. Okay, things are good.
Callum Elliott
Okay. I think that makes sense. [indiscernible] to margins a little bit and maybe you could talk about — and I’ll leave it [indiscernible] purposefully, can you talk about long-term margin ambitions.
James Quincey
Good. Then I can be [indiscernible] the answer. Look, our long-term growth model essentially implies small increments of operating margin expansion. If revenue is going to grow five to six and you want profits to grow six to eight, it implies a small increment of operating [metrics] (ph). But that cannot happen at infinitum. And so, yes, we are at this stage focused on continuing to improve our operating margin, but in the long — in the very, very long run, it’s going to be by the revenue growth. The operating margin kind of go to 110% is like is not possible, but there is a long way to go from where we are now. And I think we have the opportunities, not so much just in the cost structure, but through the management of the mix, as I talked earlier about the geographies and the categories and the package sizes, they just eke out slightly more accretive in margin terms types of growth, but it is — the first order of business is to grow the top line at the same margin. If we can get a little plus through all the levers of the business, so that we eke out small operating margin improvements that will be the plus, but the cake will be the revenue growth.
Callum Elliott
So you probably answered my next question, but I’m going to ask it anyway. Is the lack of a specific margin target reflective of prioritization of top line growth over margins?
James Quincey
No, it’s simply that as we’ve changed the structure of the business we tied ourselves and not trying to restate the operating margin target, because if you set out an OI margin target for the Coca-Cola Company, that includes the concentrate business, it include some vertically integrated businesses, it includes the coffee business and it includes the bottling businesses we own. And that is four types of fruit in one basket. If you say the margin for that basket of fruit is X and then you take one of the pieces of fruit out, well clearly is going to change. And so we got ourselves into an endless series of pointless explanations trying to say, it was X and now we have to make it Y, because we took this bit out and it was just very confusing for people. So [indiscernible] we’re making everyone’s lives to hard, let’s just kill that. Our strategy is simple, we want to grow the revenue with the same or better operating income margin.
Callum Elliott
Okay. We’ve got about 2.5 minutes, so maybe time for one last question. And I know you’ve got [indiscernible] the audience, but she is not up here on the stage, so maybe you can start and if we want to give [indiscernible] a mic, we can do that. And so it’s an ESG question, obviously, you recently linked, as I mentioned, ESG performance measures to incentive compensation for the first time I think, which of those ESG initiatives are you most excited by? And maybe I see things like pulp bottles, you are going to have partnerships there and things like that. Do you think things like that could go mainstream? Would you highlight something else?
James Quincey
I think big things to big problems. And so the one we put in the long term or the three-year incentive program is the degree of recycling. And I think the — if you look at our ESG, you could talk about lot of different things. There are four things that are really central to our business. Water, where we’ve actually got a great strategy. We said we want to be return all the water we used by 2020, we did it by 2015 and we continue to do so and we’re expanding it. Please visit the website, you can read a lot about water. The other three are, waste, sugar, communities. And for me the next one is [indiscernible]. We need to make sure that we generate a circular economy around our packaging. I mean if you think of a beverage business, you can make ESG esoteric we can go actually, water and packaging are two things that are totally inherent to the business, making sure that we continue to have a vibrant social license to operate. It’s super important to our business. So that’s what we did on water and that’s what we’re starting to do on recycling. We want to make sure we collect the Model Bank for everyone we sell by 2030, make sure they are recyclable and for ourselves use at least half of material ourselves, because we actually compete with lots of industries for that material that gets collected. And so we’re pushing very hard on creating a circular economy for the packaging materials, particularly PET, which is a very high 49:38** is not a shopping bag, it’s not a piece of clean film which has no intrinsic value once it’s been used, PET bottles are valuable if they can be collected and they can be recycled. There is a lots of different things, including Coke bottles. And so we’re very focused on that all around the world, including here in the US, there is a new scheme just been launched in Colorado. So we are focused. If I have to pick one, circular economy on packaging.
Okay. Perfect. I think that’s a great place to end.
James Quincey
Perfect.
Callum Elliott
James. Thank you so much for joining us. And everybody, thank you.

source

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