Looking ahead: Coca-Cola’s refranchising plans, new product development & higher value drinks

Refranchising will let Coca-Cola focus on expanding its future product portfolio, with bottled water, tea, juice and functional waters categories to watch, says Howard Telford, senior beverage analyst, Euromonitor International.

Meanwhile, the industry is shifting towards a model focusing on higher prices, smaller packs and premium brands. 

Refranchising

Coca-Cola has announced it is accelerating its refranchising plans: it will now refranchise 100% of Company-owned North American bottling territories by the end of 2017, including all cold-fill production facilities. This is three years ahead of the original target date.

It also announced this week that it has entered into a non-binding letter of intent to refranchise bottling operations in China to existing partners China Foods Limited (part of COFCO Ltd) and Swire Beverage Holdings Ltd.   

This follows the announcement of the new Coca-Cola European Partners for Western Europe last year (the world’s largest independent Coca-Cola bottler, formed by the merger of Coca-Cola Enterprises, Coca-Cola Iberian Partners and Coca-Cola Erfrischungsgetränke). In partnership with SABMiller, a new bottler for Africa - Coca-Cola Beverages Africa – was created at the end of 2014.

Coca-Cola CEO and chairman Muhtar Kent said the company will “look very different” once the refranchising transformation is complete. The strategy will allow the company to focus its efforts on building strong, valuable brands.   

Telford said: “The intention of refranchising is to shed expensive, global bottling operations to make Coca-Cola a more nimble, less capital intensive and more profitable beverage business. But this is not simply about profitability.

“Widespread changes in consumer consumption of soft drinks – seeking new, healthier, functional and natural drinks – necessitate a companywide focus on the creation and marketing of its brands as well as aggressive new product development to satisfy these changing consumer needs.

“The company (and investors) are happy to leave bottling and distribution of finished products to reliable independent partners, while Coca-Cola works on improving and expanding its future product portfolio.”

Higher prices, premium brands

Coca-Cola – and other large soft drinks companies – have been developing a new model: higher prices, smaller packages and premium brands delivering modest volume growth but greater profitability, said Telford.

This can be through mini-cans, smaller bottles, single-serve occasions, functional waters and energy drinks.

“Bottled water, tea and juice are the growth areas in Q4 and FY2015,” said Telford. “Globally, bottled water is the main driver of soft drinks volume growth for Coca-Cola in almost all markets, as Euromonitor’s latest data for 2015 confirms.

"Coca-Cola has benefited from this category shift but seeks a stronger leadership position with investments in brands like Smartwater, Dasani, and Aquarius.” 

Carbonates remain more of a challenge, added Telford, but notes Coca-Cola’s ‘Taste the Feeling’ campaign which seeks to integrate all Coke trademark brands in its marketing efforts. This campaign does have the potential to help introduce low calorie brands to new consumers, he said.

North America

Coca-Cola Company CEO Muhtar Kent has championed the results from Coca-Cola’s flagship North America market, which had its strongest annual performance in three years. 

“In a recent interview with MSNBC, Coca-Cola CEO Muhtar Kent recently called the US his 'favourite emerging market' – a tongue in cheek comment that nevertheless reflects opportunities arising from the fundamental shifts in consumption we are seeing in North America and other higher income regions,” said Telford.

This could include growth in higher value functional beverages like Smartwater or healthier, premium beverages like tea, cold pressed juice, or sparkling flavored water.