Coke yearns for higher margins to tempt franchisees

Mon Jul 21, 2014 10:27pm EDT
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By Anjali Athavaley

NEW YORK (Reuters) - Coca-Cola Co may have annual profits of about $9.3 billion, but that princely sum could fall short of what the world's largest soda maker needs to tempt would-be franchisees into taking over more of its regional bottling operations.

That is one of the biggest puzzles the Atlanta-based soft drink company is struggling to solve as it prepares to report second-quarter earnings on Tuesday.

North American profit margins will likely show an improvement from the roughly 14.5 percent in the year-ago period, but may still fall short of what is needed to lure more independent bottlers to bid for Coke's North American bottling operations.

Following a similar move by rival PepsiCo Inc, which reports earnings on Wednesday, Coke bought back its top bottler in the region in 2010 to streamline decision-making and cut costs.

Now Coke has changed direction again and is seeking to sell the bottling operations to franchisees in a bid to shift away from the capital intensive and low-margin business of distribution to focus on what it is best at: branding and innovation.

Some progress has already been made on that front. According to the trade publication Beverage Digest, Coke directly controlled 78.7 percent of U.S. distribution at the end of last year. Today that number is lower: In February, Coke announced deals to sell bottling operations in the greater Chicago and central Florida areas.

Irial Finan, Coke's head of bottling investments, said at a conference in June that the company was being "methodical" in its approach, adding that the company would go faster if it could but wanted to get it right.

But analysts say it could be difficult for Coke to hand over distribution to independent bottlers on a wider scale unless its North American profits grew enough to give bottling partners a large enough share to cover their cost of capital.   Continued...

Logos are seen on Coca-Cola bottles in Zurich, February 16, 2011. REUTERS/Christian Hartmann