The Coca-Cola Company (KO) Earnings Call Transcript & Summary

Makes sense. I suppose another aspect of digital that maybe historically at least has been less relevant to your business is e-commerce given the heavy, bulky nature of the products means that shipping them around the world, as you kind of earlier pointed out, is not something that happens very much. That having been said, obviously, through the pandemic, we have seen a bit of a spike in your categories like we have in kind of all PET categories. So I guess my question is, do you think that, that historical inhibitor around the sort of bulky, heavy nature of the products, do you think that, that will mean permanently that the e-commerce penetration lags in your categories relative to other consumer categories? Or do you think over the long term, your categories can catch up in terms of e-commerce penetration? And I guess one sort of specific point about e-commerce that I would love for you to touch on if it's possible, around for the Coke system in the U.S. if you're fulfilling orders in -- servicing orders to fulfillment centers that span multiple different bottler territories, how does the kind of the system deal with that complication?

So the specific one at the end, there's a pre-agreed methodology for products that are made in other territories that move into bottlers' territories. So that's a whole protocol for where -- the whole protocol, depending on where it's made, who made it, which channel it went through, which route to market it went. So all of that is set up. Of course, when you introduce something new, you go back to it, but largely, that is preprogrammed. E-commerce. Firstly, e-commerce is not one thing. There are multiple pieces of e-commerce, but let me break it down into four pieces. One, there's the e-commerce, which is the Coke system to the customers; secondly, customers being the retailers. Secondly, there's the whole grocery channel which is predominantly where you centered the question in terms of penetration, the purchase for kind of future consumption at home. The third bucket is delivery for immediate consumption of food and beverages, generally speaking. And fourth, there's direct-to-consumer by the Coke system. And I think each one has its own dynamics and its own future, and they cannot all be lumped together. Starting at the end, I'm working backwards, direct to consumer, we have a whole set of things. As we mentioned in the U.S., there's a U.S. app called myCoke and you can order product, and we've used apps around the world to let people order special edition bottles. The reality is that's a Coke-only app where all you order is Cokes is unlikely ever to be the majority of our business for all the obvious reasons that you don't wake up on Sunday morning and go to individual sites to order each category you need in your life one by one. And ultimately, the challenge of beverages in general actually, any individual category of food and beverages is the value of the order is always small, and in particular, for many categories is also heavy. And therefore, it doesn't lend itself to deliver to the consumer. So that's always going to be small. If not, it can still be high value, it can still be engaging for the consumers, and it will have its role. The second piece is food delivery, as in immediate consumption. Obviously, in the pandemic, that has shot up. And our key imperatives there has been to help these food aggregators, in particular, increase the incidence of beverages within the order because actually that's in a way super high leverage for them in terms of margins because the food is going anyway, and you can attach a drink to it. And food orders delivered to your home tend to have a lower incidence of beverages than if you actually buy it in the restaurant. Of course, the chances are you're combining it with beverages you've already got in your house. I think the food delivery business clearly made a step-up in the pandemic. It's noteworthy that most of them don't make money if they're aggregators. And so I think there is ongoing shakeout to come in the sector. But from our perspective, we do see that there will be more food delivered for you to eat immediately, and our objective is to drive the business, which actually has been relatively prosperous for us because we obviously have a very high share and a strong relationship with customers in terms of helping them in the restaurants. And it's a question of helping them get those extra sales, whether it's them selling directly to the consumers or going by these [ advocates ]. The third bucket, which is perhaps where you centered the question, but given that half our business is away from home, remember that, that means half our business is at home. So the e-commerce we talk about now is for the half that's at home. Here, you've got multiple versions of what people are trying. Clearly, there's been a step-up, whether it's delivered to the consumer's house or flat, whether you click and collect or any other version of the same thing. And it's made a step-up. And I think that there'll be some permanence, new point from which this business will grow. But again, the economics of delivery to you are stressed or seen from the macro global perspective. Of course, there are segments of the population that are able to make large enough orders, you get free delivery, you can manage the time slots or were happy to pay for delivery or there in parts of the world where people are prepared to invest capital to subsidize the whole system. But it's still at the point of margin dilutive for the grocery retailers in general. And so the economics of that have yet to shake out. Do I think that food and beverages, in general, are somehow going to converge on music and film and personal care like beauty products? Not quickly, for all the very precise reasons that I've been laying out for the various different pieces. Many of those other things are very individual and the value of the order, whether it's fully digitized music or film or it's high value to volume like beauty care products or fashion items, the value of the item is much greater relative to the cost of the delivery. When you get the food and beverages, it's a much tighter equation. So yes, I think it will grow. And yes, we've been doing a lot of work with customers to position ourselves very well in how do we help them make the most of what they're selling. And I think it's going to make a huge difference in the long run, particularly as in several parts of all these e-commerce grocery systems are also tied to other things, other ecosystem elements, whether they be entertainment, there are a few grocers or people selling groceries who have many other arms, and that in and of itself will make it more interesting and more sustained in the future. And the other bit of the equation is from us to the retailers. There's a huge opportunity for us to do much better in both the efficiency of the selling and distribution and the ability to use the sales force to increase the value of the beverage category for the retailers, just in digitizing the way we work with the retailers. I mean you can go to Australia. And if you're an independent store owner, half of those orders are already coming over in eB2B platform. So do I think eB2B is going to be the predominant for ordering for independent customers like it is for large retailers? Absolutely. I think the idea of taking an order manually or because the store person is physically there is going to be the minority of the business. So in a way, I've laid that out in a way in ascending order of penetration.

Makes sense. Look, I want to jump sort of gear a little bit. And I know we've got Bea, who's been sitting there very patiently waiting for ESG questions. So I have a few on ESG that I'd like to ask and maybe putting them to both of you, but definitely bringing Bea into the conversation. And I guess my first question is, you guys hosted a very useful ESG-specific call towards the end of last year. And I was a little bit surprised by some of the things you said because it sounded to me at least that a little bit like some of your ESG investments are considered maybe in isolation of return on capital goals, that kind of thing. So I wonder if you can just talk a little bit about how those ESG investment decisions take place. And maybe for Bea, specifically, how your specific sustainability team engages with the broader operating units when those investment decisions are made. I think you guys had an announcement this morning you made about a partnership with one of the -- towards cleaning up rivers and reducing plastic pollution. So it's very topical given that announcement, and hoping to understand a little bit more about how those decisions are made.

Shall I go first? Okay, let me make an overall point, and then I know Bea can get into lots of specific examples and she's got more examples in the time available, I'm sure. Let me make a simple analogy. And Bea will probably bury her hands in it because she heard me say it so many times. Let me go back to the history of British Leyland. You're too young to know what British Leyland was, but it was in the 1970s, the third largest car and truck manufacturer in the entire world based out of Birmingham where I happened to grow up, just down from the Longbridge factory. And within a very short space of time, they basically managed to destroy the entire British-owned car industry, including British Leyland effectively going bust and disappearing. And they made multiple mistakes. But one of the mistakes they made was to view quality as a parallel and an external or extra feature to the car rather than initial feature. So they used to make the cars in the factory. Didn't make them great, they have lots of errors. So they sent them to the quality department to fix the errors and then they sold them to you, the consumer, which still had errors in them, so you then have to spend the weekend rebuilding the car. And along came principally the Japanese at the time. And so we've got this new idea, we're going to internalize the idea of quality as a part of the product you're buying. We're going to make it right first time. So we don't need the quality department, we're going to save a fortune, and you can do something else at the weekend. And of course, obviously, the story has one ending. In a simple way, think of it, sustainability as the same thing. Whilst you think of it as separate and different to the business, it will never be able to make a breakthrough at scale. We need to put ourselves in the mindset that sustainability is an integral part of what we're selling. And that actually, businesses without a strong sustainability approach are just not going to exist in several decades time. And so we just need to get on with it. And in a way, there's a statement of belief that the economics can be sorted out within the context of the business, and are not then a trade-off of business versus sustainability, but an integral part of we just need to make the transition whilst also achieving success with the business.

Yes. So I think that's a good segue. And thank you, Callum, for that question. So I think I've been personally on a 10-year journey working to integrate it to the business, exactly what James has said. So I'm sure he's tired of hearing me saying this, but in the early days, we were really pushing hard to make sure that it was part of business planning, annual objective setting, and ultimately, we had set a goal to make it a part of comp. Today, it's a part of short-term compensation, and we've threaded that needle through as what James talked about. But where did we start? And you heard James talk a lot about the network. When we design and develop the goals, we work across the network, including our bottling partners to look at everything from enterprise risk management then a materiality matrix to the business, what's critical to the business within the ESG space. And then from there, we move into the target setting. And we look at which targets would make the most impact for the business, and we layer that in with the external conversation in terms of listening to our investors, to our key stakeholders, customers, consumers, the NGOs, academics to look at what really is a place where we can be credible to drive that difference. And when we set the objectives, we're looking at enterprise risk, efficiency and growth. So that's the needle we've been threading. We've been getting better at the growth equation, but let me start a little bit with the enterprise risk piece. If 46% of our volume is in high water stress areas, and that's critical to the business. And that's core, first and foremost, to beverages. So we have to ensure that we're focused on water. That's why the water goal was actually set all the way back through 2007 is when it started. 2010, it became official. And we achieved it 5 years ahead of schedule, but that didn't mean that we stopped. When we went to the next evolution, we started to layer that in and bring in the impacts around the climate impact in terms of agriculture ingredients, water and ag and the supply base. So we do look very closely at the entire supply side and ensure we're mitigating that risk. If I go into cost efficiency and into savings for a moment, think of packaging. So we do have a World Without Waste goals to design in better materials, design out waste. In Europe, for example, since 2018, we've lightweighted the 500 ml package by 40%. You can imagine that, that's also saved money, less material means less cost. Same thing, less water use, less cost. So that's where a lot of companies stopped, where Coca-Cola kept going as we said. While we're doing these different activities within ESG, we also see that the consumer landscape has changed. And they expect brands to do this, exactly what James said in his car example. We don't want to be obsolete. And actually, what's really fascinating is we've been looking at consumer data all the way back to the '70s. J. Paul Austin, one of our former Presidents of the company, looked at academic data way back when, and he gave a famous speech that actually ended up in congressional record. He gave it to the Georgia Bankers Association. But essentially, it was about do you evolve or do you become obsolete? And quo vadis was -- it was Latin phrase which meant, so where do you go from here, essentially. And so that was back in the '70s. And so a lot of the data has been showing trends over time in terms of what consumers expect for brands. And today, we know that consumers absolutely expect it, but how do you tell the story to get credit to drive the growth for the brand? And so there's a couple of campaigns that we launched but I'll just give one other example. James is right, I have too many examples, but here's what I think worth noting. So there is a campaign that we launched to tell the story around circular economy and water. And we did that within Poland and Greece, called it Never Settle. What we saw coming out of that campaign is not only did consumer advocacy grow, but so did purchase intent. And so we saw 50% of consumers said that they'd be more than willing to advocate for our brands with friends and family. And so it does translate into consumers giving us credit for the work that we're doing, but only if we tell the story and connect it into marketing. So the announcement you heard of today, that's the Ocean Cleanup. So young entrepreneur named Boyan Slat, trying to ensure that the oceans are cleaned up, the riverways. There's 1,000 rivers that end up putting most of the pollution into the oceans. Coca-Cola through World Without Waste has a goal to collect 100% of our packaging back and create the circular economy. We want to make sure that we don't let those packages get there in the first place. But when they've gotten there, how do we take the producer's responsibility to clean them up because at the same time, we want credit from the consumer to help drive growth for our brands. We have to ensure that they understand that we are being responsible with some of the activities that we know we're accountable for. And so when we launched the Ocean Cleanup, it was to help clean up the oceans. But also it's embedded into the marketing teams to ensure that we're telling the story, which will create awareness for the issues that exist, but also connected to our brands to create that deeper association for the work that we do. So that kind of gives you a flavor for the continuum of enterprise risk, cost savings efficiencies all the way to growth.

Super helpful. Look, I think we could spend almost the whole session talking about ESG, but I just want to build on it with kind of one specific follow-up, which is around sort of competitive dynamics. If you see, it sounds like you've got lots of initiatives going on and many of them you just touched upon, Bea. If you see some of the competitors you're competing with globally sort of not following suit and not doing the same things, especially as it pertains to things like 100% rPET and things that are costing you money to make -- to go down those paths, would that influence your decision to continue down these paths, if you end up sort of doing it alone? And we actually have a question from the audience as well. It's the most popular question we have. So I want to try and tie it in because it kind of pertains to the same point, I guess, which is almost the same question I just asked about competitors, but from a consumer standpoint. And I guess the question that investors are trying to ask is, are you seeing a willingness from the consumers' perspectives to pay more for these sustainable products? And if they're not willing to pay more, will that dilute your margins at the end of the day if you yourselves are incurring incremental costs to make this transition and consumers are not bearing that cost? So two parts to it. From my perspective, the competitive dynamic and then this kind of extra angle around the consumers' willingness?

Sure. So I know there's a saying that leadership can be lonely. Sometimes you have to lead, and it's core to our business. So if we're looking at our business in isolation without the industry, we know the enterprise risk frameworks that we see. Water is critical to our business, and we know that we operate in highly stressed areas, so we have to protect water for people and for our brands. At the same time, we have to deliver it in something, packaging. So if you look at the core areas we've selected, it's core to our business. So we do need to do this in our business regardless of competition, choosing to do it or not. But I'd say in our industry, we have been fortunate. So even over 10 years ago, there was a group called the Water Resources Group, which was about pulling in the water conversation and scaling the work that we were doing in a precompetitive way. So you have Pepsi, Danone, Unilever, Coca-Cola, all a part of the Water Resources Group. Fast forward to today, the Ellen MacArthur Foundation, plastics organizations or the Global Plastic Action Partnership, all have different competitors from the industry as well as government and other organizations who've joined in. So we do like to do it together. We don't want to do it alone. But if we have to lead and it's critical to our business, and we will in those cases to get it going. But I do even remember when James first presented our World Without Waste at The Consumer Goods Forum, and you have competition there as well as manufacturers, retailers, people quickly signed on to the plastics partnership because they started to see the implications to their businesses as well. So leadership, sometimes it means just also getting it going, and others will quickly join. So I think it's important for us to continue to do what's relevant to our business. If I go all the way through to the consumer side, what we've seen there is that there's a lot of data that says consumers will be willing to pay more. The trends have gone up. Do I really believe that I'm cynical in terms of looking at the data? I guess I believe the other sort of with trends, results or countertrends, right? We're also seeing that consumers expect this to be about how brands make their brands, how they sell their brands, how they distribute their brands. And so it's become part of that baseline of the expectation. Back to James' analogy about the car company becoming obsolete because they didn't seem to understand that, that it became a part of the core proposition of the brand. And so I'll say too early to tell, and if they'll pay more, but we recently in the U.S., launched our 13.2-ounce, 100% rPET bottle for Coca-Cola, and it's a premium price. We know it's doing well early days, right? But will that continue in terms of seeing increased price for products and services who embed sustainability in their business? I don't know. The jury is still out on there. But I'd say that regardless, we need to make sure that we're doing the right things for our business to mitigate the risk and drive growth where we see the opportunity.

Super helpful. We've got only a few minutes left, and I have a whole bunch more questions that I want to ask on innovation, on marketing. Those are different areas of the business. So I think we'll probably move on from ESG. I want to tie in because of the time limitations, a couple of different questions into one, if that's okay, James. So I wanted to ask about coffee, I wanted to ask about energy, and I wanted to ask sort of more broadly about marketing and changes in marketing through the pandemic, changes in ROI as you're shifting to more digital marketing. So if I lump those together, can you talk a little bit about where the plans in energy are moving, given the recent announcement around Coke Energy specifically? How excited you are about the coffee category broadly and your plans for Costa outside of the U.K.? And as you're kind of talking about that, maybe you can tie in the marketing element, how easy it is to build these brands, Costa outside of the U.K., how easy it is -- is it going to be to build this brand in a category where you already have established brands and what that means for the future trajectory of these categories in your portfolio going forwards?

I think there was space to get a couple more things in. Let me throw out a couple of ideas, firstly, on energy, coffee and on demand. I mean the 2 biggest drivers of growth in terms of a new growth, in terms of the beverage industry have, in a way, been the polar opposites. There's a whole cluster of categories and brands growing under the energy -- let me call it, the energy needs state or a "pick me up and recharge" need state motivation of consumer. Not the category, but the need of the consumer. I want to be recharged, whether that be -- and a lot of it is -- obviously, there's marketing that's intrinsic to the brand, that is intrinsic state, they've got calories, they've got caffeine, they've got other ingredients, but it's a recharge mindset. And the other one is kind of a -- I want the enjoyment of the beverages but I want it without the calories and I want it without -- with as few ingredients in as you can possibly make it while I still enjoy it. Let's call that flavored sparkling water in the U.S. And in a way, those two big trends continue. They continued in the pandemic, and they're going to continue post pandemic. And that takes us down not just a set of actions about doing justice to all our brands, who sit at the intersection of both or not, only sitting over one of those two. Coke & Meals, for example, continues to be huge and growing. So Coke is still the biggest driver and Coke Zero with it. But that recharge need states is going to grow, and Coke's going to participate in it. Our partnership with Monster continues to do well. And other categories will do well in that. I mean whether you call it flavored milks or with BODYARMOR and some of the stuff we're doing in sports drinks. So I would look at it as that recharge need state are going to grow. Categories and brands will compete in it, including coffee. I mean one could think of coffee as an occasion in where you sit down in the coffee shop, but also a tremendous amount of coffee consumption, including the ready-to-drink coffee is around this recharge need state. And they said the actual needs are not widely dissimilar to the other categories. So we see there's a lot of demand there, and there's a lot of opportunity for us. Secondly, how long does it take? It takes time. The funniest bit about the consumer products industry is when you call it a fast-moving consumer goods. I understand that relates to rotation in the store. But if one were to try and use that in terms of industry structure, it would be completely wrong. The industry structure globally, in aggregate, changes relatively slowly. New big brands take time to build and take time to get from small to medium to large to leadership. And that will be true of any brand will grow and it will be true of Costa outside of the U.K., but it's not that it's not possible. I mean I take another U.K. brand, Innocent, which was the chilled juice brand when we invested in it in 2009. It was 20% of the size of the leading chilled juice player in Europe. And then 10 years later, we're clear leader. But it is 10 years later. No one goes from nothing to scaling that. And you can do an analysis of all brand launches in the U.S. market where there's good -- very good historical data to go back a very long time. And you can see that for the first few years, it's very difficult to distinguish the ultimate success stories like Glaceau or like Monster, from those that ultimately go nowhere. Even after 5 years, you can distinguish, but it's still not the standout that it is after 8 years and more. So beverage brands take time to -- food and beverage brands take time to grow, to get real scale and impact on a broad basis. And so we need to keep going with the marketing, keep going with innovation, keep going with all the commercial and execution allowance to steadily build these brands over time. That's what we were getting to work before the pandemic hit. Like I said at the beginning, we were getting top line growth up at the higher end of our range, 5% to 6%. We were gaining market share steadily each year, and that's the track we can get back onto as we build out the portfolio over time.

Fabulous. Look, I have many, many more questions, but I can see that my instant messenger is flashing red at me. So I think I'd be in a lot of trouble if I try to ask you anymore. But James and Bea, thank you very much for your time. Thank you, everybody, on the line for listening in. And we look forward to having you back someday soon in person, both of you.

Fantastic. Thank you.