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

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.

You're welcome.

So look, as we discussed earlier this morning, one of the sort of resounding topics, I think, of 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 in, I think, all but 2 countries. So can you give us a lens from your perspective on how the consumer is doing?

Yes, sure. And just to clarify, it's gone from 2 to 3 in this year. And you can work those 3 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, U.S. 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 appears to be and wage inflation in the government numbers. So on one hand, the consumer has money and it's 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 than 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?

Okay. So let's move on to focusing on the things that we do know about. Since you took over as CEO, that 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?

It's going to be a long answer then. You're going to have to stop me when you don't like the -- 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. They'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 5 -- 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 a 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 the system. And then underpinning all of that with an organizational and cultural evolution. Because in the end, you can write as many PowerPoints 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 outwards, 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 to have a growth mindset and just drive 4 things very simply: Be curious about what's going on, I don't think we always know how 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 somewhere before; and be quick, don't wait for the perfect chance. And there's -- we can unpack each one ultimately. And what has that allowed us to do? If you go back 5, 10 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 all sorts of other things. But in the end, the revenue was growing at 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 that was pre-COVID, it was at that. 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 pick 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.

Changing culture is notoriously difficult to do. How do you think it's going? Are we still scratching the surface? Or...

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 1 point. Every time you do something that's consistent with the old culture or the opposite of what you're saying, that's minus 10. Because there's -- we humans are very loss adverse. And if you do something -- if you're going to get shouted at or told off or you chuck someone out of the room because they did something stupid, people are going to pay a tremendous amount of attention to that and they're going 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've gone back 10 steps. And every time you do, you only go forward 1. 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 errors for people to 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 the changes we've made in the culture, 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, we never arrive, but I think we're making great progress.

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?

Sure. Well, let me define what we mean by incidence pricing. So the idea of incidence 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, we'll say, look, the price of this tank of Coke concentrate will be a percentage of 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 at 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 changing nearly enough for the concentrate. So the easiest way in the old days to actually keep pace towards with what was happening in the marketplace and saying, 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 wide appeared. It has a number of additional benefits, and the principal one, which is why we implemented it in places like the U.S., which were not characterized by high inflation because, yes, well, why would you do it? And the reason is you also get a greater alignment of incentives. Because in the U.S. marketplace, it used to be the case, we would charge x dollars per gallon of concentrate. Now if a bottler then put that concentrate in a large 2-liter bottle or in a 600 mL bottle, the amount of value to the bottler of 600 mL is many times 2 liter. So what would happen in a year is the company people, their incentive would be to sell more 2-liter bottles because it sells more concentrate, and the bottlers' incentive would be to sell more 600 mL bottles because it has a higher price and uses less concentrate. So you basically, you set up a system that during the course of the year, you've got 2 organizations trying to go in different directions, which is self-evidently counterproductive or introduces a degree of friction into the conversation. Whereas in incidence, while our economics are not the same, we are philosophically aligned. In other words, on the incidence pricing, and I'm taking x percent of the bottlers price, we both make less on the 2-liter bottle, and we both make more on the 600 mL bottle. Therefore, the organizations have directional alignment incentives as to what to try and sell. And so that's why we rolled out incidence pricing around the world. Because we found actually, over and above the inflationary benefits from North America, it was the alignment of the organizations on focusing on the marketplace that became the most important benefit. Wind the clock forward to today, well, now we've got a 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 2 organizations aligned as we go through all the twists and turns of inflation and supply chain challenges, et cetera, et cetera, et cetera. The incidence 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 incidence pricing methodology to address what needs to be addressed in each local marketplace.

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 described it. And I think you described one of benefits of that as being reducing the time from idea to execution. Presumably, that drives 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?

Yes. All the changes we made in marketing -- and my go-to strategy is always simplification. So that's not surprising. But the benefit is, yes, there is an efficiency play. We've greatly consolidated the amount of agencies, 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 started to have campaigns come through the model, they are getting much greater resonance with consumers, all the way down to some of the small examples. 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, B-Y-T-E, 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 traction. 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.

I think Coke BYTE, you engaged with Fortnite. And I live in London, you recently just launched your -- like a pop-up store, like 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?

Absolutely. I mean the pop-up store, Bea is here, she can tell you much more about the pop-up store. I mean -- but it's not merchandise or licensed product in the old idea where it's kind of kind of relatively low-cost, baseball cap or whatever. These are designer items with top designers. There's 1 sweatshirt with a 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 collectibility 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.

I would tell you, the research will show us, the consumer is going to be really disappointed when Starlight or -- we call it Intergalactic in the U.K. When it disappears, the consumers are going to be disappointed.

Yes, also, I get some more e-mails.

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-U.S. efforts on FABs where you're doing the bottling yourselves amongst the bottling network rather than partnering.

Sure. Let me use 2 examples. We launched the 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 who are all in the soft drinks industry. They're also in all the other nonalcoholic categories. They're also in the flavored alcohol 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 flavored alcoholic beverages, unlike wine or many other types of alcohol, these essentially can be made relatively straightforwardly in a soft drink plant or 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, we 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 we basically said, 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. We got a good rate of sale, got some good market share, got some good margins. And he 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 that, yes, the knowledge about the consumer for these sorts of categories is close enough to what we know about and the inherent business system is close enough to ours and our bottlers that we can compete effectively here. We're not interested in just participating somewhere, having a toe in the water in lots of different places. It makes no difference to the Coke numbers. It needs -- 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. 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, can be relevant to the Coke company, then we've got something that's worth talking about. I do say to the people, it's like, 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 worked, appears to have gone to the Philippines really well. So 2 different marketplaces. And the other one, which is in Brazil, is mixed cocktails. So Schweppes, Schweppes Gin & Tonic, other different variants, so pre-mixed 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 footprint 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 for beer, but there's 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's 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 would be relevant to us and them. We have not reached that stage yet, but the experiments are interesting.

Okay. We have 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. It sort of builds upon what we were talking about, but amongst the third bucket that you didn't mention is around hard seltzers.

They asked me not to.

But you have been doing hard seltzers outside the U.S. as well.

Yes.

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 U.S.? Hard seltzers is very nascent, and you are essentially building from scratch.

Yes. I think it all ultimately starts with consumer insight. We can see what's happened in hard seltzers in the U.S., and the U.S. is much more heavily -- so if I break down the flavored alcohol beverages into 3 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, so hard something, which -- and we've launched Simply and FRESCA in the U.S.; and then there's the pre-mixed cocktail. So there's 3 buckets. I've talked about 2, and then there's the hard seltzer one. All of them require to start with consumers. Like you can't just go, well, I'm going to -- 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. And we can see clearly, in the U.S., hard seltzers are -- have been very big and the other 2 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 are much smaller and the pre-mixed cocktails are 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 resonating in some countries. Some countries, there is already a nascent hard seltzers category, so you don't have to just launch the brand and teach about the category. In some other countries, this category doesn't really exist, and you've 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's some degree of understanding of the category. We're the clear #2 and catching up on the #1 in places like the U.K. or Ireland. And so it really is starting to work. But again, working in 1 country is not going to cut it. We need to learn enough to think, okay, with these 3 buckets, is it a big enough idea that it's worth pursuing for the Coke Company?

Okay. And maybe we can shift gears again. Across all these things that have changed 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. How much are these digital changes enabling the business to move forwards?

Yes. I think the first time I put digitize the enterprise in a CAGNY presentation can well have been 2016 or 2017, 1 of those of 2. And I say that because actually, it keeps evolving. Whatever the right answer is today, it's going to keep evolving as the kind of ecosystem, the digital ecosystems keep moving and what's possible keeps changing. Are we making progress? Absolutely. Are we 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's 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 2 universes that are now connected. Historically, they never used to be connected really at the end of the day, but now they are connected, which is really around the consumer and the customer or the retailers. In the old days, the consumer watched TV, and that was 1 universe and the retailers were in physical stores, and that was another universe and they didn't really connect. Now of course, the 2 blend together, 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. And of course, that means we need to engage with the consumers in different ways. So you've gone from TV to social media to kind of the mobile phones or the mobile phone with the shorter video. And where the consumers are changes every few years. I mean everyone who's got teenage kids can -- will attest that 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 app there to connect with the vending machines. It's kind of a -- essentially, a digital ecosystem, 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 that universe with what's going on in the retail universe grows and the possibility to click to buy or click to add to basket 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 2 buckets. The modern retailers, supermarkets, large convenient stores, they've been electronic for a long time. They've been digitized for a long time, electronics, lots of interchange of data. Yes, the software and the ways of doing it are 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 optimize category management, blah, blah, blah. The bit of the universe, which for us is about half the business, which is the fragmented trade, this is undigitized, largely because these retailers didn't have computers or smart phones. But that is changing, that's changing rapidly. It has changed rapidly in the last few 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 salesperson with a digital platform. So instead of the retailer, 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 their mobile phone or whatever. They could add to the order, they can register that their cooler needs servicing, whatever is going -- whatever is going on, there's now a digital relationship with the retailer. When you combine the salesperson with the digital backup that allows them to buy product, 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 a platform is going to continue to drive the business forward and make it more successful.

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. 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?

Well, firstly, it oversimplifies the equation. Firstly, the sparkling business is growing. I know whenever I come to an investor conference in the U.S. over the last 10 years, like 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 U.S. or Europe or Japan, 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, still 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're often very attractive in dollar terms. They tend to be the ones with high costs. If you're in high-protein milk, like the fairlife 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 win 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 school 101, but when you compare Coke, which has got a clear leadership position with someone who's just about leader or #2, not only is the scale different, but the margins are different. And they're not different because the cost structures are inherently completely different, they're 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 to 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 a company that is the same OI margin 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're managing the portfolio effect.

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 makes you excited about it? But then tying into what you were just talking about and 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. How do you balance that M&A landscape with organic innovation?

Sure. Well, let me start on the BODYARMOR side. I mean BODYARMOR was great. I mean as a brand, it clearly did a couple of things. It was -- it brought new news to the sports drinks category, particularly obviously in the U.S. where nothing had 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 a greater runway here in the U.S. for it, and we see opportunities for international expansion in certain parts of the world. And we had already invested in it 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 was obviously last year to buy the rest of it, or not buy the rest of it or do something, which is, of course, is 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 give me scale and the margin structure that I'm looking for? And I think by the BODYARMOR can help us make a big step change in the sports drinks category, particularly in the U.S. and then in some other countries. Then to the broader question of M&A. I'm not sure I would say we were more or less acquisitive, but we are focused on the right opportunities and perhaps what's 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 5, 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 had to put together and try and create a brand out of. I think we're 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 in capital allocation, our capital allocation model is super clear. We're 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 for zillions of years. And then third, the money you're left with and perhaps 1 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 was we were spending more money than we were making when you take about all the capital returned 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's only 3 things you can do: Keep the cash; give it back to the shareholders; we'll spend it on M&A. And we do not feel the gun to our head to rush to make decisions on any 1 of those 3. And so on the M&A front, if things come up that we really think makes sense to the Coke company, of course, we have lots of capacity to do so.

Okay. One of the other categories where you've done M&A, maybe a little bit further back is coffee. So you've spoken, obviously, about your desire to have those quality leadership positions. I think you have Costa in about 40 countries now. Do you see a pathway to leadership in coffee at the moment?

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 2 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 out 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 work very well in China when it opened. We have the clear #2. So the ready-to-drink coffee, it works. The vending machines worked 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 2 years didn't take us very far forward, and so we just need to execute.

Do you have a pent-up sort of pipeline of innovation in Costa that, because you haven't been able to execute in 2 years, that you've got a whole bunch of plans that you now want to sort of throw at it? Or is it a case of just delaying the plans that you had to use?

No, we have -- of course, we have learned over the last 2 years, a whole series of things, whether it's about the stores, whether it's about the digital, the Costa Express, what it takes. I mean we have learned in each one of those 4 pillars what it's going to take to win, so we have been able to refine our plans. We have innovations in each one. But in big terms, what it takes is actually just executing the strategy.

Okay. I have a maybe challenging question to ask you. So how do you balance health and wellness goals, which you've started to integrate and is now sort of more integrated in your conversation metrics, I think, with a need to attract new Gen Z consumers to your categories? And do you see any friction between those 2 things?

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 and 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 circulate around that. But with that combination, Coke is growing. Coke is bringing new consumers in. So I think sometimes, people over-rotate to somehow, consumers want to become [ aesthete ] 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 it 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 can expand with other categories.

Okay. Maybe then 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 3-year stack basis versus 2019. Investors, look, we speak to -- we're 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 in the beginning and how much, if any, is due to all these structural changes that we spoke about that you've made with the business over the past few years?

Is that another way of saying, am I going to take the targets up?

No.

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 am a proponent of looking at the 3-year stacks. Last year, I was a proponent of the 2-stacks because that was comparing versus 2019. This year, I'm a proponent of the 3-year stack because comparing to last year or to 2020 is 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 5% to 6% or a little bit more or whatever? The dust has not settled on the reopening of economies, the reopening of certain channels. There's 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 notch everything up a bit and then we're going to hit a new normality? It's impossible to call at the moment. And so I think the simple way of looking at it, not withstanding that we spent many, many years convincing everyone to look at revenue and value, is actually just to look at the volume on a 3-year stack basis and say, what's going on? And is that tracking at the sort of volume growth rates that is consistent with us being in the 5% to 6% 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, 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, then you're like, okay, things are good.

Okay. I think that makes sense. Can we want to cut to margins a little bit. Maybe you could talk about -- and I'll leave it vague purposefully. Can you talk about long-term margin ambitions?

Good, then I can be suitably vague in the answer. Look, our long-term growth model essentially implies small increments of operating margin expansion. If revenue is going to grow 5% to 6% and you want profits to grow 6% or 8%, it implies a small increment of operating margin spend. But that cannot happen ad 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 about the revenue growth. The operating margin can't go to 110%. It's like it's not possible. But there's a long way to go when 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 to 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 level 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.

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?

No, it's simply that as we've changed the structure of the business, we tied ourselves in knots 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, includes some vertically-integrated businesses, includes the coffee business and includes the bottling businesses we own. And that is 4 types of fruit in 1 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, it's going to change. And so we got ourselves into an endless series of pointless explanations trying to say, well, 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 we said, look that's -- we're making everyone's lives too hard. Let's just kill that. Our strategy is simple, we want to grow the revenue with the same or better operating income margin.

Okay. We've got about 2.5 minutes, so maybe time for 1 one last question. I know you've got Bea in the audience, but she's not up here on the stage. So maybe you can start and if we want to give Bea a mic, we can do that. So it's an ESG question, obviously. You recently linked, as I mentioned, ESG performance measures to incentive conversation 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 have partnerships there and things like that. Do you think things like that could go mainstream? Will you highlight something else?

I think big things to big problems. And so the one we put in the long term or the 3-year incentive program is the degree of recycling. And I think the -- if you look at our ESG, you can talk about lots of different things, but there are 4 things that are really central to our business. Water, where we've actually got a great strategy. We said we wanted to be -- return 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 3 are waste, sugar, communities. And for me, the next one is waste. We need to make sure that we generate a circular economy on our packaging material. I mean if you think of beverage business, you could make ESG esoteric. We can go actually, water and packaging are 2 things that are totally inherent to the business. Making sure that we continue to have a vibrant social license to operate is 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 a bottle back for every 1 we sell by 2030. Make sure they're recyclable. And for ourselves, use at least half the material ourselves, because we actually compete with lots of other 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-value plastic. It's not a shopping bag. It's not a piece of cling 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, with lots of different things, including coke bottles. And so we're very focused on that all around the world, including here in the U.S. There's 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.

Perfect.

James, thank you so much for joining us. And everybody, thank you.