The Coca-Cola Company (NYSE:KO) Redburn 2022 CEO Conference November 30, 2022 11:00 AM ET
Company Participants
James Quincey – Chairman and Chief Executive Officer
Conference Call Participants
Charlie Higgs – Redburn
Charlie Higgs
Right. Good evening, everyone or good morning, if you’re joining us from the U.S. I’m delighted to welcome again James Quincey, the Chairman and CEO of The Coca-Cola Company to our 2022 Redburn CEO conference. James, thanks for joining. Great to have you.
James Quincey
Great to be here.
Charlie Higgs
Some housekeeping, just first of all. So this presentation will be broadcast live on investors.cocacolacompany.com. The format will be a 50-minute fireside chat mainly between James and myself. But for those on the webcast, there is a Q&A function, so please submit some questions, and we’ll try and squeeze in a few towards the end.
I don’t think any introduction’s needed. Everyone knows the Coca-Cola Company, a 136-year-old total beverage behemoth that’s actually been delivering tech levels of organic sales growth in the last year, a company with enormous history and heritage, very much at the front of mind at the moment being a key sponsor of the FIFA World Cup, where it’s advertised every year since 1950 and good to see wins on both sides of the Atlantic last night.
So James, when we finished last year’s conference, we ended by talking about Omicron and then this year, we’ve had the awful war in Ukraine followed by soaring inflation. You’ve been CEO for five years now, but three of those years have faced significant disruptions. So how do you think about consumer centricity and how has it helped you navigate the challenging operating environment? And also, how do you assess the current health of the consumer?
James Quincey
So, I mean, whether it’s good times and stable or disruptive times and difficult times in places, whether it’s pandemic or war or economic side inflation, maintaining that focus on the consumer and its parallel twin of creating money for retailers is always going to be imperative.
Perhaps, one could argue more so in disruptive times because you end up having to change more things, whether it’s the consumer marketing, because the mood of the consumer swings more drastically in volatile times, whether it’s the packaging and the price points and the RGM because you need to move around a lot more or even frankly with the pandemics, the disruptions to the supply chain and the need to focus on continuity.
But ultimately, the North Star being centered on the consumer is always going to be true and so that, I think, is part of what has guided us through these tough years. It was what guided us through the better years. It’s what will guide us in the future. So it always will remain incredibly important.
I think the other thing that goes with consumer centricity is not just thinking about the consumer in the sense of today, but where are they going towards and so not falling into a kind of a short-termers mindset of following them slavishly on the rollercoaster of the economics, but looking to where the puck is going towards and building the business for the long term.
And that’s really driven by the insights engines that we drive internally in the company. Where is the state of the consumer now? Look, clearly, there is a lot of pressure in the system. I think it is somewhat important to disaggregate the consumer. We perhaps have a tendency – or perhaps there is a tendency to overweight what’s happening to U.S. and European consumers and underweight the rest of the world.
And perhaps for many companies, that’s an appropriate balance, given where their revenues and profits come from. Obviously, Coke being so global, that understates what’s happening in the rest of the world. And you can see that in some of our numbers so far this year that there has been good – not just resilience but good growth in a number of the emerging and the developing markets.
So, the U.S. consumer – the central developed market conundrum that everyone’s struggling with is inflation shooting up, whether it’s leveling off is a matter of current debates. But the inflation has gone up. It’s gone up faster than wages, yet the consumers seem to continue to spend.
Yes, it’s sector-specific as to what they’re spending on. Yes, those with more income seem to be more impervious to the squeeze on purchasing power than those with less. Those with less, clearly in the U.S. and Europe are responding with what I would see as classic recessionary behavior, reducing basket size, substituting brands or occasions into private-label, into the categories that they value less and saving the specialists for the categories or the brands they love the most, classic signs of recession. So you do see that across the developed markets.
There are other parts of the world which are more resource-driven economies, which are quite resilient. Obviously, the emerging market economies, which are resource-dependent tend to be doing less well. But again, that isn’t even a rule because we’ve got very robust growth in India, which is also a resource importer, largely speaking.
So, I think we’re still in the territory of slightly weird economics. The math ultimately will play out and I think, therefore, it’s going to be really important as we go into 2023 to remain consumer-centric to remain focused on creating value for retailers, and to remain flexible, and accompanying the consumer with the right marketing innovation, and of course, RGM to hit the price points as we expect the consumers to feel more squeezed from a purchasing power point of view going into 2023.
Charlie Higgs
Interesting. And then, perhaps more broadly, how is the company’s strategy strengthened the resiliency and responsiveness of KO and the broader Coca-Cola system over the past few years? I mean, the latest curve pool we’ve had has been a stronger dollar. Does your approach to managing the business change at all during periods of high currency volatility?
James Quincey
We manage the business for the long-term. We’ve lived with some dollar strengthening for a good number of years now. I think what’s changed very specifically is we have added to the store of saying, look, this is a local business and just to back up one second, that the beverage industry largely competes in local terms on local pricing.
Even though there are a number of commoditized imports that are priced in dollars or euros, the business is largely run in local currency because there are much more local costs than there are commoditized international dollarized costs at a pricing level. So we look to be relevant with consumers and retailers locally, which means winning in local money.
Historically, we have therefore been, in some respects, unfairly oversimplifying perhaps the sum of the parts and we – on the talk over the last number of years to become more than sum of the parts, by being more focused on our resource allocation and our portfolio management such that, particularly in times of dollar strengthening, we could become more than the sum of the parts and as we are this year, clearly delivering strong U.S. dollar growth in the EPS, despite a very strong dollar this year.
So, very much, it’s a question of how do we overlay that agility and resilience as a corporation to be able to redirect resources, all in the service of the long-term health of the brands and the top-line, but how can we use that to offset in the meantime and that’s allowed us to strengthen the brands, work with the bottlers on the RGM and the distribution and the local market execution, such that we can be an all-weather performer.
Charlie Higgs
Yeah, that local focus has really paid off. I mean, one of the hallmarks of your tenure as CEO has been that organic sales growth acceleration towards the top end of that 4% to 6% long-term range. I mean, inflation-driven pricing skews short-term results, but what gives you confidence over the long term of sustaining top-of-the-range growth? And how do you see the balance of that between price mix and volume?
James Quincey
Sure. So, the first – the first kind of foundation stone in long-term sustained growth is the degree of development of the beverage industry on a global basis. If you just imagine two bottles for a second, one that’s the developing markets, one that’s the developed markets – the developed economies, the developed economies are about 20% of the global population and the beverage industry is a people business.
So 20% of the world, you imagine their bottle, 3/4, 70% to 75% of everything they drink is a commercial beverage of one sort or another, whether it’s non-alcoholic ready to drink, whether it was hot drinks, whether it was alcohol, it accounts for about 7 to 7.5 out of 10 of all the drinks they consume. So it’s commercialized. But our share within that is still in the low teens.
We often talk about our share in any RTD. But as we’ve expanded the beverages we drink and as we gain share from other categories, we have an enormous opportunity, not just to finish off the development of commercial beverages in the developed economies, but continue to gain share as we have done over a long period of time.
The other bottle, which is 80% of the world’s population, so think China, India, Africa, to some extent Latin America, there the beverage consumption is a quarter. So only a quarter of beverage consumption is actually commercial and there, again, we have a modest share seen in total. And so we think there is huge long-term potential to build out the beverage industry.
Ultimately, this bottle is four times bigger than the bottle that’s already been developed in the developed economies. So we think there is huge long-term potential for the development of the beverage industry. Second, as the leader in non-alcoholic ready-to drinks, not just the leader but the leader gaining share each year, we think we’re the winner – the long-term winner in the industry.
So it’s an industry that grows and if we gain share, then that adds to the growth equation and it’s not just a growth industry. It’s actually a very stable growing industry. And what I mean by that is if you take a histogram chart and you plot out over the last 20 years or go back further, what did the industry grow each year, like how many times did it grow 4% or 3% or 5%?
The highest column, the median column is 4% and if it didn’t grow 4%, it grew 3% or 5%. Of course, this year is slightly different with inflation. But I think it underlines the stability of the growth of the industry and then if you add on the share gains, you see that relatively, clearly that idea of getting into the top end of the 4% to 6% range is doable if we do our homework.
There is no silver bullet to making it happen, but we absolutely can make it happen. And it’s likely over time to translate into a balanced contribution from volume and price mix. Not necessarily the same everywhere. So the U.S. would be less volume and more price and in India, clearly, it’s going to be much more volume than price. But the net of all those different states of developments of the markets is roughly an equal mix of volume and price over time.
Charlie Higgs
Yes, it’s been a 80% volume growth in India in Q2 is probably my personal highlight of the year so far, but within that vibrant industry, Coca-Cola is obviously the biggest brand. And I think it’s fair to say you’ve taken a more experimental – or your predecessors with the launch of Coke Energy in 2019 and then more recently, the Creations have launching some pixel and space-flavored variants. How would you describe your approach to stewarding the Coca-Cola brand?
James Quincey
See, for me, it starts with this idea that over the last 130-plus years, as you pointed out, each generation of managers has managed to make Coke relevant to the next-generation consumers. If they hadn’t done so, one of those S curves would have turned up and someone else would have substituted Coke. So that the one part of the great success of Coke has been the ability to make it relevant for each generation.
And so that is our North Star as we think about Coke today and Coke going into the future. Like what makes it relevant? And then that then breaks down into a series of things, whether it’s the nature or the tone and style of the marketing or where the marketing is. It’s shifted from – over time, it’s shifted through every media form as they’ve been created and then displaced by the next media form, so the content, the style, where the consumer is engaging with content, all the way through to where the boundaries on the part of variants of Coke.
It’s not that long ago that a Diet Coke was seen as an outrageous heretical idea, Diet Coke only being launched in the early ’80s and here we are many years later with Coke Zero growing fantastically double-digit volume growth for multiple years in a row and really powering alongside, yes, still growth in Coke Original.
But that testing the boundaries, whether it’s Space Coke or pixel or marshmallow, that’s about engagement with consumers. They are not designed to be variants that will last forever, but they are more engaging and more interesting demonstrably than a flavor, a Coke with vanilla or something. And so really, it’s about marrying the insights of the consumers with the central mission to continue to make it relevant for the next-generation.
And if we do things that don’t work or don’t work in their first version, like Coke Energy, then we should stop them and move on to the things that do engage consumers. And I think that combination is really helping us drive growth through the Coca-Cola total franchise and of course, the latest iteration of that, something we’re very excited about, just launched in Mexico is the premixed cocktail of Jack Daniel’s and Coca-Cola.
And so it’s about this testing the boundaries of what consumers want to engage with and the degree with which they engage with it, all in the service of continuing to make Coke relevant for the next-generation.
Charlie Higgs
Yes. See people with some of that Jack and Coke to that CMD, it was great. And Coke is obviously the backbone of the portfolio. But what are your considerations when you think about constructing a brand portfolio that reflects both what consumers want today, but then also your view of – your longer-term view of what the future looks like. And we’ve seen the company push into coffee and alcohol recently where do you set the boundaries of what the company’s portfolio would encompass?
James Quincey
We don’t set the boundary. The boundary is set by, I guess, at the end of the day, two things. One is what is the consumer actually interested in? Where is the growth in beverages going to be? Back to the consumer-centricity, it’s got to start there. And then secondly, of course, is can we do it? Can we do it and be competitive?
Can we generate a competitive advantage in the service of the consumer and in creating value with the retailer? Obviously, the business system we have today is a starting point that, obviously, we look for synergy with. So the boundary is not a fixed line. Being an engineer, I describe it some people like explanations, some people hate it, but I’ll go with it anyway.
For me, it’s much more probabilistic. It’s not that there’s a line from here to X that will do all that and then beyond X, it will do none of that. The line – the idea is more probabilistic in the sense of I already have this position with these brands. What is the next thing that is most likely to be successful and that’s a combination of how it connects to consumers, how it sells to retailers, how it fits with our business system and the type of marketing brands that are good at selling. So then it becomes a probability of success.
Clearly, things that are near or in are more likely to be successful than things that are more different to us. But you’ve got to marry that probabilistic idea or our starting point with where is the consumer going and put it all together. So the boundary’s not fixed. We’re interested in things that grow, that have good economics and in which we can believe we can generate competitive advantage. And so that then turns into what I’ve described as kind of four buckets or four podiums.
And what I mean by that is the portfolio ultimately ends up being made of the gold-medal position on the podium, which is things like Coke. Those brands or categories where we are a clear leader either globally or in some countries in a category by a good distance, real quality leadership and that tends to come with scale, obviously, and margins. And so job number one is to reinforce and make relevant all the brands in the gold-medal position.
Then the silver-medal position, still big brands, but they might not have the clear leadership. They might just be number one or a close number two. And really, the mission there, and it includes some big brands like Fanta and Sprite is to enhance the degree of leadership, because, as we do so, we gain, not just scale but margin.
The margin improvement is greater than the corresponding scale improvement. And we’ve got quite a lot of positions around there where we would like to see increased quality of leadership.
The third podium in the portfolio ends up being those things where we have a clear vision of how value and competitive advantage can be created, but we’ve got to execute. And in that, you can put coffee. We put out a strategy when we invested in Costa. Obviously, that all got sidelined by the pandemic. But ultimately, we are back to the question, okay, now that things are largely reopened, let’s execute and demonstrate is – does the vision hold water or hold coffee if done.
And then the fourth bucket is experimental things. We don’t know enough to even get to the third podium, but we’re willing to try things and perhaps that’s where alcohol has been in the last couple of years is we tried Lemon-Dou in Japan and then we tried premix cocktails in Brazil. We’ve tried distributing spirits in a couple of countries.
And as we learn more, obviously, the next step is to be able to crystallize out of vision, okay, this could be big, because if it’s not big, it’s not going to be material for the Coke company and we don’t want to distract ourselves with lots of small things. So scale is the price of entry and there’ll be many more things in the experiment bucket, but not all of them will make it to the next stage.
Charlie Higgs
Interesting. And then supporting the portfolio has been a revamped marketing approach, and we’re a year into the new relationship with your global marketing partner, what have been the main benefits for moving to this new marketing model and the broader transformation of your marketing approach?
James Quincey
I think the benefits are very simple and straightforward, not that we have got it all fully up and running and are completely happy. But the easy starting point was when you make a huge simplification like that, and you increase the scale, you get a great deal of efficiency benefits that we have used to reinvest in a number of things. So there is a great deal of improvement in the efficiency of the buy and the spend.
But more importantly and perhaps more longer term, because the efficiency is kind of a one-off that then gets baked in, is the increase in the effectiveness and as we’ve started to simplify the number of campaigns and focus on higher quality ones, we already start to see, not just benefits in terms of impact, whether in terms of turnaround time and speed, which then obviously helps us keep more consumer-centric and keep driving value for the retailers.
And so, whether it’s examples like the #WhatTheFanta campaign or even the Coke creations which traveled around the world, I mean, the rate at which we are moving the right things around and stopping the things that don’t work and moving the best practices and really driving up the effectiveness of the marketing, I think that’s the thing that actually is the one that then endures as an advantage going into the future.
Charlie Higgs
And those traditional – the red lorries are still out in force, which is good to see. They were in London last weekend.
James Quincey
Some things change.
Charlie Higgs
It’s good to see. And then it got me on YouTube as well, so full end-to-end marketing. A bit of a sweeping question, but as you look forward, what are the opportunities you see that have the greatest potential for growth from a regional and a category perspective?
James Quincey
Well, part of the problem here answering the question is like what time frame are we talking about and like what are we – what do we mean by growth? Is it volume? Or is it immediate revenue, immediate profits or long-term development? In a way, this goes back to the bottles question and to the portfolio answer.
There is no one lever at Coke that gets pulled or doesn’t pull that makes all the difference. Unquestionably, the nearer terming you are, the more that the top-line is going to be driven by the existing portfolio, that’s kind of a self-evident, kind of mathematical certainty. And so, the sparkling business, Coke, Fanta, Sprite and the other sparkling bevs have been driving growth and will continue to drive growth for a long time into the future.
As I said earlier, that might be more price led than volume led in places like the U.S., but it’s going to be volume led for many, many years to come in Africa and India or ASEAN and China. So, I think the decomposition of growth is about what’s growing where and the portfolio effect and how that then turns into creating a business mass and then creating ultimately U.S. dollar revenue over time.
And I think the thing we focus on is how do we optimize resource allocation, so we make the best decisions to get the most progress each year. I think that’s how to see it because everywhere you look, there are opportunities, the decision is not the lack of opportunities. The decision is, how to make sure we advance in a methodical way and we don’t just disburse our efforts over lots of small things and overweight, if you like, towards the experiment podium and underweight to the gold and silver medal podium.
There has to be – if you take all the countries in the world, they each have their gold, silver, bronze and experimental podiums. The key art is managing the resource allocation over the number of podiums and the number of countries to optimize the long-term development and also get the near-end results that we’re looking for.
Charlie Higgs
Exactly. And you’ve spoken before about how top-line growth drives the bottom-line performance given the outsourced operating model. But beyond top-line growth, what are some of the key long-term operating margin levers that you can pull to drive margin expansion?
James Quincey
Yeah, clearly, the primary driver for profit growth is going to be the top-line. The sheer effect of volume and price mix with all its components of RGM. Within that, as I kind of intimated in the description of the portfolio and the podiums, there is potential for margin improvements in the sense in the gross margin as brands and categories move up the podiums, they don’t just get bigger. They tend to also come with improved margins.
Now even for us in an asset-light model, sometimes the improvement is more the operating margin than the gross margin, because the company is likely to be investing heavily in marketing, which is post-gross margin rather than the bottler. So the effect is there still. It’s just not as pronounced for us as it might be for bottler, and we’d be looking for the operating margins.
Having said that, that does not mean we won’t pursue high-value categories where it basically works in dollars and cents rather than percentages. Sometimes people rotate too far to percentages and decline to pursue opportunities that have a lot of dollars and cents, but don’t necessarily have the right percentages largely because they have our high-input costs.
And so, we do see there is a number of categories that remain attractive for us that have large – or larger than average input costs, and we’re not going to deprioritize them just because the percentage is if we think they create a lot of value and so that tends to kind of be the calendar effect on the gross margin.
The other thing that is happening, it’s not fully happened yet. Obviously, the refranchising is not totally complete. We continue to aspire to be the world’s smallest bottler. We’re down to owning about 3%, either majority or controlling majority of the global bottling system from a much higher number 5, 10 years ago. So we will over time and at the right time look to get that number down, which obviously has these mechanical effects on our margins.
Then beyond that, it’s about managing each of the line items, whether it’s the trade promotion spend, the SG&A, the productivity of the marketing, we will be judicious detailed stewards of the investments. But in summary, let me come back and say this that the margin expansion is not going to be the driver of the value creation of the Coke Company. It’s going to come from the top-line. The top-line is the first, second and third drivers of profits and, ultimately, cash flow.
Charlie Higgs
All right. And we’ve seen the system shift over the past decade or so from a volume to a value-oriented system, which definitely means a stronger focus on driving revenue per case growth by expanding single-serve formats and improving execution in the away-from-home channel. If we enter a consumer recession, what benefits does this yield versus the previous model that focused on volumes?
James Quincey
Yeah, sure. Let me just open parenthesis and talk a little bit about how this – one of the principal mechanics behind the value shift, which is how we charge our bottling partners for the concentrates. The value model was largely linked to a model of concentrate pricing, whereby we charge X amount per gallon.
Whether the bottler used that gallon of concentrate in large 2-liter PET packages or small 8-ounce glass bottles, the price of the concentrate was the same, which obviously created an incentive in the year for the bottler to focus on selling as many eight ounces and not trying to overpromote the 2 liter because it came with very expensive concentrate because it’s an average.
The value orientation is underpinned by a pricing mechanism referred to as incidence pricing, whereby essentially the gallon of concentrate is a percentage of the price realized by the bottler. Therefore, if the 8-ounce bottle is sold at a higher price per liter, then the cost of the concentrate that’s in it is higher and in the two-liter PET bottle, which sells at a much lower price than the cost of concentrate.
And what that does is it orientates both the company and the bottling people to pursue – they don’t have the same economics, but they have the same directional interests as to what should be built over time, not just on an in-year basis but on a long-term basis. The mechanism was actually designed or brought into life to help combat inflationary pressures in a fixed concentrate world actually converted from fixed price to incidents precisely to deal with runaway inflation.
But it turned out to have much greater benefits of aligning the system and focusing them particularly through RGM on what is the optimal price pack channel strategy to engage with consumers and create value for retailers. And it was a very important discovery underpinning initially the long-term success of the Latin American system and then it was rolled out around the world, including into the U.S.
And I think this has helped bring the system much closer together, which means instead of arguing across purposes, we can now focus on the direction of the things that work for both of us in similar directions. And I think it’s been a critical enabler of RGM and the packaging diversity strategies that have been a critical way of meeting consumers with the right price points in the right channels, particularly as income inequality winds and inflation goes up. And so, it’s very important to us and that’s part of what has underpinned this shift.
Charlie Higgs
Yes, it’s also been critical for building alignment with the bottlers. And we continue to see an evolution of the relationship between KO and the bottling partners increases to instance rates, territory refranchising and recently signing of some new agreements and long-term agreements in particular with some of the Latin American bottlers.
How do you think about stewarding the system over the long term? And what is the optimal structure of bottling – bottlers in a region?
James Quincey
Well, optimal sounds like a destination and unfortunately, I am not a believer that there’s some perfect world, nirvana, which we will certainly reach because, even if we did, the changes in the consumers’ interest, the retail landscape and our competitors’ actions is going to mean it – it automatically is not the optimal answer the next day.
So, that’s not to say it should change every day and there’s an infinite number of answers, but we need to constantly ask ourselves the question, what is the way – the best way to organize ourselves to drive the long-term health of the system, which is about value creation and our competitive advantage and to the extent that invites us to boldly do new things at scale or experiment with things to learn about where the boundary is and where the evolutions could or should take place, then we should do so.
It’s a very valuable symbiotic system. But it would be a mistake, I believe, to see it as fixed and final. We always have to challenge ourselves to say, how are we staying relevant, and therefore, what do we need to add and what do we need to subtract in making this happen.
And as you point out, we’ve worked – having deepened our relationship with the bottlers, got more and more aligned around succeeding with the products we’ve had reinforce the competitive advantages of the system in any particular region and it doesn’t even have to be the same answer in every region.
Charlie Higgs
Interesting. I’d like to end on a few on ESG, where – the first one on plastic. I mean, given 90% of your packaging is already recyclable. The main challenge is getting consumers to recycle their products and improve collection rates. What are some of the key initiatives the Coca-Cola system has taken in that regard to improve collection rates?
James Quincey
Yeah, sure. Collection rate is definitively the biggest gap. Let me segment the world into a couple of pieces. One, the developed economies where labor rates tend to be high and emerging markets where labor rates tend to be low and the importance of the distinction there is the cost of the collection system because, ultimately, our bottles, our PET or plastic bottles have an intrinsic value.
Unlike many other types of plastic or single-use plastics, like ourselves, we use shrink wrap around the cans, which like, for example, in Europe, we’ve moved out of and moved to cardboard because that shrink wrap has no recycling value. The PET bottles have a recycling value. If they can be collected, they can go to a system and can be made into new bottles, or they can be made into the sportswear that most of the people on this call wear at some point or into carpets or into lots of other things.
Unfortunately, that’s down-cycling because it’s lower-grade plastic. So, the key is collection and recycling into PET bottles, because then it keeps the economic value and keeps the circular economy. Collection is a challenge. In the emerging markets, collection rates are going up because the economics are there to have people collect the bottles or the cans or the glass or the cardboard, but specifically our PET bottles.
Then we have to do two things. We have to help get our PET laws. So we have to make sure that the regulatory environment allows recycled PET to be used in food-grade PET, so in packing our own bottles. And we’ve had – we made good progress around the world in encouraging – helping governments to put in place a regulatory structure.
And secondly is building infrastructure to actually do the recycling and that’s making a lot of difference in the emerging markets. In the developed world, where labor is more expensive, really even more so than in developed markets where we need to work with other industry partners to get the collection up, in the developed world, really, it’s a coming together with the manufacturers, the retailers and local governments to get the collection facility, whether it’s curbside collection or deposit systems, it needs a more cohesive structure from all the players to put in place the collection system that then obviously is multi-material, but will include the PET.
And it’s very doable. There are countries in the world with over 90% collection, both emerging markets and developed countries with overnight inflection, so it’s very doable. And we have countries where we’re already selling the full portfolio in recycled PET bottles. So this is not a moonshot problem. This is an organizational challenge in the near term. It’s hard. It’s doable. We’re at about 60 – just over 60% collected. There is a long way to go, but it is very doable, and we think it can be done.
Charlie Higgs
Great. And then, lastly, on the climate. Given most of the system’s CO2 emissions are Scope 3, i.e., sit with suppliers and distributors, how do you encourage these third parties and support them to decarbonize their operations?
James Quincey
Yes. The challenge in net zero is it’s actually always someone else and in a way we’re the retailer’s Scope 3. For us, the Coke Company, the Scope 3 sits with the bottlers and the suppliers. So our focus is on what’s happening in the bottling system, and we have – there are bottlers who set their own net zero goals, like CCEP and CCH. And so, that’s a key part of it is the bottler goals that are being set and then we’ve got to work into the carbon footprint.
And really, it’s in a few primary areas, whether it’s the cooling equipment, the conversion cost, the electricity, if you will of making the packaging materials and then in agriculture. And in the end, it comes down to a relatively small number of key things.
We either can find innovation that means we use less energy to run the coolers or we use less energy to do the packaging, and this is very doable. If you take a can – most people can remember cans when they were kids, particularly the older one on this call. And if you stood on it, you had a very hard time making that can crumble because the wall of the can was very thick.
Nowadays, the thickness of an aluminum can is about the thickness of a hair. You just need to touch the side as you’re standing on it and the whole thing crashes. So using less material, what we call lightweighting, uses way less carbon. So less use of material uses less carbon.
Secondly, the collection or the recycling of the circular economy is a critical way to reduce the carbon footprint. A recycled PET bottle or a recycled aluminum can has a much lower carbon footprint than a virgin one. So actually, the climate goals and the world without waste goals, the packaging goals, heavily work together. They are very synergistic, and they deliver results for each other.
So, as you look at the close-in system, the stuff that we touch more of, that makes a huge difference. Obviously, as the green transition happens and energy itself comes with less carbon embedded in it, that makes a huge difference. You can’t get all the way there without green energy.
And lastly, agriculture. There, it’s a much broader scale problem of improving agricultural practices, of which we and many others are engaged so that they can be – we can get the outputs without the same level of carbon being used or released in the production of agricultural inputs.
Charlie Higgs
And like you say, many of your climate initiatives are good for financials as well, such as lightweighting. We’ll have a look at the Q&A in a second. So please submit questions if you have any, but I’d like to bolt one on just quickly if I may, please where we’ve seen a few appointments today, such as Henrique Braun as the newly appointed President of International Development, which coincides nicely with 100 years of international bottling operations, I think.
What would be his key priorities going forward? And then also what does John, the CFO’s adding oversight for bottling investment groups add?
James Quincey
Let me do it in reverse order. John taking on bottling investments is relatively simple in the sense that it’s – our objective is to be the world’s smallest bottler. In other words, a good number of those are subject to ultimately when will we divest them. We have an on-hold IPO with Coca-Cola Beverages Africa, and we are trying to complete a couple of deals in ASEAN.
We’ve just done Cambodia. We’re just trying to get Vietnam online. So simply put, see it as part of completing the play on becoming the world’s smallest bottler and then it’s more easily connected on a day-to-day basis because it intersects with the decisions on where these – where the refranchising’s going. So it’s kind of like makes sense from a purely practical point of view.
Henrique’s role is to help develop and lead the operating units. We have, as a company over the years, had – we have, in a simple way, two objectives in – organizationally speaking. One is to be obviously the most efficient and effective that we can today and the second is, it needs to also develop the talent for the future.
And when you look at the Henrique’s announcement, clearly, as you’ve seen over the last 10, 20, 30 years, we’ve taken lots of different shapes and forms at the top of the house in order to help people develop, but also to help lead the operating units. So Henrique’s role is clearly to fulfill a part of what Brian was doing in terms of being the core part of corporate, working closely with me and John to help direct and lead the operating units and help grow the talent there.
Charlie Higgs
Interesting. And then following on, there is a question here on why does the Coca-Cola company need to hold stakes in many of the anchor bottlers? And what benefits does that confer beyond just economic interest?
James Quincey
I mean, need, in a strict sense, you can argue about it. We have most of the stakes that we hold in key bottlers are part of a joint commitment and alignment and are typically linked to shareholders’ agreements. So most of the large bottlers in the Coke system now, particularly the public ones, the essential composition is a large family or family grouping that owns the biggest stake in the bottling company.
The Coca-Cola Company that owns 20-and-a-bit percent of the company and then public shareholders and we have found over time that having the anchor family, it really provides a long-term-view investor group that are not distracted by the ups and downs of today and tomorrow but are really focused on the long-term value of the franchise and the enterprise with which there are deep relationships with the company and frankly between the bottlers.
And that provides a lot of stability and support for the management teams of those public – of those public bottlers. We tend to be tied in with shareholders’ agreements in a lot of those and so, the equity stakes are part of that ecosystem of keeping us all together.
Charlie Higgs
Perfect. And then I think the last question we’ll take from the Q&A. So there’s been a lot of focus on the success of Coca-Cola Zero Sugar after reformulation. Do you see a similar opportunity with some of the other sparkling flavors like Fanta and Sprite Zero?
James Quincey
Hopefully. Look, I don’t – let me back up. We are always on the Zero versions, whether it’s the sparkling beverages, or frankly, some of the other stills categories, are always looking at the quality of the Zero version relative to the Original and trying to get them closer and closer to be able to deliver on the brand promise and the intrinsics without the calories.
So, to the extent there are Sprite Zeros out there or Fanta Zeros out there that we don’t feel are as good as the original, absolutely, we keep looking to try and improve that. And we have done so over the years. So it’s not a sudden big bang. We have been making tweaks over the years to those different formulas.
Bear in mind that the Fantas and the Sprites around the world are not all one formula partly because of juice content regulation in different parts of the world. So there is not a big bang, and it’s not exactly one thing. But absolutely, we continue to look at opportunities to do even better by improving those Zero formulas.
Charlie Higgs
Perfect. Well, we’re very close to hitting on time. So I think we’ll call it a day there. But James, thank you very much. It’s been a pleasure as always, a fascinating discussion. And thank you very much, everyone online for listening, and have a great festive period coming up.
James Quincey
Great. See you.
Charlie Higgs
See you.
Question-And-Answer Session
End of Q&A
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