Coca-Cola to return some distribution to U.S. franchisers

Tue Apr 16, 2013 10:04pm BST

A woman walks past a Coca-Cola truck truck at a distribution center in Alexandria, Virginia October 16, 2012. REUTERS/Kevin Lamarque

A woman walks past a Coca-Cola truck truck at a distribution center in Alexandria, Virginia October 16, 2012.

Credit: Reuters/Kevin Lamarque

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(Reuters) - Less than three years after spending billions of dollars to acquire most of its U.S. distribution operations, Coca-Cola Co (KO.N) is starting to sell it off again.

Getting out of the capital-intensive, low-return business of delivering bottles and cans of soda to stores, restaurants and vending machines will improve margins. That, and a higher-than-expected quarterly profit on Tuesday, sent shares of the world's largest soft-drink maker up nearly 6 percent.

Coke and PepsiCo Inc (PEP.N) both acquired their North American bottling operations in 2010, in moves aimed at cutting costs, speeding innovation and turning around a sagging market where increasingly health-conscious consumers drink less soda.

Coke said on Tuesday it would return more quickly than expected toward a franchise model in the United States, where independent companies will deliver the drinks to local stores. Unlike in the past, Coke plans to continue producing the drinks.

"This is a different model than elsewhere in the world, but we see this as the right time to go forward with these bottling partners," Steve Cahillane, president of Coca-Cola Americas, said in an interview.

The five bottlers expected to expand their territories in upcoming transactions with Coke are Coca-Cola Bottling Co Consolidated (COKE.O), Coca-Cola Bottling Co United Inc, Swire Coca-Cola USA, Coca-Cola Bottling Co High Country and Corinth Coca-Cola Bottling Works Inc.

Depending on the situations, the deals might include an outright territory sale, a territory swap or a sub-bottling arrangement by which the bottler would make ongoing payments to Coke in exchange for operating rights.

The agreements are subject to the parties reaching definitive deals by the end of 2013, with closings expected in 2014. Financial terms were not disclosed. Neither was Coke's intended use of the proceeds.

"It's an evolution," CEO Muhtar Kent told Reuters.

Kent has consistently said he still believed in the franchise model, suggesting that Coke would return to it. Coke had generally laid out a timeline of three to five years.

In the quarters since the $12.3 billion (8 billion pounds) acquisition, Coke has improved performance in North America.

Coca-Cola, whose brands range from Diet Coke to Minute Maid to vitaminwater, often restructures its distribution in markets around the world. For example, it recently sold half its Philippines bottler to Coca-Cola Femsa (KOFL.MX).

As for the first quarter, it said net income was $1.75 billion, or 39 cents per share, down from $2.05 billion, or 45 cents per share, a year earlier. Earnings were hurt by a calendar shift that stripped the quarter of two selling days.

Excluding one-time items, earnings were 46 cents per share, topping analysts' average estimate by a penny, according to Thomson Reuters I/B/E/S.

Revenue slipped 1 percent to $11.04 billion, hurt by currency exchange rates and sales lost through the refranchising of other bottler assets. Sales by volume rose 4 percent.

By region, volume rose 1 percent in North America, 4 percent in Latin America, 3 percent in the Pacific region and 15 percent in Eurasia and Africa. Volume was flat in Europe, but improved from last year's fourth quarter.

"It was a good start to the year," said Edward Jones analyst Jack Russo.

Coca-Cola shares ended 5.7 percent higher at $42.37 on the New York Stock Exchange on Tuesday.

(Reporting by Martinne Geller in New York; editing by Gerald E. McCormick, Maureen Bavdek and Matthew Lewis)

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