On a day when the beverage community came together for the industry’s Beverage Digest Future Smarts conference in New York City, Coca-Cola managed to dominate the news by announcing long-serving CEO Muhtar Kent will step down in May after serving in the role for eight years.
Kent will be succeeded by company veteran James Quincey, who most recently served as president and chief operating officer. The transition occurs almost immediately after a Coca Cola (KO) shareholder meeting in April. Kent, who on Friday morning described the transition as the most orderly CEO change in Coke’s history, will remain chairman of the board.
Shareholders didn’t seem to fret the CEO change. Coke’s stock is up over 2% in Friday morning trading. Marcos de Quinto, Coke’s chief marketing officer, coincidentally spoke first at the Beverage Digest conference. When asked about why Quincey is the right executive to run Coke now, de Quinto had nothing but praise.
“He is not only probably the best professional we can have in this moment. As a person – he is fantastic,” de Quinto said. “He is bright, and the way he treats people, there is no one like James.” De Quinto went on to laud Quincey’s strength as an expert in operations, a good sense of marketing, and support from Coke’s core bottling partners—who help distribute the beverage giant’s portfolio of sodas, waters and juices.
Still, there will be challenges ahead. Here’s five things to know about this major CEO change in the world of Big Food.
Coca-Cola has underperformed under Kent
A peek at the latest annual filing by Coke shows that the company’s shares have underperformed both a peer group index and the S&P 500. If an investor were to put $100 into Coke’s shares on December 31, 2010, that investment would be worth $151 apiece by the end of 2015. But returns were far stronger for the peer group index—a basket of stocks that include rivals like PepsiCo (PEP) and Dr Pepper Snapple (DPS)—with a $100 investment over the same timeline appreciating to $218. Revenue has also faltered: it stood at $48 billion in 2012 but dropped to $44.3 billion last year. Revenue is down a further 5% for the first nine months of this year.
Kent inked deals; expect more to come
Under Kent, Coca-Cola announced a slew of deals—most notably moving to acquire some of the company’s big bottling partners after decades of keeping bottlers separate from the marketing and R&D behind brands like Coke, Sprite and Minute Maid. In 2010, Coke went forward with a deal to buy the North American operations of bottler Coca-Cola Enterprises, giving it almost full control of bottling in that region. It also took stakes in other beverage companies like Monster Beverage (MNST) and Keurig Green Mountain—the latter investment gave Coke a tidy $25 million profit after Keurig was sold.
More investments under Quincey would likely take the form of a small, startup investment followed by a full-on takeover later. That’s how last month, PepsiCo bought KeVita and Dr Pepper Snapple acquired Bai Brands. “We tend to believe that given James’ background and significant deal experience, he could accelerate Coke’s growth even further through stepped-up acquisitions over the next several years,” wrote Wells Fargo analyst Bonnie Herzog in a research note.
Of course, Coke itself could become a target. Analysts have said beer giant Anheuser-Busch InBev, which recently swallowed SABMiller, could look to Coke or PepsiCo next.
Coke needs to win market share in declining soda market
In the core U.S. market, carbonated soft drinks sales have slid for 11 straight years, hurting all the major players as consumers are drinking more bottled water, flavored waters, juices and other beverages they deem healthy. Coke hasn’t been immune from that trend: last year Diet Coke volume slipped 5.6% while the namesake brand’s drop was 1%. Analysts and beverage experts agree this trend will almost certainly continue, and there has been criticism from some that the company has been too slow to diversify beyond carbonated soft drinks, which still contribute 75% to sales. Beyond diversifying through deals or internal innovation, Coke needs to try to win market share in a declining market.
Confront new taxation
As health experts have spent years lamenting the high sugar and artificial flavors found in many mainstream sodas today, governments have taken note and recently deemed the soda industry an easy taxation target. High taxation has for decades impacted the alcohol and tobacco industries, both viewed as “vices” among consumer products. Now, the soda industry is seeing itself a target as well. The reason? Sodas have been linked to increased risk of obesity, heart disease and other negative health effects, so government officials are lauding taxation as a way to cut consumption to help public health.
Mexico introduced a 10% tax on sugar-sweetened beverages in 2014 and this year, cities in the U.S. followed suit. Philadelphia became the first major city to pass such a tax earlier this year. On election day, four more cities—including San Francisco and Oakland in California—also approves taxes on sugar-added beverages. More taxes from local governments could be in the pipeline. And sodas may have limited wiggle room to raise prices like tobacco players did in the face of taxation, as there are plenty of beverage alternatives to soda.
Quincey has got a global view
One of the most important skills Quincey brings to the table: plenty of international experience. When he joined the company in 1996, his first role was director of learning strategy for the Latin America Group. In the subsequent years, Quincey held various roles in Latin America, served as president of the Mexico division, and also worked in Europe for years, most notably leading Northwest Europe and the Nordics regions. He also played a key role leading the merger with Coca-Cola Enterprises and other European bottlers.
At the Beverage Digest conference, analysts said the appointment was more a question of when—not if Quincey would get the title. “My understanding is he is a real get-it-done guy,” said Caroline Levy, a beverage analyst at CLSA. “As a long term investment, Coke is really interesting, but in the near term there are some challenges.”