Coca-Cola (KO) Progresses With Re-franchising Initiatives

The Coca-Cola Company (NYSE:KO) is on track with its North America and international re-franchising efforts.

In North America, Coca-Cola is refranchising the majority of its company-owned North American bottling territories to create a more efficient system. More than half of the U.S. territories have already been transferred or agreed to be refranchised so far. In fact, the company plans to refranchise all its company-owned North American bottling territories by the end of 2017.

Coca-Cola has been divesting and merging several bottling operations across many international markets since 2014 to revamp its bottling system and thus, improve margins and drive growth.

Notably, three of its European bottlers – Coca-Cola Enterprises, Inc. (NYSE:CCE) , Coca-Cola Iberian Partners and Coca-Cola Erfrischungsgetränke AG (German bottler) – are expected merge to form a new Western European bottler named Coca-Cola European Partners.

Also, the company has entered into an agreement with beer and beverage company, SABMiller (LON:SAB), and partner Gutsche Family Investments, to merge their bottling operations in Southern and East Africa and form the largest Coca-Cola bottling entity in Africa - Coca-Cola Beverages Africa (CCBA)

Earlier this week, Coca-Cola announced that the South African Competition Tribunal has approved the formation of CCBA, subject to some conditions. The terms of the approval include certain commitments on the part of CCBA. The commitments include improving employment in South Africa, access to retail cooler space for smaller competitors, localization of production and inputs used in the production of Coca-Cola products and the location of its headquarters and tax residency in South Africa.

Coca-Cola will own 18% in Coca-Cola European Partners, and will have 11% stake in the new African bottler. In China, it has agreed to refranchise its company-owned bottling operations to its existing partners, COFCO and Swire.

Also, last month, Coca-Cola Japan, the Japanese subsidiary of Coca-Cola, issued a statement to support the proposed merger of two of Coca-Cola’s largest independent bottlers in Japan – Coca-Cola West Co., Ltd. and Coca-Cola East Japan Co., Ltd. The two Japanese bottlers have signed a non-binding memorandum of understanding to enter into discussions regarding the proposed integration.

Though the refranchising efforts are likely to hurt sales/profits in the near term, these initiatives will result in higher operating margins, lower capital spending, and improved return on invested capital over the long term.

Currently, Coca-Cola has a Zacks Rank #3 (Hold). Some better-ranked beverage stocks are Primo Water Corporation (NASDAQ:PRMW) and REEDS, Inc. (NYSE:REED) . While Primo Water sports a Zacks Rank #1 (Strong Buy), REEDS has a Zacks Rank #2 (Buy).