For two decades, Coca-Cola (KO) President James Quincey has seen close up the many challenges he’ll face when he succeeds Muhtar Kent as the leader of the world’s largest soda company next May.
Quincey, a U.K. native who has held positions in Europe and Latin America, was tasked by CEO Kent with implementing a $3 billion cost-cutting program begun last year and to ween the Atlanta-based company from its dependence on soda, which accounts for roughly 70 percent of its sales. Quincey has been involved in Coca-Cola’s decision to sell off its manufacturing and distribution businesses and focus on its more profitable concentrate-making operation, a move that Wall Street analysts support.
“While we believe the company has enjoyed synergies here, we anticipate improved profitability and returns on invested capital after the divestitures, given the low-margin, asset-intensive nature of bottling operations,” wrote Morningstar analyst Adam Fleck in a note to clients. “That said, we believe Coke’s ability to market new products, increase prices, and support its overall brands will ultimately drive returns on invested capital in the high teens over the next several years.”
Like other makers of carbonated beverages, Coca-Cola needs to confront the concerns that have surfaced in recent years linking soda drinking to a variety of health concerns such as diabetes, heart disease and cancer. These issue have been raised by the Center for Science and the Public Interest and others.
Quincey has been instrumental in getting Coca-Cola to sell soda in smaller portion sizes to address the health issue as the industry fights against soda taxes like the ones enacted by Philadelphia that aim to discourage consumers from buying carbonated beverages.
The CEO-to-be argues that Coca-Cola has gotten the message about consumers’ health concerns, which have dropped per-capita consumption rates to levels not seen since the Reagan administration.
“We know that consumers are looking for less sugar, so we’re expanding the selection of low- and no-calorie products, in addition to working on more than 200 reformulation initiatives worldwide,” Quincey said in a press release. “We will continue to honor our great history built on more than 130 years of proud traditions, but at the same time we must continue to follow our consumers and customers to where they take us.”
Though Coca-Cola has long held the market share lead in the Cola Wars, PepsiCo (PEP) has won the hearts of investors because it’s less dependent on the soda business, thanks to its Frito-Lay snack business. Shares of PepsiCo have surged nearly 60 percent over the past five years, outperforming Coca-Cola, which gained 24 percent during that same period.
Coca-Cola also is trying to diversify beyond soda with noncarbonated brands like Simply Orange juice and Vitaminwater. These products account for about 27 percent of the company’s total volume, up from 20 percent in 2007. Some analysts have suggested that Coca-Cola should expand further into the nonsoda market by acquiring energy drink maker Monster Energy (MNST), in which it has a 17 percent interest.
“Although PepsiCo holds the leading domestic market share with brands like Gatorade and Tropicana, Coke has carved its own niches in both the United States and internationally with products like Simply Orange juice, Vitaminwater, and Minute Maid Pulpy (Coke’s first billion-dollar brand to emerge from China),” Fleck wrote to clients. “As these brands gain traction, we forecast price increases and improved profitability.”
What kind of CEO might Quincey be once he takes over from Kent in 2017?
“Quincey brings a needed warmth and strategic perspective lacking in the more distant if not even imperious Muhtar Kent,” said Jeffrey A. Sonnenfeld, an associate dean at Yale School of Management. “Kent, sadly, too closely modeled his style on the imperial [former Coca-Cola CEO] Roberto Guizueta. Quincey is more down-to-earth, and despite his near 20 years in the company, brings a healthy larger outside perspective to the Big Red Empire.”