Can Coca-Cola increase its revenue and profitability by slashing advertising over the next 2 years?
Coca-Cola utilizes its ad and marketing budget on print, radio, television and other advertisements, marketing campaigns, point-of-sale merchandising and sales promotion. However, a major part of its advertising expense has historically been directed towards its bottling operations. With KO refranchising most of its bottling business over the last couple of years, the company’s A&M expenditure and revenue have significantly declined in tandem.
With most of its refranchising already done, Coca-Cola is expected to find it very tough to further reduce its advertising expenditure if it sticks to its current strategy. In stead, KO should cut down on its ad spend for bottlers and divert most of its budget away from soda. An increased focus on pushing healthy products, ready-to-make tea/coffee and non-carbonated beverages would provide a tough competition to PepsiCo in the segment.
Coca-Cola’s margins are higher than PepsiCo’s due to refranchising of its low-margin bottling business. However, with the expected reversal of revenue trend and decline in costs with a change in marketing strategy, KO’s net income margin is expected to increase from 20.2% in 2018 to 21% and 22% in 2019 and 2020, respectively, much higher compared to PEP’s margin which is likely to hover around 8.5% to 9% over the next two years.
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