By Mike Esterl
Coca-Cola Co. ads starring Santa Claus have been playing on TV,
but the mood inside the world's biggest beverage company is far
from merry.
Atlanta-based Coke plans to ax at least 1,000 to 2,000 jobs
globally in the coming weeks, the biggest thinning of its ranks in
15 years. It is also introducing stricter budgeting, telling
executives to swap limousines for taxis, and dropped its lavish
Christmas party for Wall Street analysts.
The moves are part of a $3 billion cost-cutting plan Coke
announced in October after warning it would miss profit targets
this year and next as consumers drink less soda, for decades its
cash cow. The austerity push is a culture shock for a company that
traditionally has grown, not shrunk, its way to prosperity.
Investors aren't convinced Coke can pull it off and question if
the cuts are sufficient. The company says the restructuring won't
be finished until 2019. Since Coke announced the plan Oct. 21, its
share price has fallen 2.2%. .
"Their track record in cutting costs has not been very strong,
so there's a reluctance among investors to believe in them," said
Ali Dibadj, an analyst at Sanford Bernstein. He estimates Coke
needs to cut $3 billion to $4 billion in costs to be as efficient
as other major consumer packaged-goods companies.
Former executives describe Coke as structurally bloated and
often slow. The company has about 20 job grade levels and decisions
like purchasing ingredients can require several rungs for approval.
Marketing and legal teams function in silos, making it hard for
managers to collaborate. Often it's unclear who has the authority
to make decisions.
"It's the puzzle palace," where managers often are "spinning
their wheels," said one former executive.
Analysts at Nomura International estimate the proposed cost cuts
would lower operating expenses to about 38% of revenue at Coke and
its bottling partners. That compares with a 31% average at half a
dozen other big consumer companies, including Nestlé SA and Procter
& Gamble Co. Meanwhile, Morgan Stanley estimates Coke's annual
savings will top out at 6% of prior-year profit, half the peer
average.
Coke disputes such math. It says its plan is aggressive and that
comparisons should factor in differences including geographical mix
and distribution. But it agrees it needs to become leaner and
faster.
"We certainly can do things more efficiently," said Brent
Hastie, vice president of strategy and planning, in an interview at
headquarters, where construction crews are replacing some offices
with open-floor layouts.
Mr. Hastie, who is heading the cost-cutting efforts, has spent
most of the past decade at Coke but also worked for 11 years as a
consultant at McKinsey & Co. The 41-year-old has tapped
outsiders for advice, including former executives at brewer
Anheuser-Busch InBev NV, famous for its lean operations.
Coke says it will adopt zero-based budgeting, which requires
managers to reset spending plans each year to justify all
expenditures, rather than roll over some items from year to year.
It recently tested the practice in some corporate functions and in
its North America division, ahead of a broader rollout.
This month the company eliminated voice mail at its
headquarters, pushing callers to use email or cellphone numbers if
the employee doesn't pick up. Coke says the savings will be less
than $100,000 a year, but that the change will simplify and speed
up work.
Analysts had been told there would be job cuts by November, but
Coke says it is still determining how many people will be affected.
Job-cut notices will go out to North American staffers Jan. 8 and
international employees will be given a timeline for cuts by Jan.
15, according to people familiar with the matter.
Some insiders estimate job losses will range from 1,000 to
2,000, but one person involved in the review said more than 2,000
jobs could be axed. That isn't a lot for a company that had 130,600
employees at the end of 2013. It also pales with the more than
5,000 jobs Coke slashed in 2000 in response to sagging earnings and
sluggish sales. Rival PepsiCo Inc. said in 2012 it would cut 8,700
jobs, about 3% of its workforce.
Still, the impact is expected to be significant at Coke's
headquarters in Atlanta and global regional offices, where more
than 10% of corporate staff could lose their jobs. Bottling and
distribution, which employs more than 85% of personnel, are largely
out of the firing line for now.
Coke plans to eliminate the bureaucratic layer of regional
groups based in Hong Kong, Istanbul, London, Mexico City and
Atlanta so that country business units directly work with corporate
headquarters, while also standardizing operations across business
units. The overhaul is designed to "rewire our organization for
faster and more effective decision making," Chief Executive Muhtar
Kent told employees in an internal November memorandum.
Ideas, decisions and practices until now have been slow to move
through the company, which sells its namesake cola in every country
except Cuba and North Korea. Sales rose in the U.S. this summer
with a successful "Share a Coke" marketing campaign in which
bottles of Coke, Diet Coke and Coke Zero were relabeled with 250
popular first names, ranging from Aaron to Sarah and Zach. But that
was nearly three years after the campaign was launched in
Australia. People close to the company say the campaign's spread
was slowed by turf wars and other hurdles, including concerns by
some U.S.-based lawyers about diluting Coke's trademark.
Many business units have their own information-technology
systems for travel booking and other functions. When headquarters
recommended a few years ago marketing teams do more regimented
pretesting of TV ads, several country units, including the U.S.,
ignored it.
Coke said in October it will accelerate the refranchising of its
U.S. distribution, a low-margin and capital-intensive business,
shedding more than half by 2017. The company also is upgrading
plants that don't currently manufacture the plastic bottles they
fill with soda. Right now, "we're shipping empty bottles of air
around the country," said Mr. Hastie.
Critics say Coke has moved too slowly since 2010, when it bought
the North American manufacturing and distribution assets of
Coca-Cola Enterprises Inc., its biggest local bottler. Outside
consultants recommended a few years ago that Coke outsource
hundreds of trucks that travel between bottling plants and
warehouses to save money, according to a former executive. The
company decided against it, fearing labor strife, the former
executive added.
Former executives say Coke maintained two large North American
commercial teams after the acquisition, creating overlap and
confusion in implementing sales plans with retailers.
Mr. Hastie says Coke has taken steps to integrate its North
American commercial operations and that it is progressing in making
the company more efficient. But "we're really focused on doing the
work right," he added, and sensitive to the human impact of
restructurings.
"Self-surgery is hard," said Mr. Hastie.
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