Coca-Cola follows a business strategy (implemented since 2006) where through its operating arm – the Bottling Investment Group – it invests initially in bottling partners operations. As they take off, Coca-Cola divests its equity stakes, and it establishes a franchising model, as long-term growth and distribution strategy.
The secret isn’t in the secret formula but its distribution strategy
The Coca-Cola Company business model is based on five large independent bottling partners. In 2019, these five bottling partners combined represented 40 percent of the total unit case volume the company sold.
Coca-Cola has separate agreements with bottling partners for both manufacturing and sales of the company’s products. As specified by Coca-Cola “the bottler’s agreements generally authorize the bottlers to prepare, package, distribute and sell Company Trademark Beverages in authorized containers in an identified territory. The bottler is obligated to purchase its entire requirement of concentrates or syrups for the designated Company Trademark Beverages from the Company or Company-authorized suppliers.”
Coca-Cola typically agrees to refrain from selling or distributing, or from authorized third parties to sell or distribute, the Company Trademark Beverages throughout the identified territory, to guarantee bottling partner exclusivity under that territory and product.
However, Coca-Cola typically reserves for itself the right manufacture and distribute its trademarked products and brands.
In exchange Coca-Cola also participates in the sales and marketing activities of its bottling partners. For instance, in 2019, Coca-Cola spent $4.4 billion in promotional and marketing programs with bottling partners.
Coca-Cola short-term chain, long-term franchise-model
The strategy of Coca-Cola when it comes to building, growing, and maintaining its distribution system is pretty fluid. Indeed, in most cases, Coca-Cola leverages a network of independent bottling partners.
In some cases, Coca-Cola places strategic investments in some of the bottling partners’ operations. It does that either to enable the entry in a local market, by leveraging on Coca-Cola’s group resources or to maintain control on the bottling partner.
In the long-term Coca-Cola will divest its stake as the bottling partner operations take off, thus enabling Coca-Cola to keep its capital requirements low, while keeping a minor stake in the bottling partner, thus guaranteeing control and cooperation.
Therefore, the distribution system and the bottling partners are organized as a hybrid approach between chain and franchise. Where in the short-term Coca-Cola acts as a chain of bottling companies. In the long-term, it acts more like franchising, where bottling partners are kept mostly independent, yet tied to the Coca-Cola brand.
This mixed distribution system of owned and non-owned bottling partners is the Coca-Cola system which sold 30.3 billion unit cases by 2019. Trademark Coca-Cola accounted for 43 percent of U.S. unit case volume.
Re-franchising or “going franchise”
For instance, in 2019, Coca-Cola acquired the controlling interests in bottling operations in Zambia, Kenya, and Eswatini. As those bottling operations will become stable and established over time Coca-Cola will re-franchise them.
Therefore, it will sell its controlling stake, having a franchisor-franchisee relationship with those bottling partners, and in some cases, it might keep a minor equity stake to keep more control over the operations.
In 2018, for instance, Coca-Cola had a few hundred million in proceeds as it re-franchised its Canadian and Latin American bottling operations. This is how Coca-Cola keeps its CAPEX low, while still keeping control of the bottling operations, and yet enabling expansion and capillary distribution!
This is how Coca-Cola represents its system:
While in the directly owned bottling facilities Coca-Cola sells directly, in the concentrate operations, independent bottling partners manage distribution. Therefore, Coca-Cola makes money by selling its concentrate to bottling partners (they must place a full order for the concentrate available in that territory as part of the bottling agreement).
To handle those operations, Coca-Cola introduced in 2006 the Bottling Investment Group, which managed the acquisition, divestment, and re-franchising of the bottling operations.
The graphic below gives a good picture of the overall process and strategy which has been implemented since 2006:
- An ingenious distribution network and system, drive the Coca-Cola business model.
- Beginning in 2006, Coca-Cola established the Bottling Investment Group, which invests initially in bottling companies by bringing them under the control and ownership of Coca-Cola.
- As local operations are established, marketing and distribution activities run efficiently, Coca-Cola divests its controlling stakes, thus forming a franchising relationship with its bottling partners.
- Bottling partners keep an exclusivity agreement from other third-parties bottling companies to produce or distribute under the territories those bottling partners control. For the products, they bottle up, yet Coca-Cola also reserves its right to manufacture and distribute its products.
- Coca-Cola, in turn, sells concentrate to those bottling companies, which act as franchisees for the branded Coca-Cola products.