Coke CEO: Policy Changes Needed to Help U.S. Compete
Policy + Politics

Coke CEO: Policy Changes Needed to Help U.S. Compete

Like most U.S. companies, Coca-Cola was hit hard by the recent recession. But Coke was shielded from major disaster by its global sales. Because the world’s top supplier of fizzy soft drinks, juices and ready-to-drink teas and coffees earns 80 percent of its profits overseas, the negative earning patch was short-lived.

“I believe our darkest days have passed,” Coke CEO and self-described optimist Muhtar Kent said at a meeting in Washington D.C. last week, noting that in the past two quarters Coke’s sales volume in North America grew for the first time in five years. “I believe we’re not only going to see a return to pre-2008 economic conditions, but we’re also going to witness potentially unprecedented levels of growth and prosperity in the years ahead … the journey has begun.”

That doesn’t mean he’s entirely happy with the way things are going. He thinks changes in U.S. tax policy and regulation are needed to advance the country’s competitive position in the world. “We certainly need more progressive tax policies ... so that all U.S. companies can compete effectively with their European, Chinese, Australian and Japanese counterparts,” he said. “Our national focus needs to be more on entrepreneurship and growth and less on taxation and regulation that threatens incentive, investment and growth.”

“Why do we have to swim with one hand tied behind our
backs? American companies need to be competitive for the
health of America, for the health of this nation.”

Under current regulation, Kent said, money earned abroad by U.S. companies and taxed overseas under certain circumstances is subject to additional U.S. income tax, while foreign competitors are only taxed once. “Why do we have to swim with one hand tied behind our backs?” he asked. “American companies need to be competitive for the health of America, for the health of this nation.” He says President Obama’s relationship with the business community “needs improvement.”

But there’s the question of whether expansion overseas comes at the expense of jobs in the U.S., something Kent denies. Coke currently employs 11,700 workers in North America and 92,800 globally. The company has more than 300 partners that manufacture and distribute its products and almost 1,000 bottling plants in more than 200 countries, a Coke spokesperson said.

While the North American market for Coke was contracting, it was growing in emerging markets like China, India and Vietnam. In the fourth quarter of 2008, the depths of the recession, unit case volume of all Coke products grew by 29 percent in China, and 28 percent in India and Eastern Europe, while it declined 3 percent for North America. At the end of September, the most recent quarter, ended Sept. 30, North America made a small comeback from its slump with a 2 percent boost in case volume, compared to 12 percent for Eurasia and Africa.

“I expect the majority of the volume growth to continue
to come from the less developed populous foreign markets like
China, India, Indonesia, and Nigeria.”

The multinational firm’s total earnings have been steadily climbing over the last six months, and its stock price has rebounded. In the third quarter of this year, Coke’s per-share earnings were more than double the last quarter of 2008.

“Coke has the almost perfect hedge against weakness in some markets at any time,” said John Sicher, editor and publisher of Beverage Digest. “If part of the world is slow there are almost always going to be other markets where it is still getting growth, which is what happened here.”

Most beverage industry analysts agree that Coke’s expansion in emerging markets has and will continue to steer its growth. “I do expect the majority of the volume growth to continue to come from the less-developed populous foreign markets like China, India, Indonesia and Nigeria,” said Damian Witkowski at Gabelli and Co. A major reason is that the U.S. market is saturated and doesn’t have much room for growth. In 2009, the average per capita consumption of Coke products was a whopping 399 eight-ounce servings — but that hasn’t changed much over the last decade. Foreign markets’ lower consumption leaves more room for growth, although the upward trend has already begun. China’s per capital consumption was a mere eight servings in 1999, ten years later it had quadrupled to 32. Russia’s per capita consumption was 12 servings in 1999, and grew to 59 in 2009.

“As consumers in these countries get more disposable income, and as infrastructures build out, Coke has decades of growth ahead of them,” Sicher said.

There are other reasons for Coke to look overseas. “Colas have been tarred with the brush of trying to fight the obesity epidemic,” said Mark Pendergrast, author of For God, Country, and Coca-Cola — and many states are weighing taxes on sugared beverages.

“Taxes have never created jobs,” said Kent, the Coke CEO. He asserts that growing international demand for Coke products will be a major job growth engine in the U.S. “Our business in China is creating jobs and economic stimulus right here in the U.S.,” he said in a speech at Washington D.C.’s National Press Club last week. He cited an Auburndale, Fla., Coca-Cola plant that processes mass quantities of orange pulp for juice, of which 80 percent is exported to China. “Far from shipping jobs overseas, we’re creating real and tangible benefits for Main Street America,” he said.

Coke also has plans for North America. This year, the company pumped $12 billion into North American operations by acquiring Coca-Cola Enterprises — its biggest bottler on the continent. Coke also has a new-wave fountain called The Freestyle that can dispense 106 different Coca-Cola drinks — any of which can be mixed — from one spigot. The gizmo, which has been introduced in restaurants, airports and retail locations in Atlanta, Dallas, Salt Lake City and Southern California, also “gives the environment a break,” Kent said, by cutting down on the water and packaging typically used in drink machines by 30 percent.