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Revenue Growth Management: Coca-Cola profit rises investment pays off
Coke announced it achieved or exceeded revenue and profits expectations for 2019. This came in stark contrast to 2017 when it looked like the Atlanta based fast-moving consumer product company faced an existential crisis over sugar. Consumers didn’t want to drink it anymore—bad news for a company whose portfolio revolved around sugary drinks. In two years, the company repositioned itself around sugar-free sodas and other healthier alternatives. It included the acquisition of Fair Life, a brand in the struggling dairy market, that was successfully integrated into the company’s distribution network. The result, according to CEO James Quincy, was growth “in a more sustainable way.” Despite the prevailing narrative, I don’t think it was just a transition to healthier products that drove results. It was also a successful execution of revenue growth management.
What is Revenue Growth Management?
The consumer goods value chain is broken down into three parts:
Successful companies look to maximize their bargaining position between each part in the chain. The ideal position is a monopoly, but If that’s not possible, managers look to streamline and optimize each connecting point. The connecting point between Manufacturers and Retailers is called trade spend. Trade spend is a mixture of manufacturer to retailer pricing discounts and slotting payments to maximize the manufacturers position between Retailers and Consumers. It drives in-store pricing, shelf placement, and promotional activity (think buy-one-get one.) Revenue Growth Management is about optimizing trade spend between 1 and 2, to grow demand at 3.
Here’s how Coca-Cola COO Brian Smith described Coke’s approach in 2019:
It’s the ability to look at the total market, all of the offerings that are there, both ours and our competitors, and look at what consumers want, and to be able to then –with a lot of information, a lot of data, be able to figure out where the big opportunity areas are for us…
Now, that’s a lot of information and it can be super complicated. And so, once you have that, you need to figure out within that how to sequence the things that you’re going to go after, based on what your system capability is, because you can’t necessarily do everything at once, but if you do that in an organized, disciplined fashion, then you begin to grab those opportunities and to drive your revenues and your profits.
Basically, it’s the ability to analyze consumer consumption data against retailer activity to identify better opportunities for trade spend to “grab those opportunities and to drive your revenues and your profits.” It may sound simple, but it is incredibly complex. Coca-Cola sells to hundreds of thousands of retailers across the globe—each with a different product assortment and level of data sophistication. Coke must not only identify the opportunities but create the right mechanisms to ensure the company actually executes them with the retailer.
In the most recent earnings call, Coke CEO James Quincey made it clear that Coke has laid a revenue growth management foundation. In fact, he gave a concrete example of it.
Working with one of our European bottling partners, we added an incremental 100,000 transactions per week for one of our largest customers through insights driven by our RGM capabilities. This kind of collaboration helps drive results, leveraging the power of our consumer insights to support growth for us, our bottling partners, and our customers. It’s another example of how we create shared value for all who touch the Coca-Cola business. And we’re still in the early stages of building out these capabilities and see this as a source of growth for a long time to come.
What’s really interesting, and exciting for Coca-Cola shareholders, is that there is a lot of low-hanging fruit here. The connecting point between manufacturers and retailers has long been relatively opaque. Trade spend has traditionally been viewed as a simple cost of doing business—not an opportunity to optimize a manufacturers return. With the advent of big data and cloud-based computing, it’s never been more affordable or practical for CPG manufacturers to maximize their trade spend through revenue growth management.