Late last year, Coca-Cola Bottling United opened a new $86 million sales and distribution center in the metro Atlanta town of Union City, just south of Coca-Cola headquarters. The 456,000-sq-ft facility serves 10,000 retail customers in metro Atlanta, covering 2.8 million consumers. As many as 750 employees will manage the warehousing, picking and delivery of 36 million beverage cases per year. Manual order picking has been converted to an automated process built by System Logistics. Marketed as “Vertique,” the system is “an organized, more ergonomic and efficient sequential operation, with less stress on associates and not as labor intensive,” according to Coke United (click HERE for a video of the system). The Union City facility is among a series of investments by Coke United to modernize its distribution system since acquiring new territory, including Coke’s flagship metro Atlanta market in 2017. Last month, Coke United broke ground for construction of a $60 million, 300,000-sq-ft warehouse and sales center in the South Georgia town of Tifton, about an hour’s drive from the Georgia-Florida line. The facility will consolidate inventory from eight older and smaller facilities into a single automated order picking location when it opens by the end of 2021. Birmingham, Alabama-based Coke United, with franchise roots dating back to 1902, covers territory in Alabama, Florida, Georgia, Louisiana, Mississippi, and Tennessee. The company is Coca-Cola’s fourth largest US franchise bottler (after Coke Consolidated, Reyes Holdings and Arca’s Coke Southwest Beverages). United distributes 11% of Coca-Cola system bottle/can carbonated soft drink volume in US. Last week, Coke United CEO John Sherman and East Region VP Mike Succo joined officials at the new Union City center for a grand opening attended by Coca-Cola North America President Jim Dinkins. BD sat down for an interview with Sherman. The following has been edited for clarity and space:
Investment. BD: What gave Coca-Cola United the confidence to invest further in the Coke system and the US soft drinks industry?
JS: We’ve always been very optimistic about our business enterprise and the categories that we participate in. Generally we have seen pretty consistent growth through the years. We became very confident that we would be able to accelerate that growth by taking on these new markets through refranchising and converting them to our local operating model. In addition, our relationship with the Coca-Cola Company in North America is at its greatest moment in any time in my career. It’s a relationship built on mutual respect and trust, which leads to the ability to have really open and transparent conversations for the benefit of our respective businesses. There was very little hesitation by our board to approve doing this.
Capital. BD: What does your capital investment strategy look like?
JS: “On average, we are investing more than $100 million a year in capital investments for items like trucks, manufacturing equipment and cold drink equipment. In addition to this, as part of taking on new territory through refranchising, we set aside a separate strategic capital budget for the investments we knew we needed to make to modernize infrastructure across the territory to support long-term growth. In the past five years, we’re well underway for that group of projects.
Brand Coke Growth. BD: Nationally, the trend for flagship Coca-Cola has been strong pricing and dollar sales growth even as volume has declined. Are you seeing similar trends in your business?
JS: We haven’t really seen a decline in our unit volume. We’ve seen some years where our sparkling [carbonated soft drink (CSD)] beverage volume declined in the 1% or 2% range, offset by accelerated growth in stills. But even that’s recovered. Our sparkling beverage business grew in 2019 on a unit volume basis.
BD: Is that the result of the market re-setting or is something else happening?
JS: There’s a little bit of reset at how consumers see sparkling beverages given all the innovation in the category. We still have the responsibility to execute in a way that limits as much as possible the caloric intake of our products, but I think consumers appreciate what we are doing to address their concerns on sugar. And then of course you can’t discount the fact that we’ve had tremendous innovation in the sparkling [CSD] space, like Orange Vanilla Coke -- it’s a huge success. That’s encouraging to see our core business respond in a positive way to really good innovation.
BD: Have extensions of the Coca-Cola brand helped lift the flagship, too?
JS: No question about it. It’s had a halo effect on the core brand. Brand Coke grew in our franchise last year.
BD: Is it your experience from conversations with other major bottlers in the system that they’re seeing some of those similar results?
JS: Every market is different. We’re fortunate to have high share markets generally speaking across our franchise, and probably skew a little bit more towards sparkling beverages. But generally speaking, our trends are very similar, because we’re all running the same play.
‘Significant’ Production Investment. BD: What other production expansion and distribution center consolidation are you planning for your territory?
JS: We have some stills manufacturing through a co-packing arrangement with the Coca-Cola Company in Chattanooga and Baton Rouge. But essentially, other than Dasani water, we’re manufacturing sparkling beverages. That’s our production footprint. We put a $28 million case pack water line in Montgomery, Alabama, two years ago. A high speed line. We’ve made investments in Cleveland, Tennessee, to produce sleek cans and to be able to produce Aha [sparkling water] in the near future. Those are the types of investments we’re making today. Line modifications allow us to be flexible in meeting the packaging demands. We are planning a pretty significant investment in production capacity that’s not ready for prime time yet, so I can’t tell you where it is. It’s in our capital plan for 2020. It’ll be a new incremental production line for small PET. At this point, there are no major plant additions or new plants planned.
SKU Diversity ‘Part of Life.’ BD: There was a time when SKU proliferation created consternation for bottlers. How does United think about that today?
JS: We have come to the realization that innovation is such a big part of our annual revenue performance that we embrace it. We obviously like big innovation because we’re a business of scale. We need to find a way operationally to embrace innovation so that it doesn’t become such a burden to our operators. Before, I don’t think we always saw the value of that innovation, and so we just wanted to stiff arm it because it’s too hard. We’ve all embraced the fact that it’s part of life. Not only is it part of life, but it is part of success. Now, I do embrace the idea of eliminate to innovate. That’s an important concept. We haven’t always been very good at eliminating low-performing SKUs. Once you understand that innovation is so important, now you’ve got to figure out how to handle it, and part of how you handle it is you’ve got to rationalize what you sell. In the balance of 2020, we’ll eliminate over 100 SKUs in our territory.
Innovation. BD: Speaking of product innovation, are there any gaps that you are looking to fill?
JS: The biggest gap is being addressed with Aha. The sparkling water category was the biggest category that we really didn’t play very well in, and I’m very bullish on Aha and the potential we have to get meaningful results in that category. It’s not like we haven’t been in sparkling water, but we’ve been playing in the space without the optimum levels of customer authorization. It became clear that the way we had been trying to do that wasn’t successful. So let’s go back and do it in a really big way, and invest up front to get the right brand, to get the right quality and taste. And do it early enough that we can get the quality authorizations. Aha has the right flavor profile, the right contemporary flavors and the functional benefits to set it apart. This is exactly what we’re doing with Aha.
Chilled Distribution. BD: Have you considered investing in warehouse and distribution capability to handle higher-margin chilled beverage products?
JS: We’ve talked strategically about the need to get in that space. We have not made that leap, and it’s a tremendous capital investment to get into fleet that can handle refrigeration. But it’s not something that we put on the shelf. It’s always a discussion.
Beer + Soda? BD: Do you see a bigger future for beer and soft drinks together on the same trucks at some point?
JS: Never say never, but our capacity today is set for our non-alcoholic beverage business. There is so much growth available to us in that core business that my recommendation would be not to vary from that. What does an average American consume in liquid, eight drink servings a day? And as a system we’ve got one of those servings. I don’t know why we would want to clog up our system with another category when we ought to be going and chasing that opportunity.
Pepsi System. BD: Is it inevitable that PepsiCo will re-franchise its US soft drink bottling system to regain share?
JS: Knowing what I know about the dynamic situation with our business and how much of that was created by the re-franchising and committing ourselves to being a local operator, I don’t know why anybody wouldn’t want to do that. But the longer you stay away, the more difficult it is.
Bodyarmor. BD: How difficult is it to balance the distribution of competing sports drink brands Powerade and Bodyarmor?
JS: We view these as complimentary beverages given their very different positioning in the market, and we approached our marketing and execution plan in that manner to ensure we can growth both brands. We’re the highest share Powerade bottler in the US, so getting that right was clearly important for us. The direction to our teams was to make sure Bodyarmor is an “and” and not an “or.” Bodyarmor has been hugely successful, really powerful growth, and if you look at the combination of those two, we’ve had significant share gains in that category because we are providing an offering that hasn’t been in the market before and, together, these brands compete well against the market leader. The fact that the Coca-Cola Company now has some really cool innovation on Powerade will allow Powerade brand to grow and compliment the growth of Bodyarmor, so I see in 2020 both brands growing, and that would be an ideal scenario for us.
Coke Energy. BD: What are the prospects for Coke Energy in your markets?
JS: It’s a brilliant extension of the brand, and consumers seem to embrace a higher level of caffeine than what previous consumers would embrace. But they don’t like a lot of the other ingredients that are in your normal energy drink.
BD: Has it been difficult to get shelf space for Coca-Cola Energy outside of the traditional energy set?
JS: They see the benefit of not cannibalizing the other energy drinks. This is a big deal for the retailers to get that right. Coke Energy needs to be plus-plus for them. So, it hasn’t been difficult.
BD: Will Coke Energy cannibalize flagship Coca-Cola and Coke Zero?
JS: We want to try to make sure that we minimize that. I’m sure there will be some trade-off within the Coke franchise, but in the end Coke Energy is sort of a new entry that we think can lift the entire trademark like other innovations have done.
Artificial Intelligence, Autonomous Driving. BD: How are you planning for technologies such as A.I. and autonomous driving?
JS: Artificial intelligence is here today. We’re using it in a number of our back shop operations, like accounts receivable and payment posting. We’re using block chain technology to help us with our supply chain initiatives. And we’re actually sticking our toe in the water, from a customer replenishment standpoint, because we have such powerful data. With artificial intelligence you can create a custom order that is equally as good as someone going out there and taking it, and that’s a really big deal for us. You can redeploy resources to go sell more. We are testing that customer replenishment technology today in a handful of locations, and the early results are pretty powerful. On autonomous driving, it’s too early. I’m very intrigued by it, obviously. I believe it’s going to be a part of our future at some point, but sometimes it’s not best to be first out. I want to watch other people do it for a while. It just needs to continue to be tested and proved.
E-Commerce. BD: How are you assessing e-commerce and home delivery when it comes to your business during the next three to five years?
JS: It’s growing rapidly, and we participate in a small way with e-commerce today, with Amazon and a few others. The new technology that we have in the warehouse is fitted to include parcel pick. If we want to get into the e-fulfillment side of this, our innovation will be able to do that. E-commerce is going to have to evolve. You think about the cost to ship, and right now everybody’s offering shipping. Well it’s not free, it’s costing somebody something. And if you think about the restaurant meal delivery, nobody’s making any money in that version of e-commerce. Now, we do know that ordering online and going to pick it up is pretty easy, and that’s obviously grown with a number of retailers. That’s one of the parts of e-commerce that is sustainable. The unique thing about that is the consumers in that environment shop more often and spend more money, and that’s clearly what the data says. Now there’s a positive story in that for us. And the other thing that’s becoming pretty clear is that consumers are more freed to purchase bulky items in e-commerce than they are walking around the store because they don’t have to handle it. So, beverages have an opportunity to grow in that environment of e-commerce. The one thing that we haven’t figured out how to solve is the impulse-related shopper. And the retailers have to figure out how to solve that as well.
BD: Can you put a refrigerated cooler at the pickup?
JS: That is probably the biggest opportunity that we and the retailer have, because we both know that there is a significant amount of revenue and margin generated by immediate consumption sales at the register. So, I have a great deal of confidence that we will figure that out, because it’s too important to both parties. The retailer’s going to have to figure out how to present impulse items to the electronic shopper. ‘Do you want a cold beverage at pickup?’
Impulse Shopper. BD: Has the loss of 20-ounce impulse purchases for click-and-collect customers shown up yet in your sales numbers?
JS: It has not yet. But, clearly, it’s important that we work with retailers to figure out solutions that work for both of us and ensure that it doesn’t.
Plastic Waste. BD: How will the issue of plastic waste change Coke United’s business in the next three to five years?
JS: We all acknowledge that plastic container waste is a problem, and we have to be a part of that solution. Packages play almost as important role for us as a bottler as brands do, and consumers may shop brand first, but they’re going to shop package very close to that. Plastic bottles are an important option in the portfolio, as are cans, as are glass, and they all play an important role. But I would say that whatever container type we may choose to use and the consumer embraces, there is still going to be the risk of waste. We’ve got to figure out how to create an effective circular economy so that we can get them back and we can reuse them. Otherwise, we’re going to be talking about waste of another material. We have to provide consumers the package types they want and, at the same time, help build confidence in a circular economy through increased use of recycled content.
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