Speeches

Consumer Analyst Group of New York (CAGNY) Conference

José Octavio Reyes, President, Latin America Group, The Coca-Cola Company
February 19, 2010

Transcript

Thank you Brian. And good morning everyone. I'm Jose Octavio Reyes. I am the president of Latin America. It's great to be here with you this morning. It's a great pleasure, it's an honor really to be here in your CAGNY conference today.

Especially grateful to do two things. One, first talk about a region, a part of the world, break down a little bit more, on something that I believe is essential to our 2020 vision, the one that you heard Muhtar and some of us in the leadership team portray back in Atlanta last November, I think it was.

A year ago, actually, Muhtar was here in this same scenario in what was the midst of the global recession and shared with you some insights on why our business is made for a time like this. He then went on to describe a number of actions that were taking at that time to take advantage of that opportunity, and he finished, if you recall, with an overview of the incredible opportunities, the enormous opportunities that exist in the non-alcoholic, ready-to-drink market in the next 10 years or so.

I know that by now you are all familiar with those -- what we call global megatrends -- that are driving our business through 2020. They are the economic power radiating from many nations, and not just a few -- 1 billion new consumers -- emerging in the middle class... a massive expansion of urban growth and development, and a new global consumer mindset, one that is attuned to social, environments, economical,... [and] sustainability issues.

Now my point is that no market, no market is more representative of these trends. And I offer to you that no market is more poised to win within those trends, better positioned to do it in the coming decade than Latin America. And that's why I wanted to focus today in this sunny south Florida.

I know that you have been here from 7 AM to 7 PM, but the rumor is there is sun outside, so in this sunny times and sunny weather, [I'm] going to give you some Safe Harbor language. If you happen to be a sailor, at sunny south Florida Safe Harbor, it's a good thing.

So I know that you are all very good at speed reading, so please do it one more time. Okay? Let's move on.

I want to begin this Latin America story today by briefly sharing some facts, some highlights about what our success has been in the region. Then I am going to introduce five common misconceptions, myths, I call them, that seem to have come up every time that I talked about our business in Latin America. Those myths are related to drivers of our success or how we are positioned for the future. I am sure that when we finish that part of the conversation, you will agree with me that we are stronger, we are better positioned than ever -- than ever to capture the opportunities ahead of us. And then I will finish with a closer look at the opportunities ahead, the opportunities that exist in Latin America. And you would -- and hopefully you would see that our entire Latin America team is laser-focused on harnessing those opportunities as we head toward 2020.

So a few facts and highlights. From Baja California to Tierra del Fuego, in that territory that Latin America covers, there are about 0.5 billion people. And importantly, about 40% of those is the youth market. 40% about 0.5 billion is the youth market. Across this wonderful land of ours, there are several seven languages being spoken. Spanish and Portuguese are, of course, the most important, but there are seven languages being spoken.

We represent -- we in Latin America -- represent a huge slice of the non-alcoholic, ready-to-drink industry. Last year our portfolio in that region represented nearly 7 billion unit cases, with 150 active brands and 800 products competing, looking for the consumers' hearts and mind.

I believe that this is, ladies and gentlemen, the most complex market in terms of the sheer number of packaging options that are being offered to the consumer and to the customers. Let me give you just one example.

In Mexico City today, [Coca-Cola] is offering 60 different SKUs -- six-oh. Those 60 different SKUs, each one has a different route to market. Each one has a specific price pack architecture. Each one covers a specific consumer need. Each one covers a specific consumer occasion. It is a very sophisticated and demanding consumer market, and it will become increasingly more.

We -- Latin America -- we manage this region through four large, rather self-sustained business units, dynamic and with significant scale. Mexico last year eclipsed the 3 billion unit cases mark, and in doing so, became the first business unit outside of the US to ever accomplish that. Brazil is quickly getting into the 2 billion mark, and South Latin and Latin Center are around the 1 billion mark. So they are big, they are self-sufficient.

And importantly, all of them grew last year, the same way we've done it in Latin America throughout the years... in good times, in difficult times, and in terrible times. We've faced some terrible times. Even in the midst of the 2008-2009 global recessions, we have been able to take advantage of the tailwinds and weather the headwinds.

Now, you know and I know that growing one year is relatively easy. The key is to do it year in and year out and to do it consistently, just the way we have done it in Latin America.

Over the last 10 years, Latin America has grown volume at a CAGR, a compounded rate of 5.4% for those 10 years. So in the last three years we have essentially added another Brazil. That's what we have created. And if you look at the 10 years, we've created another Mexico, another Brazil, and another Peru combined. So it's consistent growth. It's been growing throughout the years.

And today we are growing ahead of the industry overall and in each specific sector. So you see here that Latin America is also much more -- much more than just an important sparkling market, which we are. And we are very proud of that.

So those are the facts. But even with those good, consistent quality results, arguably some of the best in the industry, when I talk to industry observers -- even some of you guys -- when I listen to the things that are being written here in this space, to some of the newspaper articles, there are -- I see a lot of misconceptions. Misconceptions about our business in Latin America. And even though those misconceptions stray from the truth, they're hard to change. They are deeply rooted.

I wouldn't be doing my job if I didn't try to right that wrong, if you will, and set the record straight. So here's what I'm going to do. I'm going to walk through those myths and misconceptions, I'm sure you've heard them, and I'm going to give you the straight facts. Hopefully we will come together with a better understanding of where we are in this region.

Myth number one. You've heard this a couple of times, I'm sure. Carbonated soft drinks have reached their ceiling -- perhaps the most common myth. I've heard it many, many, many, many times, and the argument is simple, and I get it. I get the logic. High per caps, high shares, circular trends. I get the logic. Hopeful and gladly for me and fortunately the people in Latin America who enjoy our product, the 0.5 billion people that do it either have not heard it or [do] not believe it. But that's good news for us there, because we continue growing.

Here's again, something over the last 10 years. We have added a little more than 169 million unit cases every year-- annually. Yes, I get it. Total in sparkling per caps are above 200. Frankly, we don't see that as a ceiling. We don't see that as a ceiling at all.

In fact, take the example of Mexico. About 30 years ago when I first started in this business, Mexico was around the 200-plus mark in per capita. And the talk that the ceiling has been reached, the articles about how that would not grow anymore, how that same thing about the high per caps and the high market shares were already there. Well, today Mexico's sparkling per cap is 486. And frankly there are no signs of a slowing down. I assure you that there's plenty of room to grow in Latin America in sparkling.

Yes, it is true that our volume and value shares are strong. I see that, but we are not content. There is ample room to grow, and the fact is we'll do it.

At the end of the day, when everything is said and done, it all starts and ends with consumers -- with people, with you and me. And we work very, very, very hard to connect with our people in our region, with their passions... with their lives. And when we do, when we do it right. At least, they give us their preference, and that's the cycle that we are trying to build.

Back in November in the analyst meeting in Atlanta, you heard me talk about the love story that exists between Coca-Cola and the people in Latin America. I told you there is nothing that comes remotely close to the relationship that exists between the people in Latin America and their Coca-Cola.

And this love affair -- just like any good love affair -- is something that we don't take for granted. It's actually something that we work very hard every day to continue to build. To continue winning with our consumers and customers.

Constant interaction, constant attention to detail, the way that Muhtar characterizes this constant state of constructive -- what is it that he said? Constructive discontent is the way that he puts it.

And because of that constant attention to detail, because of that willingness to continue speaking and trying to build that relationship with consumers... there is no ceiling. I believe there is no ceiling to our business.

I'm going to show you a few examples of that consumer connection. I'm going to show you four examples.

• The first one: it's a Coke and meals ad, and it's actually a note -- a celebration to moms. It recognizes the effort and especially the magic touch that she puts into everyday life, into everyday occasions, into everyday meals.
• The second one, the one called Cielo, it's a Latin America production for [Open] Happiness. It reminds people that the joy and happiness resides in the little things in life. We aired this last year, and it was the right message for our societies and the mood that they were in.
• Then the one for Coca-Cola Zero, the one called Happy Kingdom -- it's a story of good versus bad, of joy versus sadness. Joy wins, of course. It's done in a [youthful] way. I hope you like it.
• And then the last one, Big Splash, it's a spot directed to teens. Keep that in mind as you look at it.

Could we show four please? (video plays)

So myth number one, the sparkling ceiling has been reached. The flip side to that is this one. Okay, I got it. So they got it on sparkling, but they are losing the battle on stills. Not quite. Not quite. Let's see the facts.

As you can see, stills are booming. Granted, it's from a fairly small base, but stills [are] growing at a fairly decent clip. In fact, it's a wonderful number. A full 60% of our incremental volume in Latin America last year came from stills. 60%.

The one thing that I liked of this is that it's not confined to one single brand or one single segment. We are talking about a robust portfolio of well positioned categories and products.

A couple of examples: 39% of incremental volume came from water. And water grew 22% and now represents 12% of volume, with Ciel and all those brands that you see here.

Energy drinks, another example. They grew more than 60%, driven by Gladiator. Gladiator is an affordable day occasion energy drink. That contributed to almost 70% of that growth.

So the fact is that we have winning propositions. Winning propositions that make our brands either number one or number two in almost all categories. So it's not about winning in stills or sparkling, it's about doing it all, winning in both and doing it consistently.

I want to show you another example of that consumer connection now with stills. I'm going to show you five pieces here.

• The first one, the Detalles... is with Ciel, but it's used for all water brands across Latin America. It communicates that Ciel gives you that something extra you need to hydrate and cope with the pressures of everyday life.
• The POWERADE ad reminds people that we play sports to actively enjoy the game. That's why we do it.
• And then I want to show you the [one] for Epika. And I'm going to -- I have to read this. Epika is a sophisticated and naturally sweetened drink made of ancient recipes that provides energy, relaxation and stimulation whenever needed -- it's great, no? Hope you had a chance to taste it. It's a great product.
• Then I'm going to show you an ad on Hugo. Hugo is a product that's a combination of juice and milk. It doesn't work as well in the translations, because at the end of the day, there's a play of words here in Spanish, and it's a [youthful lag] that tries to interact with the fact that this guy created this product. It doesn't work as well in the translation, but it has connected very, very, very well with our consumers in Chile.
• And then, lastly, a campaign for juice brands across Latin America. In this case it features Cepita, which is our brand in Argentina, but again, it's a pan Latin America campaign.

So could we see those five please? (video plays)

Okay. So two down, three to go. We've talked about growth hitting the ceiling in sparkling, and still beveragea not growing in Latin America. The third common misconception: the business model is broken... it doesn't work... bottlers are unhappy... they're inefficient. You've heard those things. Let's look at those slides.

I would argue that our selling and distribution system in Latin America is second to none. The numbers are impressive. The system is intently focused on serving our customers. More than 4 million customers served more than three times a week, delivering 450 million servings every day.

But more important than that is the fact that our bottlers have the execution capabilities to serve different types of customers and to efficiently work with a wide array of packages and products. This makes us available, visible and affordable to everyone. Literally everyone in Latin America. And I believe that's a key part of our success.

Now this great system of ours has evolved through time. In sparkling, we started with revenue percentage sharing models, such as [instance price], and Latin America was the first place in the world where that happened. We have fine-tuned that model through the years.

In stills, we have taken an alternative path, because stills are different from sparkling, different in terms of production investments and in distribution merchandise, and you know all that. The key to accelerate, and I believe at least one of the keys to accelerate in stills growth has been the 50/50 partnership we've established with our bottlers. In these early stages of development, that 50/50 has allowed us to leverage the individual strengths, to make faster decisions, to seize the opportunity. It's a much more entrepreneurial model and gives everyone a real sense of ownership. I believe that is the right way to do it in these early stages.

But as the saying goes, the proof is in the pudding. And nothing speaks more of a healthy system then reinvestment in the business. It is essential for growth... it is essential for growth today... it is essential for growth tomorrow. Muhtar recently announced those figures: $5 billion of investment for the system that is in Mexico and $6 billion of investment for the system in Brazil in the next five years.

We see this as an imperative. We see this as something which is paramount for achieving our 2020 growth targets, which globally calls for more than doubling our system revenues.

The fourth common misconception, myth number four. Coca-Cola doesn't have competition in Latin America -- they were there first, and no one has entered because they're entrenched and, therefore, no one has dared to enter.

Again, the facts do not support this. Competition is alive and well and growing in Latin America. Everyone is there, and they are doing a great job. And actually our competition is not simply limited to the international global brands and companies. We also have a bunch of strong, well-managed local companies that sometimes are as strong, if not stronger, than the global players.

[I'll] give you another fact. Our principal competitor entered Mexico 71 years ago and enjoyed a leadership position in the cola market in Mexico up until the late '60s. I remember the late '60s. It was not that long ago. So it's been a long battle, one that we have faced, will face, and will continue to face over the years, and one we will fight to win. Yes, we will. I think this heated, crowded competitive arena in Latin America is good for everyone. It's good for consumers, it's good for customers, it's good for us, for us in Latin [America] -- in Coca-Cola, because it forces us to bring our A game to the marketplace every day, day in and day out. So I'm very happy that that is happening.

The last and final myth, if you will, and one of my favorites: Latin America is profitable because the large retailers have not entered. Just wait. Just wait. It's an accident waiting to happen. You've heard that. But again, my friends, that's simply not the reality.

Now, it is true -- it is true that we have a large customer base. That's true. It is also true that small retailers are profitable. It's also true that we serve them passionately. It's also true that we work with them to provide the equipment, the tools, everything they need to continue serving our mutual consumer.

There is this daily occurrence -- we call it a ritual -- in Latin America of buying a cold drink -- usually a cold Coca-Cola -- for lunch and dinner, or dinner. That specific occasion is better served by this traditional channel. But that is being done on top of, not instead of, growing with all major retailers. All the major retailers, all of them have been in Latin America, are in Latin America and have been there for two, three, even four decades. And importantly, and I think that's the point, they are very successful. They are very successful.

Our goal is to serve every customer in every channel all the time so that we can serve our consumers in the best possible way and to do it passionately.

The 2020 vision that I keep referring to calls for us to become a critical part of our customer growth strategies, so we want them all to grow, and we want to grow with them, and we want to win together with them.

Let me show you an example of how pervasive big customers are in Latin America. Wal-Mart. You're familiar with them. Wal-Mart has more than 2,700 outlets throughout Latin America. They have more diverse formats in Latin America than in most places anywhere in the world. In fact today their business, their Wal-Mart business is stronger in Latin America than in the US. So big retailers have arrived. We are thrilled, we are excited, we are elated with the fact that they are there. We are committed to grow with them, just as we are committed to grow with every other customer so that we can have the privilege of serving together our consumers.

So those are the most common misconceptions. And hopefully I've turned them around. So hopefully I have convinced you of five basic truths about our business in Latin America.

• Truth number one: there is no ceiling to sparkling beverages growth.
• Truth number two: still beverages play an important role in Latin America.
• Number three: our system is strong, it's working well, and it's investing to drive new growth opportunities.
• Number four: the competitive landscape is vibrant, it's growing, and yet it's keeping us stronger.
• And number five: large retailers are on the move throughout Latin America and are central to our mutual growth strategies.

Okay. So let's look a little bit about the future. Obviously everything that I have said paints a great picture of robust and sustainable growth as we look ahead into the wonderful, enormous opportunities -- this growing world of refreshment that we've talked about that exists in Latin America.

I mentioned briefly the 2020 megatrends that are shaping our business, the one that moved our layout last year in this same conference.

So just look at the opportunities from the socioeconomic arena in Latin America. The next three years alone, 15 million people will rise into the middle class. Most of these people will live in urban cities. In urban places. The urban areas in Latin America now rival the ones in North America. There are more than 50 cities in Latin America today that exist -- exceeds 1 million people. More than 50.

And as the middle class grows, we are well positioned to capture incremental profits via price and package mix. I cannot emphasize this enough. It is fundamental. It is central to our strategy, not only in Latin America but in other parts of the world -- in China and India, the way we construct our packaging and pricing architecture and the way that we capture that value as the middle class grows.

Now look at the youth population. That tells you that this is something that has legs that we will see. Think about it this way, 40% today is below 20 years of age. That's about 0.25 billion people. That 0.25 billion people will be entering their peak earning years over the next three decades.

So at the end of the day, when you put all this together, you're going to have a highly empowered, highly connected, highly mobile, highly demanding generation of youth, the one that Muhtar described in his global megatrends, and that is why this market will continue to grow. This is all very favorable things for the continued growth of the non-alcoholic, ready-to-drink beverages.

And because of that, all our business units are now laser-focused in growing per caps.

Earlier I shared with you the strong sparkling per caps of total Latin America. What I am showing here is the per caps just for the Coca-Cola trademark. The average, as you can see, of Latin America is well above the world. And, of course, Mexico is well above that.

But even with those per cap's, there are huge differences between countries, and there are differences in the countries in itself. So for instance, there's no reason why a Brazil today with a per capita of 141, or a Colombia with a per capita of 67, cannot reach the Latin America average or the average of Argentina and Chile's, not to mention Mexico.

And then take the Mexico example. Even within Mexico with that high per capita -- I'm going to do a little math for you. If we only bring those cities like Guadalajara, like Oaxaca, like Veracruz, that are below the average of Mexico, that will mean an increase of 10%. And if we bring those cities that are below to Monterey, which is the highest, then you would have an increase of 23%.

I'm not naive. I'm not that naive at least. I mean, I get it. It takes a lot of work. It's easy to do the math. It's more difficult to make it happen. But the point is we are committed to do it, and the point is there is ample room to grow.

The other thing that I believe would play a big, big role in the future growth of Latin America is innovation. And we are extremely excited about this pipeline that we have, whether it's for -- from global bets, if you will, or global products that happen in other parts of the world, or things that we have done locally. There are a lot of these projects that have honestly the great opportunity of becoming real blockbusters.

Let me take a point of Valle Frut. That's an affordable fruit still drink. Valle Frut was launched in Mexico in May of 2008 and in Brazil in June of last year, 2009. Last year in Mexico Valle Frut sold 60 million cases. There are opportunities there.

So when you look at the facts in Latin America, when you look at the trends, when you look at the opportunities that exist in the marketplace over the next 10 years, you cannot help but come to the conclusion that there is no better industry to be in than the non-alcoholic, ready-to-drink industry, an industry that is expected to grow handsomely and above alcoholic beverages and packaged goods.

It's an 8 billion -- or nearly an 8 million unit case opportunity. That is the size of the pond we are fishing in. That is the prize our system, we and our bottlers, are after.

So let me bring this to a close. Hopefully you'll share with me the excitement of being a player in this industry in Latin America. Some of those perceived barriers are just that, perceptions. And we see them as opportunities.

We and our bottlers are working together, and we will win in an industry that presents to us an 8 billion cases opportunity. And I know -- I am convinced that we have the system, we have the team, we have the capabilities, we have the people ready to continue our winning trajectory. I know, I am convinced that we will continue to play a significant role in helping our company achieve our 2020 vision. I am convinced of that. I hope you share that belief with me, and I hope you share that enthusiasm about the great opportunities in this growing world of refreshment that exists in Latin America.

So thank you again for the invitation. It's great to be here with you all, and thank you for being here and not watching what Tiger had to say. So thank you very much.

Let's open it up and see if you have any questions for Jackson, who is here with me.