So you’re not expecting them to the last. And then of course there are things we’re putting into the marketplace that are new innovations, whether it be something like a Minute Maid Zero Sugar or something like the Absolute Sprite or the Jack Daniels and Coke. So these things they seem – and then of course you’ve got non-product based innovation like it’s a new bottle size or a new can size, so we track across all these things. As it relates to product innovation, we have a very clear set of metrics on whether it’s still growing on the fifth quarter after its launch. So is it cycling itself and continues to accelerate? So there’s a lot of clear measures, but we do not set ourselves an artificial strategy objective of it has to be X percent from innovation.
As it happens, about 25% of the growth comes from innovation, but it is not set that way. In the end, we are not setting ourselves up to sell what we make. We’ve got to sell what the consumers want to buy. So it’s about doing justice to every brand and every idea and every package and every channel and then service that resulting demand. If that is led by a great new innovation or by 138th year of classic Coke, then that’s the answer.
Operator: Our next question comes from Carlos Laboy from HSBC. Please go ahead. Your line is open.
Carlos Laboy: Yes. Good morning. James, market development is a culture related to philosophy, and it seems to me that so much of what you are doing and what you talked about today is intended to get shelf replenishers to become better market developers for faster growth. Can you speak to how this evolution is going in the system? Are there any regions or countries that stand out for momentum in this system transformation of moving toward richer market development and to less shelf replenishment order taking?
James Quincey: Yeah, sure. Look, I think each part of the world is in its journey to continue to add value to the retail. Because in the end, this is about together with the bottlers, making sure that we are adding value to the retailers. This is our objective. At the retail level is to grow the beverage category faster than the average of their business, and for us to grow our portfolio brands faster than the beverage category. And to do that, we’ve got to add more value and that takes different forms in different places and so as that happens, for example, the pre-sellers, they move from just the order taking to account development. As AI comes in, it generates a suggested order for the retail outlet that is demonstrably more efficient in helping the retailer drive sales and then allows the salesperson to do more account development and to expand on different ideas.
So at each stage, it’s about taking the system capabilities to the next level, so that we can continue to add value for the retailer. Everything that was done in the past starts to become the price of entry in the future, and so we need to keep adding value. So I think there’s a strong growth in capabilities all around the world, specifically focused on the channel structure that the bottlers have in any given market.
John Murphy: And if I may just add James, I think one of the big changes in the last three to five years is that the ambition that we share respectively with all of our bottling partners is much more at the high end of what it should be than scattered. So I think that’s, and then it’s working backwards from there as to what does it take to deliver that ambition, and some are further along than others, but it’s the ambition at that starting point that I think is helping to drive the progress that we’re seeing each quarter.
Operator: Our next question comes from Robert Moskow from TD Cowen. Please go ahead. Your line is open.
Robert Moskow : Hi there! Just a couple of clarifying questions. James, I think you said on the last call, you were very clear that you viewed the business as…
James Quincey: Can you speak up? We can’t hear you.
Robert Moskow : My apologies. Can you hear me now?
James Quincey: Yeah.
Robert Moskow : I think last quarter you spoke very specifically about the business being a 2% unit volume grower. Given the timing impacts, is that still how you would view this year? And then secondly, can you be a little more specific about those timing differences in Mexico and I think the Middle East between units and concentrate? What causes those discrepancies and do they naturally reverse in the coming quarter?
James Quincey: Sure. Yes. Timing differences naturally reverse between the concentrate units and unit cases. Partly it happens when there is a different number of days in the quarter than we have the – we use the 445 system for all sorts of reasons and what that causes sometimes is different numbers of shipping days in quarters and so you undersell when you got less days like the first quarter. And of course, in the fourth quarter this year, when there’s two extra days, there’ll be way more concentrate units than there were cases, relatively speaking. So over the course of time, these anomalies or differences reverse themselves or average themselves out. And then as regards to the 2% volume. Yes. Look, I have a very strong view that our overall ambition to see our revenue grow at the top end of the algorithm.
I’m leaving aside the high, the intense inflation countries for the sake of the argument at the moment. We want to grow at that 5% to 6% range and we want that to have a balanced contribution from volume and price mix, so implicitly looking for 2% to 3% on volume. And I think we talked last quarter that in the current circumstances, that’s likely to be slightly less volume and slightly more prices as prices and inflation normalizes, and so I think that 2% is still a pretty good number. It’s certainly been the average growth rate in volume over. If you take a compound number over the last number of years, you are going to get something like a 2%. So that seems to be the momentum we’re driving. And that, if you strip away the inflation and the weirdness in the first quarter, what you see is, you’ve got that 1% volume, which given the Middle East headwind of 1% and actually was cycling the strongest quarter last year, you could say it’s a good volume number.
It has good underlying price mix in the normal countries. So the kind of the normal performance is right at the top end of the algorithm there, and then that feeds its way through to a 7% EPS growth. So I think right in there, the main business, notwithstanding the kind of peripheral noise, is humming away right in line with where we said we wanted to be.
Operator: Our next question comes from Rob Ottenstein from Evercore ISI. Please go ahead. Your line is open.
Rob Ottenstein: Great. Thank you. Just like to drill down, both on the U.S. and the volume question. Can you talk about your expectations for volume growth in North America this year? What it’ll take to get volume growth? Is it a function of more the economy, more the comps, more the sectors. And tied to the sectors or categories, I think you mentioned that tea, coffee and water were very weak. Any color around that? Thank you.
James Quincey: Sure. I mean clearly in the case of the U.S., we’ve commented in previous calls, that our expectation would be modest – flat to modest growth in volume on a long term basis in North America with good pricing. Clearly that remains our overall ambition. Whether we get from the flat to something more positive in the rest of the year will obviously be a combination of what we execute against and the trajectory of the purchasing power of the economy in the balance of the year. But we’re very focused on continuing to build the business, drive the revenue and continue to win in the marketplace, and we’ll see where that nets out to. Then in the case of where we were doing well and where not, clearly we had a strong quarter in terms of sparkling, in terms of some of the other categories in North America.
Dairy obviously, the Fairlife additional charge as John talked about, as the earn-out is in its last year. A very strong quarter on dairy, very strong on sparkling, actually good on juice. The water and the tea and obviously to some extent, obviously the sports categories were a little softer. Some of it on the water was selling less of the kind of the case pack water and tea I think was very much a question, or we just need to focus a little more on some of what needs to be done there. But it was more on the kind of the FUZE Tea end of the spectrum rather than the gold peak end of the spectrum, which tends to do better.
Operator: Our next question comes from Callum Elliott from Bernstein. Please go ahead. Your line is open.
Callum Elliott : Thank you very much. So I have a slightly longer term question on gross margins. In 2015 your gross margin was 61% I think and you had published a slide at CAGNY in 2016 showing that you expected gross margins to get to 68% post the re-franchising that had been announced at the time. Today we’re still around 60% over the past 12 months. I recognize that you guys weren’t in your current seats in 2016 when that slide was published. But my question is, what’s happened? I’m sure your point to M&A, Costa, BODYARMOR, CCDA, etc., but I don’t think they come close to explaining the 800 basis points of Delta and I don’t think that FX explains the gap either. So what else is it? And has re-franchising maybe just not been as margin accretive as you expected or was there some kind of other structural drag that hadn’t been anticipated back in 2016? Thanks.
John Murphy: Yeah, actually I think it does explain. I think it does explain what’s happened. I don’t have the breakdown in front of me, but at the gross margin level, when you take into account the impact of currency, of some of the spotless acquisitions that came back into our portfolio that we’re now in the process of re-franchising and some of the other acquisitions. I think they have had a mechanical impact and we can come back with a little bit more color on that. And then I think when you look at the operating income and how it flows down into the operating income line, the primary driver are these items. So yeah, don’t have it in front of me. We can follow-up in a bit more detail, but that’s – yeah, that’s the story.
Operator: Our last question will come from Brett Cooper from Consumer Edge Research. Please go ahead. Your line is open.
Brett Cooper : Thank you. Good morning. Just wanted to ask on your digital experience and B2B and if you can share any quantification as to, when you win B2B or you get B2B into more particular retailers, what happens to your space or share category performance as relative to a base that isn’t there? And it’s not so much the question of the 8% increase in the quarter, but looking back over time. Thanks.
James Quincey: Again, I don’t know if something was up with the line today. That was very kind of broken up. But I think Brett, you were asking about the digital experiences in B2B and what happens in shares in the category. There are multiple – B2B is not a singular thing. The digital version of B2B is not a singular thing. There is a vast amount of B2B business that has been done for many years with direct order transfers, largely to large store modern retailers, where order replenishment has a longstanding track record and is really focused on the efficiency of making sure the shelf is not out of stock from products, and is more a process of support to what already goes on. And so actually you see it as its enabling the physical presence in the kind of the analog world, if you like.
Of course, there’s other types of B2B. For example, in the mom and pop stores where we have moved heavily from a, you have to wait for the pre-seller to a peer type of relationship with the mom and pop stores, to where that is complemented by some sort of ordering and relationship platform. They come in multiple guises depending on where you are in the world and the relative need and cost efficiency of doing so, but those platforms allow retailers effectively to be able to order, make additional orders 24/7, maybe even book servicing for their cold drink equipment, follow loyalty programs, etc., etc. So there’s a lot of different types of B2B relationships. Generally speaking, they are supportive of us continuing to grow the relationship and to continue to do well, but they are enabling rather than consumer facing.
