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Saturday, February 12, 2011

How vertical forward integration delays revenue recognition at Coca Cola

When a company vertically integrates forward, the standard rationales given are more operating flexibility, entering the value chain, exclusivity in distribution, control etc. But one aspect is sometimes missed out- the impact on bottom line profitability due to revenue recognition timing.

Coca Cola follows a dual business model

  • It ships concentrate to independent bottlers who then manufacture and sell the drinks or
  • It manufactures and bottles in house.
In the 4Q'10 conference call( transcript here), while explaining the impact of Coca Cola acquiring its major bottler(Coca Cola Enterprises-CCE), it was mentioned that earlier, concentrate sales to CCE by Coca Cola could be accounted for upfront when shipped. But now that Coca Cola would own those manufacturing/distribution assets of CCE, it cannot recognize the revenue from concentrate sales till the final product is sold.

The estimated impact is delaying revenue recognition on concentrate sales by upto a quarter(for Coca Cola). Given our vertically integrated Indian conglomerates, it would be interesting to analyze the impact of this on them, given Indian fragmented transport/distribution chains

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