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Coca-Cola announces refranchising; profit beats

Candice Choi, AP Food Industry Writer

NEW YORK (AP) -- Coca-Cola reported first-quarter results on Tuesday that came in above expectations and said it struck deals to start parceling out more of its distribution territories to independent bottlers.

The world's biggest beverage maker, which makes Sprite, Dasani and Powerade, had purchased its biggest North American bottler in 2010 to take greater control over new products and packaging.

Now the Atlanta-based company is starting to sell back distribution rights to smaller bottlers but is holding onto its factories as it continues to push for a national production model more akin to those in other countries. That means further changes to the system will be in store, such building new plants and consolidating others.

"There's room for costs to come down. There's room for efficiency to increase," CEO Muhtar Kent said in a call with investors.

A franchising model lowers overhead costs for Coca-Cola because it means regional bottlers take on the responsibilities for delivering drinks to retailers such as supermarkets and gas stations. Although Coca-Cola doesn't book beverage sales from franchised territories, it gets fees from the bottlers.

Rival PepsiCo Inc., which also bought its biggest bottler in 2010, has also been consolidating production and plans to provide an update on a potential restructuring of the unit early next year, with possibilities including refranchising or a spinoff of the business.

According to the industry tracker Beverage Digest, the deals announced Thursday mean Coca-Cola will end up handling about 74.5 percent of its U.S. bottling business, down from 79.4 percent. The company declined to set a timeline Tuesday for when it will complete its refranchising in the U.S. But Kent noted during the call with analysts that in in four or five years, the U.S. market would come to represent some of its best practices in the world.

Meanwhile, Coca-Cola said that global volume during its first quarter rose 4 percent, with Thailand, India and Russia posting strong gains. In its flagship North American market, volume rose 1 percent, fueled by growth in non-carbonated drinks such as Honest Tea and Simply Orange juice.

But soda declined 1 percent in the region, reflecting a continued movement away from soft drinks in developed countries such as the U.S.

For the three months ended March 29, the company said it earned $1.75 billion, or 39 cents per share. That's down from $2.1 billion, or 45 cents per share, a year earlier.

Not including one-time items such as restructuring charges, however, the company says it earned 46 cents per share. That's better than the 45 cents per share analysts expected.

Net revenue declined to $11.04 billion, from $11.14 billion a year ago, hurt by foreign currency exchange rates and two fewer selling days in the period. Analysts expected $10.97 billion, according to FactSet.

Shares of Coca-Cola Co. rose almost 3 percent at $41.23 in premarket trading.